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POSTED: Sun, 01/31/2010 - 11:53

Analysis of See's Candies
If I understand correctly, we're looking to analyse great businesses in this forum. I believe Warren Buffett has called See's Candies a great business many times so it seems a good place to start. Below is my analysis of See's plus some unanswered questions. Please add, amend, correct etc! Quantitative -----------**1972** Purchase Price - $25m (16% off the asking price of $30m) Sales - $30m on 16 million 1bs of candy = to $1.88 / lb of candy Pre-tax Profits - $4.5m (56% on invested capital) Post-tax Profits - $2.25m? (estimate) growing 12% a year Invested Capital - $8m **2006** Sales - $383m on 33 million 1bs of candy = to $11.61 / lb of candy Pre-tax Profits - $82m Post-tax Profits - £60m? (estimate) Invested Capital - $40m **2006 at 1972 prices** Sales - $80m on 33 million 1bs of candy = to $2.42 / lb of candy Pre-tax Profits - $17m Post-tax Profits - £8.4m? (estimate) So Berkshire invested $32m since 1972 (approx $1m / year) whilst pre-tax earnings over the period total $1.35bn. Total investment $57m. ROI = >2300% over 34 years. Please see a public google spreadsheet posted as a web page for the above here: http://spreadsheets.google.com/pub?key=t248xiVFFLXMMjEj3fwS91Q&output=html Qualitative ----------The product tasted great - used the highest quality ingredients The personality of the product -> nostalgia, share of mind, reputation for innovation, history (the inspiration for Charlie & the Chocolate Factory?) Reasonable price (too reasonable) - untapped pricing power. WEB believed another $0.15 was possible. This would increase profits by $2.4m. Total control of distribution Exceptional service Market leader Minimal funds needed to operate - cash eliminated accounts receivable & production & distribution cycles are short minimizing inventories Virtually all of the post-tax profits are free cash Tough to grow volume All these factors lead to an extremely wide moat. The loyalty of the customers can be seen by the 2 years they spent defending See's when it was purchased by Blue Chip Stamps.

(Editor: See’s had a brand in its established region (Calif) but struggled to grow outside that region.)
Unanswered questions: - why was so little capital investment needed? isn't chocolate making equipment expensive? or is it more labour

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11/03/2010 . 09/13/2011 . something recent like IDQ. Nick tim83030 REPLY POSTED: Sat. Any advice? nickwebb REPLY POSTED: Wed. The next company I'd like to look at is Coke.15:46 — nickwebb Ships that pass in the night Hello all! Sorry for the long period of quiet on this thread.intensive? . Is this book value? ie net asset value? Does anyone have any idea what See's balance sheet looks like? (I imagine there are few liabilities) . Buffett.00:11 — Redliner Replies? Would like to access the 19 replies to Nick's analysis of See's candies. Has anyone seen any analysis that they think is of value? In the mean time. If empty vessels make the most noise we must all be very full! I did intend to finish with a consolidation of everyone's input on See's and publish that analysis on a 'Backwards BRK' wiki. XTRA. McLane.Can you present a case? Say like. You've mentioned several times that the case method would be the best one to learn more about how WEB evaluates a great business -.I'm confused regarding 'invested capital'. I'd like to share a side project I've been working on. See what you think at buffettfaq. 02/27/2010 .where can See's go now? can it continue to raise prices above the rate of inflation? REPLIES 20 Redliner REPLY POSTED: Tue.20:33 — tim83030 Case Study Alice. It's a compilation and categorisation of all the question & answer sessions I could find with Mr.com. or something you would prefer? Cheers! aliceschroeder 2 . Can't seem to figure out how to do so. But I don't think that's necessary now given seekingwisdom's excellent analysis.

