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October 30, 2009

The Leading Authority on Value Investing
Found in Translation Inside this Issue
“A good business is a good business no matter where it’s based,” says David
Herro. His expertise: identifying just such businesses when their stocks are cheap. Investor Insight: David Herro
Betting on companies well positioned

avid Herro remembers reading a INVESTOR INSIGHT for brighter days ahead, including
poster on the wall of his high Rohm, Adecco, Ansell, Allianz, Credit
school Spanish class, which Suisse and Carpetright. PAGE 1 »
extolled students to “Join the Jet Age: Learn
a Second Language,” and thinking, “When Investor Insight: CastleRock
Looking for possible sources of unex-
would I ever need that?”
pected surprises and finding them in
Lucky for Herro's investors, his foresight Equinix, Yahoo, Gap, Syniverse and
has improved markedly since adolescence. Warner Chilcott. PAGE 1 »
The Oakmark International Fund he has
run since 1992 has earned an annualized Of Sound Mind: Dan Ariely
return of 10.5%, vs. 6.5% for the MSCI Taking aim at those persistent and
World Index (ex-U.S). As CIO of Harris stealthy forces that inappropriately
influence our decisions. PAGE 17 »
Associates’ international equity business, he David Herro
oversees nearly $14 billion in assets. Harris Associates Uncovering Value: GM/Ford
Betting today on companies best posi- Investment Focus: Seeks high-return A bullish case for a North American
tioned to prosper from a cyclical companies run for shareholder benefit automaker – with a built-in airbag in
upturn, Herro is finding value in financial when the market isn’t seeing beyond short- case of high-speed collision. PAGE 20 »
term cyclical or operational challenges.
services, temporary help, semiconductors,
carpet retailing and gloves. See page 2 Editors’ Letter
Paving the route to high performance
without high drama; How “junky”
has the rally really been? PAGE 22 »


Adecco 6
Average Annual Total Returns as of 9/30/09
Ansell 7
Inception Exp. Ratio
1-Year 3-Year 5-Year 10-Year Carpetright 8
(date) as of 9/30/08
OAKMARK INTERNATIONAL FUND 17.71% -1.26% 8.15% 8.65% 10.52% 1.10% Equinix 11
Gap 14

The performance of the Funds does not reflect the 2% redemption fee on shares redeemed GM/Ford 20

within 90 days. The performance data quoted represents past performance. Past perform- Rohm 5

ance does not guarantee future results. The investment return and principal value will Syniverse 16
fluctuate so that an investor’s shares, when redeemed may be worth more or less than their Warner Chilcott 15
original cost. Current performance may be lower or higher than the performance data Yahoo 13
quoted. To obtain most recent month-end performance data visit
Other companies in this issue:
Allianz, Bank of America, Best Buy, Cisco,
Credit Suisse, Domtar, Goodrich,
International Paper, Lloyds, Petrohawk,
Precision Castparts, Richemont
I N V E S T O R I N S I G H T : David Herro

Investor Insight: David Herro
Oakmark Funds' David Herro describes the “biggest reason quality companies sell at discounts,” why his direct
emerging-market exposure is currently so low, the best advice he'd give someone looking to invest outside the United
States, and why he sees significant upside potential in Rohm, Adecco, Ansell, Allianz and Carpetright.