But Warren can screen faster than he can analyze and much of what he does is screen. cash flows. 02/26/2010 . What is best to help you folks understand more about the thought process is to eventually work through some specific cases with the caveat that each is unique rather than writing narrative descriptions that try to generalize what Warren does. 02/26/2010 .keywords not sentences. I would argue he does both (screen and analyze) very fast compared to the rest of us. This may not add materially to The Snowball. the way he works is very similar to the way every good analyst I've ever known works. Charlie is simply countering the impression that Warren riffles the pages of an annual report for ten minutes and is done. He spends more time on this kind of work when SEC filings and annual reports come out. Warren-watching has morphed into a sort of Kremlinology (literally Buffettology. capex.S. He is content to update himself on information no more than quarterly except by reading the newspaper/Internet for major breaking news.He may (or may not) take notes about footnotes. when taken. I think that rather than being literal. He simply reads all the available material he can find. as you would expect.19:33 — aliceschroeder "Warren practicing his craft" P. The point is that you 3 . I appreciate that you're seeking meaningful information that will add to your own store of knowledge. The more time he spends the more likely he is to take notes of things he is interested. Please understand. He works in between phone calls. but to say that would sound pejorative to Dave and Mary's book. Here. I think what's truly different about him goes on inside his head and doesn't have a whole lot to do with his work method. The work of security analysis is always painstaking if done right. The files are chronological to the extent they are organized at all. Here goes. sometimes the way individual company files are organized has a bearing on the thought process in that specific situation.18:22 — aliceschroeder "Warren practicing his craft" Hi Lorax. and takes notes in an ad hoc manner. income statement. His notes. Ok? aliceschroeder REPLY POSTED: Fri. are brief -. balance sheet #s. it's largely the same process as anyone would go through. Okay. It's not as generalizable as you might think despite any offhand statements from either one of them that might be interpreted that way. but hope it helps. Warren spends five minutes thinking about a company and sometimes he spends many hours . What is interesting are the specific about any one company. twenty. Sometimes. It depends on all the obvious reasons. Except for this and the absence of a computer and an earnings model. which is not my intent) anyway Buffettology in which every little crumb of information is examined to see whether it means something more. eight. When he does analyze. He works in his office and at home and while traveling. ratios. Sometimes he files the notes and sometimes he throws them away after he's thought about them. He writes notes in the margin of annual reports or on the cover of SEC filings or on a separate sheet of paper or on the back of an envelope or on a burger joint takeout menu or in the margin of a letter from somebody else about some other topic. or more. Perhaps this is a better explanation. It's better to think about it the other way around (invert). When Warren and Charlie make a statement like the seven/eight hours it may merely mean one of them is trying to summarily counter a wrong impression using a quick declarative. hundreds of other items.REPLY POSTED: Fri.seven. projections.

okay. It all lends so much valuable perspective. I would of course have put it in The Snowball. and how sustainable are they.20:08 — aliceschroeder filtering add: shelves a cash register and trade dress. Yet Warren recently discussed the value of Berkshire stock as a simple multiple of book value. as I'm sure everyone here does. I keep repeating that his way of thinking about valuation is simpler than many people believe. the store decor is probably very cheap despite its neat uniform appearance. nobody has pricing power. aliceschroeder REPLY POSTED: Sat. and indeed. a couple of things. and what a challenge. rather it is an estimate. and perhaps even about your writing process.01:32 — The Lorax "the files" Alice. of telling us not only what you've learned. Thanks again for the comments. 02/20/2010 . I hugely appreciate it. Intrinsic value is not a precise figure." This is the most important thing that anyone has said. People talk about "intrinsic value" as though such a thing were calculable as a point estimate. the store decor? the margins on candy are so much higher than your local greengrocer's and yet the capex should not be dramatically different except for training the employees. but also about the discovery process. This is the hard part. How much are the cash flows. The price of cocoa shot up and it was not able to pass along the cost to customers because of price controls. 98% of the investor's time should be spent on the "Is It a Good Business?" question. for spending time blogging to us at all. "I must point out that it drives me crazy listening to the investment community regurgitate “Buffett Like” terms like intrinsic value and cash flow. This was a temporary factor but when thinking about pricing power don't forget this story. Intrinsic value is a loosely. If you could. Where he spends his time is figuring out What Is a Good Business..can't generalize from it. i will respond to a few of them. 02/22/2010 . When inflation is serious. aliceschroeder REPLY POSTED: Sat. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. with that said. as you blog. Thanks for commenting on Warren's files. and often misused term in the investment community.. The Lorax REPLY POSTED: Mon. I hope you'll find more opportunity. "See's has pricing power" is not a glib phrase to throw around. It's both a treat and a help to get a more tangible depiction of what you discovered when you waded into his office. What fun you must have had. 02/20/2010 . You just can't bridge meaningfully from the specific to the general when it comes to these files. > See's suffered from inflation in the 1970s. Make sense? I am not holding back on you here. 4 .19:35 — aliceschroeder filtering thank you for this (all of you) there are a lot of wonderful thoughts here.