You’re not that old, but you’ve been run- What is the market often missing in the
ning international equity portfolios for situations that attract you?
almost 23 years. Has your strategy
evolved in any key ways over that time? DH: I would assert the biggest reason
quality companies sell at discounts to
David Herro: As a value investor, I was intrinsic value is time horizon. Without
initially almost exclusively focused on short-term visibility, most investors don’t
companies with good balance sheets sell- have the conviction or courage to hold a
ing at low valuation multiples. There’s stock that’s facing some sort of challenge,
nothing inherently wrong with that, but either internally or externally generated.
I’ve learned from experience that when It seems kind of ridiculous, but what most
cheapness blinds you to not-so-hot busi- people in the market miss is that intrinsic David Herro
nesses or poor management, it’s a recipe value is the sum of all future cash flows
for disaster. We still only buy bargains, discounted back to the present. It’s not Accidental Tourist
but we pay a lot more attention to things just the next six months’ earnings or the
like whether the company’s returns on next year’s earnings. To truly invest for It says something about the prominence of
capital are as good as they should be and the long term, you have to be able to non-U.S. investing at the time that David
at how adept and disciplined manage- withstand underperformance in the short Herro was chosen in 1986 to create an
ment is at allocating cash flow. When term, and the fact of the matter is that international equity product for what is
returns are inadequate or capital is allo- most people can’t. now the Principal Financial Group in Des
cated recklessly, equity value is usually If you look at some of the newer par- Moines, Iowa. He had just earned a
destroyed. ticipants in global equity markets, like Masters degree in Economics from the
Another thing that’s been particularly hedge funds, think about how they get University of Wisconsin, but at 25, he had
important in analyzing foreign companies paid. Their financial incentives are heavi- no actual investing experience. He started
is to rely far more on cash flow than ly weighted to one-year performance, so
out reporting to the head of fixed-income
reported earnings. This always made what are they going to go after: compa-
private placements. Until he took the job,
sense to me. When I was in graduate nies they think will have a big share-price
he hadn't even been outside the U.S. “You
school, my brother-in-law hired me to do spike in the short term. Having more
could say there was no grand plan that I
some temporary work at a canning com- trading driven by investors with a com-
was destined to be an international
pany. One project was to go through a pletely different time horizon than we
investor,” Herro says.
pile of invoices and pull out anything that have can be very helpful in creating
looked at all like a capital purchase, even opportunity.
After successfully launching the new
for things like tires and other pretty basic
product for Principal and then doing the
recurring expenses. I finally asked why I Is this inefficiency more or less pro-
same for the State of Wisconsin
was doing that, and he said the CFO nounced in non-U.S. markets?
Investment Board, by 1992 Herro was in
wanted to capitalize anything that
demand as an experienced international
remotely looked like capital spending so DH: It’s everywhere – animal spirits are
investor. That year he joined Harris
they could write it off over time. animal spirits. What may be somewhat
Associates to launch and manage its
The lesson in that for me was that a more common outside the United States,
Oakmark International Fund. Today he’s
clever accountant can make financial especially in smaller companies, are ideas
responsible for some $14 billion in non-
statements say whatever he wants in the for which fewer people seem to be paying
U.S. equity assets for Harris. “I stumbled
short term. That conclusion has only been attention, leading to something truly
reinforced over time, especially as the dif- interesting going unrecognized. Even as into this side of the business, but it was
fering tax regimes and accounting con- some of our funds have gotten so large in love at first sight,” he says. “There's an
ventions you see overseas can make com- terms of assets, we still prospect for those added dimension and excitement to it that
parisons based on reported net income types of overlooked small- and mid-cap I feel as much today as I did 23 years ago.
even more meaningless. ideas. It's funny how things work out.”

October 30, 2009 Value Investor Insight 2
I N V E S T O R I N S I G H T : David Herro

We assume taking a longer-term perspec- petitors have disappeared. We sold some equity. For things that look attractive, our
tive has proven painful at times over the shares as the price increased – maintain- next step is to interview management and
past year. ing around a 3% portfolio position – but try to fully understand the return charac-
we still believe the sum-of-the-parts value teristics of the business and how manage-
DH: Of course. We were early into finan- is closer to 115 Swiss francs. ment makes capital-allocation decisions.
cials as we thought valuations got so far
removed from what we expected “nor- Talk about one financial that didn’t work Is interaction with management more dif-
mal” to eventually be, but as you know, out so well, the U.K.’s Lloyds. ficult outside the U.S.?
the gap got painfully wider before it start-
ed to turn the other way. We spoke with DH: One of the more common unhappy DH: There are still language barriers,
you about Credit Suisse [CSGN:VX] in reasons we sell is if management proves particularly in Japan, but that’s gotten
January [VII, January 30, 2009] and the not to be the worthy steward of our cap- better over the years as English has
stock proceeded to fall another 30% by ital that we thought. Lloyd’s did some- become firmly entrenched as the interna-
March, to less than 22 Swiss francs. Since thing colossally stupid in buying a finan- tional language of business. Culturally, in
then it’s up more than 150% [to a recent cial train-wreck called HBOS last some parts of the world we’re up against
56.65 Swiss francs]. September. Lloyds was a company that a kind of social-democracy attitude, that
Another similar example is Allianz says shareholders are equal constituents
[ALV:GR], the giant German insurer and with employees and customers and sup-
financial services company which many
ON CHINA: pliers and banks. I don’t ascribe to that at
U.S. investors know as the parent compa- We’ve never owned a mainland all, so in some cases we have some con-
ny of Pimco. We’ve always considered it vincing to do. Most often, if that attitude
well-managed, but it got painted with the
Chinese company – there’s too is too prevalent we just won’t be very
same brush as all financial companies as much potential conflict between active.
the crisis unfolded and its stock got
crushed. But we saw them taking steps to
shareholders and the state. Your portfolio is heavily weighted to
focus on their core strengths in property established rather than emerging
and casualty insurance, life insurance and economies. Why?
asset management, while getting out of could have come through the crisis almost
businesses like commercial banking. We unscathed, but they stole defeat from the DH: For our type of investing, which
also saw them benefiting over time from jaws of victory by buying HBOS. We lost involves buying big stakes in companies
the extreme distress of one of their largest money on it, but the only consolation is and investing for the long term, we need
global competitors, AIG. that we got out when the shares were transparency and a firmly established rule
Our feeling then – which hasn’t around £1.20 and it’s now trading under of law. If we can’t believe the financial
changed – was that Allianz would be very £0.90. You have to be able to take a loss statements or we see too much risk of the
well positioned to come out of the crisis in this business – we ended up putting rules being changed after the game starts,
in a strong competitive position with a that money mostly in other financials like the whole exercise is pointless. As a
lot of earnings leverage. Of course, the Credit Suisse or BNP Paribas, which have result, we won’t invest in Russia. We’ve
market couldn’t have cared less about done very well. also never owned a mainland Chinese
any of that in November of last year or in company, because most of them are con-
March of this year, when the shares went How do you organize your research trolled by the state and there’s too much
below €50. The stock has come back to effort? potential conflict between shareholder
around €80, but we still have a big posi- and state interests. Say the government
tion because we believe the intrinsic DH: We have eight people focused on wants independence in inter-coastal ship-
value based on normalized earnings is international research, with seven of our ping, so directs a shipping company to
closer to €150. analysts responsible for at least two dis- buy ships that might produce lousy
tinct geographic regions. We’re abso- returns. That’s terrible for shareholders.
Do you still consider Credit Suisse shares lutists, so we don’t want people to say Our emerging-markets exposure has
attractive? things like “this is cheap for a German been as high as 25%, but is now for both
company,” but instead focus on whether our large- and small-cap funds in the 4-
DH: Yes. Its tier-one capital ratio is over it’s an attractive international idea. 6% range, with most of that in Mexico,
15%, its private-banking franchise goes We do some regular quantitative South Korea, Israel and Malaysia. The
from strength to strength and its invest- screening for what looks cheap and of most-asked question I get in the past three
ment bank has survived relatively intact good quality – say, looking at enterprise or four months is, “Why aren’t you more
in a business in which a lot of big com- value to EBITDA relative to return on heavily in emerging markets, don’t you

October 30, 2009 Value Investor Insight 3
I N V E S T O R I N S I G H T : David Herro