Again. > berkshire subsidiaries. therefore. investment analysis and in recent years less material rather than more. who already knew what it was like to work with Buffett. or where he owned the stock but it's not a berkshire sub. to some extent they are simply the material he happened to keep and inherently a bit random. See's shut down the stores rather than use inferior chocolate or dilute its concentration. the files break down into a few basic categories. or has studied very closely. When a company forgoes sales and closes its doors to maintain its authenticity. with that said. but you don’t want to get too close to it. > Franchising is a terrible business model. Other thoughts on capex of opening a new store? aliceschroeder REPLY POSTED: Sat. it is important in reading these files not to assume that they perfectly reflect what was in warren's mind. companies used to disclose far less information than they do today. 02/15/2010 . this represents the majority of the files. 'what is a good business?' Opening a See's store requires nothing more than signing a lease. not much in these files. a sense of perspective is in order. had once explained to a colleague that “The sun is nice and warm. maybe a marginal note or two.training the employees may be the largest component of "capex" as it were and they are doing this all the time anyway. with the files. but I have copied and pasted below a couple of the passages on Rickershauser.14:17 — The Lorax Rickershauser Nick. "No sooner had Buffett achieved the glory of joining the Post board than his and Munger’s need for legal services was about to grow with stunning rapidity. business transactions. sorry i cannot be more specific but it depends entirely on which one you're talking about. The Lorax REPLY POSTED: Mon. and it becomes the basis for an entirely new interpretation of someone's life. > most of the companies he follows out of interest . This event was pivotal for See's." 5 .19:22 — aliceschroeder "the files" the files are an incredible mosaic of the man's mind. on the other hand. the material is what you would expect . he might toss in things that interested him that a securities analyst would find of marginal relevance. this may be justified or not depending on the contents. > the files were not compiled in the manner that a security analyst would use. Rickershauser. warren is extremely consistent in the way he thinks and does business and always has been. the man has lived a long life and hundreds of thousands of pages of documents (if not millions) have passed through his hands. > biographers often treat any new material as if it were the rosetta stone or the dead sea scrolls. I have The Snowball on my Kindle.a somewhat random collection that very much depends on the investment. and hiring a few people and training them . > as a biographer i considered his files essential because contemporaneous documents are simply more credible than oral histories. varies enormously because it is a compendium of company history.”25 He would spend the next couple of years testing what could be called Rickershauser’s Law of Thermodynamics. it is fascinating. Managing franchisees is no fun. printing some signs. warren keeps a lot of information in his head. > companies that he's considered buying. a new cache of letters. Look at all the trouble Berkshire has had with IDQ. as a private investor he did not have the responsibility to document his work that most securities analysts would feel. customers remember it for a long time. but yes.reads annual report and sometimes other sec filings. his files a) are not complete and b) were casually assembled. so I can't point you to a page number. there are a few of these and they're interesting. 02/20/2010 .> During WWII.

and others. but I yearn for more concrete examples of what Warren is like "in the raw" when he does his work. Thanks Wow! Very educational. the paper even posted a pdf of the actual 10-K with Warren's handwritten notes on the cover.would you mind explaining why "businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change"? Not sure I understand. he called the company to ask if the method of depreciation used in the financial statements had been changed from one period to the next (apparently the footnotes didn't make this clear). Third. if I'm not mistaken.. he made notations on the front page of the 10-K of all the footnotes he didn't understand. etc. and methods. Alice has talked about how when Warren comes to work he cocoons himself in his office and reads trade publications. I know which I'd choose! 6 . and focus. “My mind was so tired.looks like Fanny May chocolates are $23/lb versus See's at around $15/lb (up $3 per lb since 2006). intangibles. Three cases-in-point: When Buffett bought Justin.. From my perspective." but the company was stunned that he was attentive to such a small detail. That is another subject (that we can explore) and applies after the purchase of See’s has been made. Thanks everybody. But it would be fabulous if she could embellish these observations with additional details that. Seekingwisdom . the answer was "no. and of the fact that even a man operating at his level still needs to invest a considerable amount of time and effort to "make the grade. 02/15/2010 . I think Buffett added that he might spend 7 or 8 hours to just cursorily brief himself on a company. 10-Qs. he doesn't just fly through it. etc. like the double-stitches on a fine garment. As I recall." I can't imagine that he ever shirks the necessary work.” said one friend. “I had to recuperate from seeing him. I recall that at one of the BRK annual meetings. company reports. Indeed." I think Alice communicates Warren's intellectual intensity extremely well with these passages.10:33 — nickwebb Wow! Very educational. etc.” said another. this man's habits. “It was like being pounded on the head all day long. recently one of the major newspapers reported that when Buffett reviewed the 10-K of one of the investment banks during the financial crisis (Lehman. Wouldn't there be less spoilage using the FIFO method? (given the limited shelf-life of a few weeks) . of his attention to detail.would you expand on: "Trademarks. which apparently is his habit. nickwebb REPLY POSTED: Mon. but Buffett was so focused and his mind worked at such speed that extended conversations with him left them sunburned. ect.” said a onetime employee. add texture so that we can visualize." Why would you look at this after the purchase has been made? Why not before? . I think). are factored in on the return on equity calculation as economic goodwill. This is why I'm asking her about the contents and organization of his files. in response to a question. when he wants to bring himself up to speed on any given company. 10-Ks. to some degree.what bonds are you referring to? I'm assuming long-term government bonds? . press releases. I remember Charlie then chiming in to reassure the questioner that even Warren needs quite a bit of time to plow through such details. I'm hoping Alice will paint us a less abstract and more particularized picture so that we can "see" Warren practicing his craft. these are marvelous concrete examples of how Warren works."Those who tested Rickershauser’s Law of Thermodynamics found that the sun was indeed nice and warm.. Buffett talked about how he reads masses of annual reports. In the second case. for example.

how are employees well trained and relations kept up with vastly varying demand of candy? (ie. or internal reports generated by the subsidiary. It had its own refrigerated storage unit at the San Francisco airport. learning the best cadences of the English language. and skimmed the pages.answers. since the chocolates had to be kept refrigerated and then needed to be sold within a few weeks. most demand on valentines day and last few weeks leading up to Xmas) .Could you remind us what Rickerhauser's Law of Thermodynamics was? I've had a quick search of The Snowball and couldn't find it. Bernard Baruch always went for 7 . See's had had stores in Hong Kong since the 1960s. Blue Chip Exec.a googlewhack of sorts! . or even just by seeing the number of titles. About that big file cabinet of stuff on See's. if you came into my living room and saw my book shelves. For example. or both. an investment advisor for Blue Chip. or something else? I ask because knowing what a person is reading or writing down. It was going to be closed down because of it's lack of parking. when I came over to the US last year for the Wesco meeting I went to the See's store in Pasadena. Apparently. and that Lincoln spent much time with Shakespeare. but international distribution was tricky for the company.flaherty-crumrine. Robert Flaherty is still on the board of Wesco and is former president of Flaherty & Crumrine (http://www.what should See's strategy be now? . Fannie May. 02/13/2010 . An entertaining 5 minute video at the See's factory: http://www. like his analysis of coca futures and such. did you just copy scads of Warren's files and take them home in the course of your research? When you say these materials are "complex and sophisticated" are you talking about materials generated by Warren himself. I love biographies.How does See's compare to it's competitors? Godiva. Fannie Farmer On a final note. preparing himself for something (who could have then guessed what). you could learn something just by knowing where my attention was focused.com/).Regarding how WB got the deal . The Lorax . It has left a mark knowing that Truman spent many hours reading history when he was still just a poor Missouri farmer.com/watch?v=jrj-GgZNoXI Interesting insight into the difficulties of expanding overseas in this history of See's: http://www. See's moved its products to Hong Kong by air. ability to park makes a very significant difference to sales at most See's stores. can be very revealing in itself.How can the cost per store opening be close to zero? . Robert contacted William Ramsey. Russell Stover.what explains See's lack of success outside of California? Is it the distance from the See's factory? ." Further questions: . and saving. If you came upon my diary.. See's instead was moving ahead with plans to sell its candies abroad.youtube.Sahil .17:36 — The Lorax Warren's files Alice. you could gain some insight into me by seeing the titles. who contacted WB. etc.com/topic/see-s-candies-inc "By the early 1990s.what is persistent capital intensity? A google search only turns up this post . Nick The Lorax REPLY POSTED: Sat. and the flight was met in Hong Kong by a refrigerated truck.I understand it was initially found by Robert Flaherty.

has talked about creating long. Do Warren's files reflect these traits? Are they a mass of intensely accumulated facts and figures? Let me put it one final way. nickwebb REPLY POSTED: Sat.11:05 — nickwebb Deliberating. No doubt. Alice. I've still thinking about what you've both written." How can the cost to open a new See's store be close to nothing? [I've compiled all the Wesco meeting notes I could find on the web for myself: http://tinyurl. all attributed in the notes. or are they thrown together haphazardly? Are there spreadsheets. what does a Warren Buffett company file look like? How big is it? What's inside? Does Warren thoughtfully organize his files. to settle himself down and reevaluate his decisions (thoughtfully managing himself. You are a securities analyst. We're drowning in capital of our own that has almost no cost. by hand. as I suspect that similar studies of his political forebears was useful to Lincoln himself. you talked about Warren's passion for detail.long walks after he made an investing mistake. or do they? In The Snowball.com/wesconotes I hope the original note-takers. to inculcate into himself the particulars of a company's or a commodity's financial history. I love your commentaries. I'll reply back later when I've properly digested your posts. One question springs to mind right away though. We like owning our own stores as a matter of quality control.Charlie Munger was asked this question on See's at the 2001 Wesco meeting: Why not franchise See's candy stores? "It takes almost no capital to open a new See's candy store. But knowing where Lincoln focused his attention in preparation for his accomplishments is a useful character study. Taking Seekingwisdom's point that each company cannot be analysed using the same matrix. You write of Rickershauser's Law of Thermodynamics. How would the company files in Warren's office compare to those of a typical sell-side or buy-side securities analyst? Thanks. what do you think is the best way of learning the unique methods of analysis for different types of company? I'm assuming you break it down by industry? ------One addition of interest . a la Jim Rogers. forgive me for publishing it here] Nick Seekingwisdom 8 . detailed spreadsheets. Jim Rogers. Cogitating. just as there was no secret sauce to Lincoln's writing of the Gettysburg Address. you have compiled many company files in your time. and his affinity for the like-minded Herb Wolf. And as I recall. 02/13/2010 . It would be crazy to franchise stores like some capital-starved pancake house. his treasure hunt-like search for obscure facts. the investor. Digesting Seekingwisdom / Sahil . or does Warren keep all the numbers in his head? Does he write memos to himself to record or organize his thoughts? How do Warren's files reflect his extraordinary personality. I suppose Drucker would say).what an excellent and thoughtful analysis. We all know there is no "secret sauce" to Warren's investing. In this vein.