know that’s where all the global growth is years back to the present and add to that purchasing-power parity as calculated by
coming from?” I do know that, but that the present value of the fifth year’s cash the OECD [Organization for Economic
doesn’t mean there are cheap stocks to flow after applying a multiple to it. The Co-operation and Development]. If a cur-
buy there. We’re just seeing much better setting of that multiple, of course, is very rency is 20% or more overvalued, we will
value today in developed markets. important and is where we have the hedge against it, with the amount of the
I’d add that most of the companies we most debates in our approval process. hedge basically rising along with the level
own in developed countries have consid- There are quantitative and qualitative of the overvaluation.
erable exposure to emerging markets, aspects to it. We’ll maybe start with peer Right now we’ve hedged about 30%
giving us that exposure at better prices multiples or the multiples at which deals of our Swiss franc and Japanese yen expo-
and with less risk. Richemont [CFR:VX], have been done, for example, but that’s sures and about 15% of our exposure to
for example, which owns luxury brands not the only input because every compa- the euro.
like Cartier and Montblanc, will benefit ny is different. We also take into consid-
dramatically from growth in emerging eration things like the consistency of the We haven’t spoken of any opportunities
markets. As people move into the upper business, its financial strength and the in Japan. What’s your investment thesis
middle class, one of the first things they for chip-maker Rohm [6963:JP]?
want to do is let other people know
they’ve done so. You can walk around ON CONCENTRATION: DH: We had always admired the compa-
any major metropolitan area in China ny for its profitability, innovation and
We believe in being concen-
and see that. Just because the consumer competitiveness. They are a broad-based
may be dead for some time in the U.S., trated because we think our maker of specialty semiconductors, fol-
we don’t believe that’s going to be the lowing a basic model that their customers
research is fairly accurate and
case in much of the rest of the world. design with Rohm what they need, and
want to fully benefit from that. then Rohm manufactures it at its own
Are there industries you avoid? plants or the plants of third parties. We
consider this Japanese manufacturing at
DH: As long as it’s a good-quality busi- operating prowess of the management its best. Right now roughly 70% of their
ness selling at an attractive price, I don’t team. For Heineken, for instance, we customers are Japanese, with 30% out-
care much about what the company like their brands and profitability but side Japan.
makes or sells. we’ll ding them a bit on the multiple What kept us from owning the stock,
One thing we are very conscious of is applied because they haven’t been so however, was that we didn’t at all like
the degree of leverage in a business. That smart about M&A. how the company allocated capital. It
can be financial leverage, which is reflect- Once we arrive at an intrinsic value, wasn’t at all unusual for them to be sit-
ed on the balance sheet. It can be opera- we require at least a 30% discount in ting with 60% of the entire market value
tional leverage, where you look at how order to buy something. All else being of the company in cash. We didn’t
much of the cost base is fixed or variable. equal, the stocks trading at the highest believe it until we saw it, but that’s
It can also be the degree of leverage to a discount have the largest positions in the changed. They have bought back 10% of
particular industry or geography. In gen- portfolio. the company’s shares. They increased the
eral, I’m uncomfortable with companies dividend payout ratio from almost noth-
that are vulnerable to more than one of How concentrated are your funds? ing to more than 30%. Beyond giving
those kinds of leverage going against back to shareholders, they’ve also made
them at the same time. A cyclical business DH: Our top ten holdings usually make some smart acquisitions to fill out the
that has a lot of fixed costs, for example, up at least 30% of the portfolio, which product line and expand geographically.
should not have a lot of financial leverage usually has around 60 total positions. We When a company starts behaving this
or be too levered to one geography or believe in being concentrated because we way, the return structure usually
industry. If things go the wrong way, think our research is fairly accurate and improves significantly.
management has its hands tied in trying we want to make sure we fully benefit
to get out of trouble. This is a big reason from that. Beyond 65-70 positions, I’d How cyclical is Rohm’s business?
we rarely find opportunity in more com- consider us over-diversified.
modity-type businesses. DH: It is cyclical, but we’re positive on
How do you manage currency exposure? the long-term growth prospects as more
Describe your valuation methodology. advanced chips continue to be used in a
DH: As we do with stocks, we also cal- broader array of applications. Your cell
DH: We forecast cash flows out five culate the underlying value of the curren- phone and PC are loaded with chips that
years, and then discount the first four cies we’re exposed to, based primarily on manage power and improve graphics in

October 30, 2009 Value Investor Insight 4
I N V E S T O R I N S I G H T : David Herro

addition to managing more basic func- but we believe improving economic con- DH: Including net cash on the balance
tionality. That Rohm is so well estab- ditions and upside from the acquisition sheet – which is still nearly one-third of
lished as a go-to developer for original- will move margins well into the mid- the total market cap – we estimate intrin-
equipment manufacturers allows them teens – from 6-7% in the current fiscal sic value to be roughly twice today’s share
to stay on the leading edge of technolo- year – within a few years. Given the cus- price, or ¥12,300.
gy and leverage their R&D spending tom nature of much of what Rohm does, One could argue they still have too
quite well. this business can have nice margins – much cash, but our feeling is that the
operating margins have been above 20% company has fundamentally changed its
Profitability today is quite low. Why? in the past. orientation toward shareholders and we
By fiscal 2014 we’re looking for ¥100 expect more good news in that regard
DH: Part of that is cyclical, but another billion in earnings before interest and going forward. And, by the way, having
important factor is the integration the taxes [EBIT], significantly better than the some excess cash isn’t the worst thing in
company is going through of the chip ¥20 billion expected in the year ending the world.
business it bought last year from Oki next March. That may sound like a big
Electric. The Oki business was losing increase, but it basically just gets them What attracted you to temporary-help
money, but by all indications Rohm is back to the earnings level they had in fis- firm Adecco?
turning that business around and taking cal 2003.
advantage of some pretty substantial cost DH: We first became shareholders three
synergies. On the top line we’re modeling At a recent ¥6,000, what upside do you years ago when Adecco bought a German
mid-single digit annual revenue growth, see for the shares? competitor that we owned called DIS.
The plan was to install DIS management
to run the overall company, which we
thought was a great idea for turning a
Rohm sleepy company into a first-class industry
(Tokyo: 6963:JP)
player. Adecco, like a lot of staffing com-
Business: Japan-based producer of inte- Financials (For FY2009) panies, had been on an acquisition spree
grated circuits and discrete semiconductor Revenue ¥317.14 billion
that expanded its global footprint –
devices primarily used in the manufacture of Operating Margin 3.3%
which was strategically important – but it
digital consumer electronics products. Net Profit Margin 3.1%
chronically overpaid. As a result, prof-
Share Information
Valuation Metrics itability was much lower than we thought
(@10/29/09, Exchange Rate: $1 = ¥91.42):
(Current Price vs. TTM): it should be.
Price ¥6,000
52-Week Range ¥3,690 – ¥7,130 Rohm S&P 500
What do you like about the temp-help
Dividend Yield 2.2% P/E 66.8 77.7
Market Cap ¥691.8 billion