" we can only profit from the special dimension you bring to the table. Then again. although I know it irks the CPA in you. I think Buffett (as distinguished from Munger!) cult-members do you a disservice by calling you on the carpet for expressing contrarian views. I feel the same way about Berkshire in most respects. My own view of Buffett is a pragmatic one: If Warren's approach to business. based on your incomparable perspective..and far more effectilvely than would be the case at most conventionally managed enterprises. for example. "learning machines.00 per second is the velocity of BAC's interest rate) for this round of financing. sees fit to put Burlington in the same segment as MidAmerican. I assume that the core-beliefs of the cult shortly to be overturned relate to Berkshire's transition to a post-Buffett era. We're only going to learn from you. Alice's words should not be forgotten for their prescience. I might have been gullible enough to take this news at face value. :-( Had I not heard Charlie Munger's mouth disparage them with my own ears not much more than one month ago. he's looking after their interests effectively . but not at Cravath. I am. I think that criticism of you for illuminating Warren's ways and means. and how. image. Certainly. serves to advance Berkshire for shareholders' benefit. evolution should not be ruled out as a majority part of the cause behind shattered belief systems. Would you expand on which core beliefs you think will be going out the window. right?  reply Wed. It's not that everyone thinks he's infallible or a saint.00 per second ticks ($9. but that through whatever means. I'm a happy shareholder. But in the context of Berkshire. somebody has to continuously act as JP MORGAN once did during The Panic of 1907.The Buffett Enigma Hmm. it works for me. I don't expect we will be hearing him brag about $15. 08/17/2011 . I think it's fine. what's the status of the new Buffett book? Is it months or years in our future? Will Alice Schroeder fans get a preview of coming attractions? Thanks. bailing out a competitor to his Wells Fargo stake. and I suspect the backlash you're getting when you challenge the so-called core beliefs of the cult stems from the fact that most of the cult-members feel a similar level of innate comfort about how Warren runs the show and does his job. As shareholders. as a result. is greatly misplaced. If Warren. and we should all be appreciative for every one of your tweets. something of an anathema to be studied by Buffett in his early Graham Days. Nonetheless.22:33 — The Lorax Core Beliefs Alice. I wish your critics would shut-up and let you talk. etc. Charlie once said that an unfunded pension plan would trouble him at most companies. In blunter language. or as Charlie might put it. Alice 9 . has to be high on the totem pole of oxymorons requiring contemplation at this time. except for the modern era JP Morgan themselves at dimes on dollar today. you think Berkshire will function differently after Warren is gone? Also. Besides railroads. A nice wink and a nod from his friends at The Central Reserve Bank will probably be sufficient.

ect. the increment also should be included. Transatlantic actually is not for sale nor was it ever for sale. businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change. However. First. We don't have to look far to find a reason. this is an opportunity to clarify an important point. the vitriol back and forth with Validus has made it clear that TRH is extremely committed to the Allied deal. The Allied World deal was structured as a strategic combination which legally does not constitute putting the company up for sale. is "unfriendly. that depends. and certain other non-cash charges less the average annual amount of capitalized expenditures for plant and equipment. Owner Earnings is represented by: reported earnings plus depreciation. one is easier to swallow than the other. Second. because it possesses something that relatively few business in 1972 (and now) have. Big mistake on my part. The deal terms also prevent the Transatlantic board from accepting a higher offer without holding a vote on the Allied agreement if Allied choses to hold a vote. In addition. The distinction is not meaningless. amortization. as you know. He's just giving the Transatlantic board another option if they want it. Is $4 million pre-tax a good return in 1972? Well. The Allied deal would keep TRH largely intact and its board members would retain their board seats. depletion. That said. If you invested $44 million in bonds at that time you would receive the 10 . all businesses are not evaluated under a single matrix. you could earn 9% on bonds. it does not matter whether Warren purchased 1% or 100% of the business in order to evaluate the business. it means that Transatlantic expressly arranged the transaction so that it would not have to consider unsolicited bids. (If the business requires additional working capital to maintain its competitive position and unit volume. There is probably some cute colloquial term for this provision (like "grenade" or "land mine" ) and if someone knows it I would like to hear it. what would you be willing to pay? $4 million divided by 9% equals $44 million. that the business requires to fully maintain its long-term competitive position and its unit volume. reply Mon.) In See’s case it was $4 million.16:09 — Anonymous If the company is already up If the company is already up for sale. the evaluation of a company like See's falls under the category of "Unique". So.16:58 — seekingwisdom Filtering I must apologize for my typo when I referred to Fannie May as Fannie Mae. RESPONSE: Thanks for asking. and refer to it as hostile. The first step is to establish the taxable "Owners Earnings" of the company. All of the numbers presented are proportional to his "share" of the business. Therefore. including Berkshire's. Let's break this down. considering the opportunity to own a truly unique businesses or a safe steam of bond income. 02/10/2010 . That is the ability to consistently earn 25% after tax on net tangible assets. with conservative accounting and no financial leverage. I wouldn't say it's an unfriendly offer. most people would call a spade a spade. The practical effect is that a would-be buyer must take the market risk of waiting a couple of months until after a vote is taken on the Allied deal before it can reach any agreement with TRH.) REPLY POSTED: Wed. Unique." (If Buffett were not involved. 08/08/2011 . What could you earn if you invested the same amount in bonds at that time? In 1972. I would say that any other bid. Because the Allied deal was structured to deter unsolicited offers and make them difficult to complete. the offer is certainly unfriendly to Allied World.