ROHM PRICE HISTORY DH: Some people kind of dismiss this
15000 15000 business as body renting, but if you’re
positioned in the right sectors – specifical-
12000 12000 ly, focused more on professional jobs
rather than clerical ones – and you’re
9000 9000 global so you can service big clients, it
can be a very good business. It’s cash-
generative, most of the costs are variable,
6000 6000
and you need almost no fixed capital.
We still believe there is secular growth
3000 3000
2007 2008 2009 in the industry, particularly in Europe and
Japan, as companies increasingly turn to
THE BOTTOM LINE temporary help in order to have more
The market isn’t recognizing the potential profitability of the company’s “custom” chip flexibility in managing headcount. The
business, its improving shareholder orientation, and the savings it should realize from a downside of that flexibility from a
recent acquisition, says David Herro. Assuming a return to 2003 profit levels within the staffing company’s perspective, of course,
next few years, his intrinsic value estimate for the company’s shares is above ¥12,000. is that spending on temps is one of the
first things – along with advertising – to
Sources: Company reports, other publicly available information
be cut in a downturn.

October 30, 2009 Value Investor Insight 5
I N V E S T O R I N S I G H T : David Herro

Is this essentially another of your time- 1 billion Swiss francs by 2013, up rough- DH: We think it makes a lot of sense. At
horizon ideas? ly 10% from 2008. what should be close to the bottom of the
cycle, they’re buying a company that is
DH: An important part of the story today How does your resulting intrinsic value focused on professionals – primarily in IT,
for Adecco is that while temp help has estimate compare to today’s share price of finance and engineering – and paying
been cut way back, it’s one the first things just under 48 Swiss francs? only around 10x EBITDA. After syner-
to come back. Companies are careful in gies, they expect to end up paying only 6-
the early stages of a recovery to not add DH: We use a 12.5x EBIT multiple on 7x EBITDA. With the Swiss franc as
too quickly to their more permanent cost 2013 numbers to capture the long-term strong as it is, we also think it’s the per-
base. But we don’t have to make heroic cash flows, which we think is justified by fect time for a Swiss company to be buy-
turnaround assumptions for this to be an the low fixed-asset requirements, strong ing a U.S. one.
attractive opportunity. Looking out to balance sheet, diversified base of business
2013, we see operating margins rising and profitability-oriented management. What risks do you see here?
from tight cost control and a better rev- After all other adjustments, we end up
enue mix to around 5%, versus 4.5% in with an intrinsic value estimate of about DH: Given the variable-cost nature of the
2008. We expect revenues to fall more 100 Swiss francs. business and its geographic and industry
than 20% this year, stay flat in 2010 and diversification, we don’t consider this
then grow again until getting back to Adecco earlier this month announced a particularly risky. We will keep a close
around 2008’s sales level by 2013. U.S. acquisition, of MPS Group, for $1.3 watch on this latest acquisition and any
Overall we expect EBIT to reach around billion. What’s your take on that? others to make sure the integration and
cost-saving targets are being hit. Any
trouble on those fronts would be a cause
for concern.
(Switzerland: ADEN:VX)
Describe the potential you see in glove
Business: Provider of human-resources Financials (Year-end 2008) and condom maker Ansell [ANN:AU].
services worldwide, including temporary Revenue CHF 19.96 billion
staffing, permanent placement, outsourcing, Operating Margin 3.7%
DH: This is one of the surviving compa-
consulting and outplacement. Net Margin 2.5%
nies after the breakup of the old-line
Share Information
Valuation Metrics Australian conglomerate Pacific Dunlop.
(@10/29/09, Exchange Rate: $1 = CHF 1.02):
(Current Price vs. TTM): Ansell operates in three main businesses,
Price CHF 47.60 the first of which is industrial gloves,
52-Week Range CHF 30.16 – CHF 58.00 ADEN S&P 500
used primarily to help protect your
Dividend Yield 3.1% P/E 286.4 77.7
hands while allowing you to do things
Market Cap CHF 9.01 billion
like screw in a screw. Given how big a
ADEN PRICE HISTORY problem hand injuries are on production
100 100 lines, there’s a strong case to be made for
using these kinds of protective gloves.
80 80 The second business is latex gloves used
in the healthcare industry. The final
60 60 business is condoms, sold under a vari-
ety of brand names, including LifeStyles
40 40 in the U.S. The current sales breakdown
is 47% industrial, 33% healthcare and
20 20
20% condoms.
2007 2008 2009 Management has done an excellent job
to keep sales growing at a healthy clip
THE BOTTOM LINE over the past five years, while at the same
The company is well positioned to take advantage of a rebound in global temporary- time increasing operating margins into
help spending, one of the first areas to come back in a cyclical recovery, says David the low teens. Some of the positive drivers
Herro. Assuming a moderate increase in operating margins and a return by 2013 to we see for the business going forward are
revenues achieved in 2008, he pegs the shares’ intrinsic value at 100 Swiss francs. greater safety awareness in industrializing
nations, continued expansion of basic
Sources: Company reports, other publicly available information
healthcare spending worldwide, and

October 30, 2009 Value Investor Insight 6
I N V E S T O R I N S I G H T : David Herro

ongoing efforts by governments to pro- expecting operating margins to maybe Are you concerned about the CEO leav-
mote condom use for disease prevention fall from 11% to 10% for the fiscal year ing early next year?
and birth control. Ansell has the global ending next June. Looking out to fiscal
footprint and scale to take advantage of 2014, we’re expecting revenue to grow DH: He’s taking a bigger job to run
each of those. 4-5% per year, to A$1.6 billion, and International Flavors and Fragrances, but
Also on the subject of management, operating margins to return to around the remaining Ansell team in place, in
we believe they’ve been excellent stew- 12%, which is where they were in 2005 particular the CFO and the Board, is very
ards of capital. They’ve been disciplined and 2006. The margin improvement is strong. We’re not concerned about a tran-
in making acquisitions and investing in partly driven by a healthier economy, sition leading to trouble.
organic growth, while buying back plenty but is also from fully integrating some
of stock with the cash left over. The share acquisitions the company has made, Describe what you think the market is
count has fallen from 161 million in 2005 mostly in the condom business in less- missing in U.K.-based Carpetright
to what should be 135 million by the end developed markets. [CPR:LN].
of the current fiscal year. The stability of the business, along
with very low asset intensity, low debt, DH: This is the U.K.’s biggest retailer of
Is this business overall more stable than and shareholder-friendly management, floor coverings, mostly carpeting. It’s
some of the others we’ve talked about? leads us to use an 11.5x multiple on the managed by Lord Philip Harris, who has
out-year EBIT. That results in a target been in the business a long time and who
DH: Yes. Revenues have been fairly sta- value of A$17.50, against a current share I consider one of the best CEOs any-
ble through the downturn and we’re price of around A$10.20. where. He has carpet retailing down to a
science, running the business with nega-
tive working capital and with operating
margins and returns on capital that are
Ansell the envy of competitors. The company
(Australia: ANN:AU)
has allocated capital well and in a variety
Business: Operates in three primary busi- Financials (Year-end 6/30/09) of ways: buying stores from bankrupt
nesses: protective industrial gloves, surgical Revenue A$1.35 billion
competitors, investing in organic growth
and non-surgical gloves used in the health- EBIT Margin 10.5%
outside the U.K., buying back stock, pay-
care industry, and latex condoms. Net Profit Margin 8.9%
ing dividends. Lord Harris himself owns
Share Information
Valuation Metrics 25% of the company, so his interests are
(@10/29/09, Exchange Rate: $1 = A$1.09):
(Current Price vs. TTM): well aligned with ours.
Price A$10.18
52-Week Range A$7.51 – A$13.83 ANN S&P 500
Is this basically a bet on an industry
Dividend Yield 2.7% P/E 11.4 77.7
leader at a time when its industry is par-
Market Cap A$1.37 billion
ticularly challenged?
15 15 DH: The business is closely tied to the
level of new and used home sales, which
fell off a cliff in the economic crisis. So
12 12
Carpetright is very leveraged to a cyclical
upturn, even more so because the #2 com-
petitor in the market, Allied Carpets, is
9 9
operating under bankruptcy protection.
Allied has sharply cut its store base and
pulled back from businesses selling to
6 6
2007 2008 2009 insurance companies and homebuilders,
so we think there’s no question
THE BOTTOM LINE Carpetright will take share as all aspects
The quality and stability of the company’s glove and condom businesses are not ade- of the business start to come back.
quately reflected its it current valuation, says David Herro, especially given its excellent
balance sheet, low asset intensity and shareholder-focused management. His target How do you see the rebound working
value for the shares is A$17.50, more than 70% above the current market price. through Carpetright’s financials?
Sources: Company reports, other publicly available information
DH: We expect operating margins, which