rather it is an estimate. Which would you rather have a steady stream of $4 million coming in each year or a variable "Equity Bond" producing $4 million in the first year? Hmmmm. See’s true “Cash Flow” has been extraordinary. Businesses require the replacement of "tangible assets". Since (net) tangible asset requirements were so “Uniquely” low. over a ten-year period of time. For this part of the evaluation. Once again. Given the bond rate at the time of 9% and the earnings power of 16%. Since See’s required so little capital going forward. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. See’s makes a product that is “frozen in time”. one can reasonably assume that inventories are not going to build up and “lose value”. we must address inventories. so to speak. This leads to the next important factor that weighs in on the decision of capital deployment. inventories. I must point out that all fixed assets are not created equal. not all companies are alike from a net tangible asset perspective! This is one of the reasons that there is not a "black box" to evaluating businesses. will prevent or minimize a loss. ect. This is one of the most important “factors” of any businesses intrinsic value calculations. expanding a business’s moat is the primary goal of management. are factored in on the return on equity calculation as economic goodwill. intangibles. Therefore. An important point to make here is that the value of See’s box of chocolate is in what the consumer believes is the value of the product and not the production cost. don’t fix it” comes in handy. not quite. retooling to keep up the latest and greatest “candy fad” is not an issue that See’s must address. aggregate net tangible asset expenditures have totaled only a fraction of the total sales.. Therefore. Well. but in the case of See’s. or net tangible asset. a world of continuous inflation. I must point out that it drives me crazy listening to the investment community regurgitate “Buffett Like” terms like intrinsic value and cash flow. the margin of safety lies in an expected earning power considerably above the going rate for bonds”. That is another subject (that we can explore) and applies after the purchase of See’s has been made. Notice I said sales and not unit volume increases.” Ben Graham so eloquently states in chapter 20 of “The Intelligent Investor”. the earnings power in 1972 was 16%. Inflation is the next issue to tackle. It is important to point out. This consists of (net) receivables. As long as you anticipate. This figure is sufficient to provide a very real margin of safety – which. This is where the term “ain’t broke. let’s test this concept and see what type of margin of safety was allowed for when this purchase was made. So. “In the ordinary common stock. Well. and often misused term in the investment community. as Charlie and Warren did in 1972. if you follow See’s history. Inventories are most certainly not created equal. the excess of stock earning power aggregated to over 50% of the price paid. fixed assets or property plant and equipment. we use after-tax earnings to evaluate efficiency. Intrinsic value is a loosely. That brings us to the last and usually the largest inflation exposed asset of all. This allows Warren to increase the price per pound of chocolate above the rate of inflation without jeopardizing unit volume. Trademarks. under favorable conditions. Because they have not changed the design of the product. Receivable will increase proportionally with sales. “Margin of Safety. Lastly. See's at the time had $8 million in "honest-to-God" assets. sahilgujral 11 . What Warren and Charlie saw in See’s in 1972 was a company who’s product was underpriced in the market and therefore. and property plant and equipment.same $4 million stream of income. In a truly “Unique” business. and it requires no additional capital. Well. This is also why you do not need unit volume increases in a business that possess these “Unique” qualities. then you better understand the effects it will have on both the steady steam of bond income and the steady effect it will have on the business that you are buying. First we must address receivables. Let’s break them down individually. this deviation created an increasing intrinsic value over time. They produce a product that it timeless and requires very little maintenance. Intrinsic value is not a precise figure. had bottled up pricing power (even if unit volume did not increase) that would outpace inflation. they would average an annual margin of 7% annually accruing in their favor. What is required is the ongoing maintenance of consumers “share of mind”. the “secret is in the sauce”. In 1972. The turnover in the candy business is high. See’s earned pre-tax $4 million and they paid a total “Enterprise Value” of $25 Million. After-tax earnings are what are left over at the end of the year for management to deploy. Next. let's dig a little deeper and try to figure out what we are really getting. bought for investment under normal conditions. This is important to point out. especially in See’s because See’s has not had a staggering amount of unit growth over the years (nor is it necessary) because they had pricing power.

"exact calculation of intrinsic value" is interesting but probably less important than the actual contracts this business had. With the statistics you gave we are talking about a 21% economic return business. less "manufacturing" oriented part of the value add chain at a time in America (before the 1970s) when VERY FEW people in business were yet totally thinking that way. His interest in this idea may go back as far as the Rockwood cocoa situation.REPLY POSTED: Wed. To the extent that the "commoditized" parts of the businesses were "outsourced" onto Guittard. as people writing on Alice's blog have pointed out in respect to BNI. This admits at least the possibility of that very rare situation in retail where you can grow volume without "diluting" the original brand's pricing power (margin) as say happened with Lacoste brands when they went to discount stores to try and save the company. it is plausible that they identified and drove a very interesting. Given the presumed 21% "return on capital" (we are unsure what kind but this company does not seem to have been heavily indebted so its perhaps a less important issue) and what you write about Ed Peck's abilities (and what is known about the Sees themselves)." That See's has stores state by state in so many key markets each of which probably report individually sliced data to BRK is no doubt a great asset as an investor trying to read what is really going on in America. You are posting really excellent material! Some more thoughts: -See's had been open (indeed expanded) during the great depression. benefitted from. That is part of the benefit of owning the stores and controlling your channel. --Regarding the persistent capital intensity questions. and in conversations with management that later also led to the famous "price raise". "networking" abilities. this business and its development ultimatley gave Buffett profound quarter by quarter insight into how rich the US consumer was feeling and what she was spending. Note that NE furniture mart is one of See's largest distributors today. an "upmarket luxury" like chocolate is at least plausibly a leading indicator for people's " consumer happiness" and "willingness to go out and spend.is surely an instructive way to "screen" for investments. My memory is that most See's stores are pretty small and have high foot traffic so it makes sense.15:53 — sahilgujral More on Nick's Qualitative Factors Nick. it is plausible that Buffett both recognized. That he went from being aware of the opportunity to actually being in a place where he knew the right people to buy it is a testament to his "never criticize" approach. 12 . Ben Graham's oft-cited quip is you don't need to weigh a man to know that he is fat. One simple point we can make is that during an absolute economic crisis like the 20s simply being willing to look at who was not only still in business but thriving during this point -. People are often startled that WB has these buying opportunities from private owners so early on. this business deal is iconic for the way Buffett quickly used it to generate not simply "synergies" but actually "synergistic dependency" that most company M&A/PE firms just BS about. It is analogous to what Buffett may be thinking about the "resilience" of confectioneries in Cadbury behind the scenes despite the public presentation.and then looking at accounting data to see the actual trends -. and general "entrepreneurial" traits. trust building abilities especially with people in love with their businesses. Though inelastic to an extent. --Further. its execution. The most important of these might be allying See's operating with hugely efficient distribution operators and logistics chains of other BRK acquisitions again during a period when it could have otherwise had very different economics to break out of CA distribution and expand market penetration. 02/10/2010 . --A final thought is that this may be one of the rare "manufacturing" businesses that actually has negative working capital or something very close. growing at 15% a year that qualitatively showed itself to be not simply recession but depression proof given a wide variety of "normal" states of the world. valued about 11x earnings. --More than simply getting the family to sell to him. it will be helpful to understand more precisely the nature of the contract and supply relationship with Guittard. drove that trend. branding. and how WB actually got the deal.