October 30, 2009 Value Investor Insight 7
I N V E S T O R I N S I G H T : David Herro

fell to 4-5% in the downturn, to get back back some things like excess real estate, You wrote recently about the macro sub-
to what had been a more normal level of we arrive at a per-share intrinsic value of ject of inflation. To what extent are you
around 13%. With the cyclical and struc- around £15. concerned about that?
tural kick to the business, we’d also
expect revenues to rise 20-25% off the What general advice would you give U.S. DH: I’m actually not that concerned
bottom, and then grow 5-6% per year investors trying to become more active about it at this stage. The global economy
beyond that. Our estimate for 2013 EBIT internationally? is soft and there’s plenty of excess capaci-
is close to £100 million, which is a strong ty, so I believe inflation is still very pre-
increase from a more normal level of £50- DH: It’s very important not to get too ventable. That said, there is an incredible
60 million in the past. caught up in the macroeconomic or polit- amount of dry kindling out there – all you
ical currents and just focus on the funda- have to do is look at the Fed’s $2 trillion
What’s your intrinsic-value estimate for mentals of individual businesses. Bigger balance sheet. I do happen to believe,
the shares, which recently traded at issues obviously matter, but they should though, that we have a wise central bank
around £8.85? just be a part of the many inputs you look chairman who knows that when the time
at in assessing the quality of the business, comes he’s going to have to sell the stuff
DH: Because this is a high-quality, well- its prospects and what you think it’s on his balance sheet and take liquidity out
run company, we use a 12x multiple of worth. It doesn’t matter how well you of the system. If the economy starts hum-
the fifth-year cash flow before discount- handicap the next presidential election if ming and the Fed’s balance sheet isn’t
ing back. Discounting back the earlier you can’t discern a good business from a slimming down, then it’s time to worry.
years, subtracting net debt and adding bad one. My biggest macro concern would be
new laws and regulations that prevent the
free flow of goods, services and capital
across boundaries. Things like carbon
Carpetright taxes and idiotic tariffs on tires will inhib-
(London: CPR:LN)
it growth – that makes me far more nerv-
Business: Discount-priced carpet, floor- Financials (FY2009) ous at the moment than inflation.
covering and bed and mattress retailer with Revenue £482.8 million
more than 700 stores in the U.K., Ireland, Operating Margin 4.7%
When we spoke in January you were opti-
Holland, Belgium and Poland. Net Profit Margin 2.4%
mistic about the global economy’s ability
Share Information
Valuation Metrics to right itself and grow. Has anything
(@10/29/09, Exchange Rate: $1 = £0.60):
(Current Price vs. TTM): happened to shake that confidence?
Price £8.84
52-Week Range £3.11 – £9.70 CPR S&P 500
DH: I still believe the greater trend of the
Dividend Yield 1.0% P/E 50.4 77.7
emerging world consuming more and
Market Cap £594.4 million
moving hundreds of millions of new peo-
CPR PRICE HISTORY ple into the middle class will compensate
15 15 for the fact that the largest economy, the
U.S., is suffering from a big hangover.
12 12 Even the old-world economies in Europe
have the potential to bounce back quick-
9 9 er because consumers there, while scared
to death by the economic crisis, at least
didn’t leverage themselves to oblivion like
6 6
so many people in the U.S.

3 3
2007 2008 2009 You were once on track to become an
economics professor. Is that still on your
THE BOTTOM LINE to-do list?
Run by “one of the best CEOs anywhere,” says David Herro, the company is capitaliz-
ing on the distress of its closest competitor and should increase market share and DH: I’d still like to teach economics, but
earnings power in an eventual recovery in the U.K. home-sales market. If that happens, I’m a big believer that if you love what
Herro believes the shares’ fair value is closer to £15, a 70% premium to today’s level. you’re doing, don’t mess with it. Why
gamble on the grass being greener on the
Sources: Company reports, other publicly available information
other side? VII

October 30, 2009 Value Investor Insight 8
As of September 30, 2009, the funds held the follow securities as a % of total net assets:
Adecco 2.45% 0.0%
Allianz 3.56% 0.0%
Ansell 0.0% 2.24%
BNP Paribas 1.62% 0.0%
Carpetright 0.0% 2.25%
Credit Suisse 2.70% 0.0%
Heineken 0.26% 0.0%
Lloyds 0.0% 0.0%
Richemont 3.47% 0.0%
Rohm 2.27% 0.0%
Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.

As of September 30, 2009, the following geographic distributions were held as a % of the total net assets:
EUROPE 73.5% EUROPE 67.2%
Switzerland 23.6% United Kingdom 18.4%
United Kingdom 16.6% Germany 14.6%
France 11.5% Switzerland 10.0%
Germany 9.9% France 8.4%
Sweden 2.9% Italy 6.2%
Ireland 2.8% Netherlands 3.9%
Netherlands 2.7% Norway 3.4%
Spain 2.1% Greece 1.9%
Italy 1.4% Sweden 0.4%
ASIA 14.2% ASIA 15.1%
Japan 13.7% Japan 11.1%
South Korea 0.5% Malaysia 2.6%
LATIN AMERICA 3.7% Philippines 0.8%
Mexico 3.7% South Korea 0.6%
Canada 3.0% Australia 6.0%
AUSTRALASIA 1.0% New Zealand 2.2%
Australia 1.0% NORTH AMERICA 1.8%
MIDDLE EAST 0.3% Canada 1.8%
Israel 0.3% LATIN AMERICA 1.4%
Emerging Markets 4.5% Brazil 0.9%
Emerging Markets consists of: Mexico 0.5%
South Korea, Mexico, and Israel MIDDLE EAST 1.3%
Israel 1.3%
Emerging Markets 6.7%
Emerging Markets consists of:
Malaysia, Philippines, South
Korea, Israel, Brazil, and Mexico

Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.

Investing in foreign securities represents risks which in some way may be greater than in U.S. investments. Those risks include: currency fluctuation;
different regulation, accounting standards, trading practices and levels of available information; generally higher transaction costs; and political risks.

The stocks of smaller companies often involve more risk than the stocks of larger companies. Stocks of small companies tend to be more volatile and have
a smaller public market than stocks of larger companies. Small companies may have a shorter history of operations than larger companies, may not have
as great an ability to raise additional capital and may have a less diversified product line, making them more susceptible to market pressure.

The MSCI World ex U.S. Index (Net) is a free float-adjusted market capitalization index that is designed to measure international developed market equity
performance, excluding the U.S. This benchmark calculates reinvested dividends net of withholding taxes using Luxembourg tax rates. This index is unmanaged
and investors cannot invest directly in this index.

The discussion of investments and investment strategy of the funds (including current investment themes, the portfolio manager’s research and investment process
and portfolio characteristics) represents the investments of the funds and the views of David G. Herro and Harris Associates L.P., the Funds’ investment adviser, at
the time of this article, and are subject to change without notice.

For a prospectus and more information about The Oakmark Funds, including management fees and expenses and the special risks of investing, please visit or call 1-800-OAKMARK. Please read the prospectus carefully before investing. An investor should consider a fund's investment objectives, risks,
and charges and expenses carefully before investing. This and other information about the Funds are contained in the Funds' prospectus.

Harris Associates Securities L.P., distributor. Member FINRA. 11/09