Having 'old-time' equipment that continues to be used to this day is part of the selling point . bought all of See's? What happened to the other 33% of the business? (if BRK bought 67% of business for $35m). .very distinctive stores and uniforms A couple more discussion questions . I'd love to see See's balance sheets. through Blue Chip.unlikely to cause trouble . p.a bit of luck and a bit of skill in choosing Chuck Higgins to lead See's .what is your estimate of intrinsic value given what Buffett / Munger knew in 1972? Trying to avoid the bias of hindsight.testing .and with Ed Peck.the potential to modernise processes without touching anything else (the packaging hasn't changed in 70 years!) .nickwebb REPLY POSTED: Mon. On a few points I'm not sure I understand correctly: > I thought BRK.what other businesses are there like See's? A brewery would seem to have similar attributes although I'm not aware of one that doesn't have a huge amount of competition and full control over the distribution.their quality assurance lab is an industry leader . kept managers talking about what sold and what didn't. $25m of the $35m investment wasn't cash? > Would you mind explaining why the capex looks reasonable to double sales? > Why do price increases tend to lag cost increases? Is it because increases in costs are not predictable and anticipating them is tough? > If the market can bear greater price increases (after the period of price controls) why didn't See's go for them? > Do you know what the thinking was behind Japan? It seems an unusual move Like seekingwisdom. I'm betraying my nationality! Nick aliceschroeder REPLY POSTED: Sun.15:21 — aliceschroeder seeking wisdom :-) I would rather buy products from See's than Fannie Mae especially in recent years :-) 13 . It had great quality control . he'd take them out to fancy restaurants and hire the best candy makers away from the competition all across the US.it was famous for not compromising the quality even during rationing in WW2 . 02/07/2010 . the Sam Walton of Sees .trademarks (as Alice mentioned) . :) Further qualitative factors on the See's purchase that have come to mind since my first post: . This is very educational and interesting.s.investigated competitors.everything about the company demonstrated it wasn't about to let the quality of the product slip.12:01 — nickwebb Thanks Alice & Seekingwisdom Thanks Alice & Seekingwisdom (Peter?). what's the maximum you would have paid? . 02/08/2010 .long trusting relationship with chocolate supplier Guittard was in place (from the 1950s!) . They should all be in dollars. just noticed a pound sign crept into my first post a couple of times.

02/07/2010 . BRK bought 67% of See's for $35M. the $2 million net income on See's net tangible assets of $8 million was 25%. against Russell Stover. You do not need volume increases in order to compound your profits if the net tangible assets required to maintain normal business operations is not growing as much as the sales. the $25M was net of $10M cash. As long as a business owns a "share of mind" then prices may be increased year after year.e.g. I believe that there is still room to increase prices. This represents all of the required capital to operate the business. See's has been able to increase prices since 1972 because the candy was underpriced in the market at the time Blue Chip purchased them. ect. retained earnings at the date of purchase (excluding goodwill .12:12 — aliceschroeder comment Hi Nick. It probably contains the material you want but needs to be sorted out and vetted. Where can See's go now? In the 1970s it could not raise prices above the rate of inflation because of price controls and because prices tended to lag cost increases. you can pass along price increases greater that inflation. you would only get 1/1000th of it.00:36 — seekingwisdom Net tangible assets Warren refers to the $8 million as net tangible assets. See's candies have not changed since 1972. I have a big file cabinet of stuff on See's that probably includes a balance sheet. Yet if more is ever to be made useful to mankind it has to be filtered and vetted. inventories and (net) property plant and equiptment. Am still working out what is the best way to handle this material. BUT 14 . The file on See's is pretty voluminous. See's has had to spend some money along the way to defend their trademarks e. He further states that the net tangible assets include: (net) receivables. Therefore. sophisticated. The materials in these files are complex. 02/06/2010 . See's chose essentially not to expand except for a brief foray into Japan that did not work out well. In a business school type case study. these are part of their "real" net assets = invested capital even if they do not depreciate. so the equiptment required to make the same candy in the same box. Compare the prices of See's candy per pound in 2009 to Fannie Mae's 2009 prices. The enterprise value of $25 million paid and the recognition of untapped pricing power gave them years of future price increases without "requiring" them to increase prices to what the market would bear. seekingwisdom REPLY POSTED: Sun.In a business like See's invested capital should include trademarks. The latter will probably be true in any future inflation scenario. Invested capital I believe is the See family's original investment i. Not many businesses are capable of earning 25% return on net tangible assets. As long as you do not abuse your pricing power. Let me weigh in a bit more. and could easily be misused (aha! on page 270 I found the "secret sauce" to how Warren Buffett REALLY invests! when there is no such thing). I would be interested in looking at the balance sheet the year prior to the Blue Chip purchase. is minimal. Alice. The capex looks reasonable to me to double sales. This is the sort of material I'm trying to figure out how to handle. In an investing book. Do you have a copy of that? aliceschroeder REPLY POSTED: Sat.. On the purchase price. So as to your question on capex. you would only get 1/500th of it.the difference between that and the $25M).

aliceschroeder REPLY POSTED: Thu. More important it did not require a lot of capex. this is great.See's could increase prices on a lagging basis and eventually they caught up. where worn-out equipment needed to be replaced and yet these costs could not be possibly passed through to customers. It would be helpful if some people would review/comment on it.13:22 — aliceschroeder See's Nick. This is one reason why Warren and Charlie harp constantly on the mistake of thinking only in terms of EBITDA and ignoring depreciation as a real cost. Anyone 15 . The epitome of a bad business in the 1970s was Berkshire the textile mill. 02/04/2010 . Where you get killed on inflation is if you are having to make continual capex with customer pricing that can't reflect your costs.

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