"Zandman, brains, acquisitions."
Not much of a strategy if you ask me; but lets test it.
On a per share basis, VSH hasn't even doubled sales in the past 10 years. The return on equity was above 12% only in 2000. Return on total capital hasn't even reached double digits except in 2000. Profit margins on sales average in the mid single digits except for 2000. There is no dividend, but profits seem to be reinvested at fairly low rates of return.
This looks like a pretty average business that managed to have one outstanding year. To their credit, they managed to avoid a loss in any year. Growth through acquisition has been accompanied by quite a lot of dilution, unlike the history of BRK. VSH had about 80M shares outstanding in 1991, and about 160M in 2002.
So Zandman has a good, but not outstanding record. They probably have as much in the way of brains as their competitors. Since the stock is below book value, it can't be used effectively for acquisitions, but offsetting this is the fact that it's cheap, perhaps cheap enough to be classified as a Ben Graham type investment. So it will probably work out okay, but don't wait for it to show up in a Buffet-Munger portfolio.
Good luck with your investment. It isn't a bad pick, but I think the superlatives have it overrated.
2000 was more than just irrational customer behavior. You had once-in-a-generation irrational markets providing free cash to startups. These startups bought and/or built products using truckloads of VSH's discretes. Those VSH customers will not be irrational in the next cycle because they'll be dead. Most already are.
I was in tech for 20 years. I saw a lot of irrationality in both directions, but I never saw anything that remotely approached the insanity of 1999-2000. I don't expect to again for at least 30 years.
Yes, VSH will continue to grow the top and bottom line via acquisitions. But I'm interested in EPS, not gross earnings. 2002 EPS is of 0.43 represents roughly 4.5% annualized growth from 1991's bottom of the cycle 0.26. Compare any set of long term EPS numbers that exclude 2000's abberational 3.77 and you'll come up with a long term EPS growth rate in the 4-7% range.
Buying VSH on the basis that 3.77 will return in the next cycle is simply speculating on another bubble. Might as well buy QQQ leaps.
I chopped off half of the 2000 peak earning of 21% net on sales because the previous peak was 7.5% reached in 1995. It dropped to 0.5% three years later. If human nature is any guidance, an even deeper drop is not inconcievable. I feel comfortable with that modification on account of possible depressed earnings in the next couple of years.
Mr. Cloud raised a valid question. The moat may not be that strong. The latest 10K talked about competition(s). The historical low Return on Equity (ROE) also confirms it. The ten year average was 11.7%, with almost half of that contributed by year 2000 alone.
<<Well, Zandman, brains and acquisitions are in the historical record as well. So, in a way, I can't imagine Warren missing it... >>
I would never think that anyone can be sure what Warren thinks. But we have a pretty good idea what Wartren won't think. VSH is one.
I am a share holder. I wish it work out better, but I want to realistic too.
"What is the company's sustainable competitive
advantage over its competitors that will permit
it to earn above average returns?"
Zandman, brains, acquisitions.
How many of their competitors did the kind of shopping Vsh does at the bottom ?
"Predicting that the next earnings peak will be higher than the last is guessing, not analyzing"
Well, Zandman, brains and acquisitions are in the historical record as well. So, in a way, I can't imagine Warren missing it...
"Though cyclical, the historical average net
margin was about 6 % excluding half of the
Cyclical earnings imply peaks and throughs, if you choose to eliminate half of the peak, it kind of distorts the earnings picture, unless of course, if you can demonstrate that changed
factors will alter the cyclical magnitude of the peak earnings. IMHO, we'll keep seeing shortages
and human behaviour isn't changing that much.
Another thing, Vsh's acquisitions should rather contribute to increased future sales and its changed business mix of passive and active components should smooth the throughs according
Time after time, Vsh stated that they would
achieve growth through acquisitions, and they
did purchase companies quite successfully.
Why dismiss it in your scenario ?
Zandman stated that Vsh'goal was to reach
6'000 mio in sales by 2008.
I don't think Warren and Charlie would ever approve of an investment in VSH. It doesn't appear overpriced, but I'm sure they would ask, "What is the company's sustainable competitive advantage over its competitors that will permit it to earn above average returns?" And the answer is, it doesn't have any. 2000 earnings look like fluke, sort of like being a bullet-manufacturer during a war. You have to wait for the next war to make a decent profit. Predicting that the next earnings peak will be higher than the last is guessing, not analyzing. Warren has said that he has no interest at all in projections, only in the historical record as far as it demonstrates the sustainable competitive advantage of the company. So I think I'll pass on this one.
Marty Whitman is doing exactly what he should be doing in grooming his successors and letting them make picks in industries he has generally avoided in the past (under his guidance of course), but the "kids" are no Marty Whitmans and to the extent Marty doesn't do the picking, Third Avenue Value may be past its prime. Anyway, that's my opinion.
Thank you for the quotes. I looked at VSH from different angles. Here is a brief summary.
VSH made about $940 million in the past ten years. The equity increased $2,017 million. Hmmm.
VSH is prominent and properly capitalized. It should make it.
Growth through acquisition is not to be dependent upon for evaluation. The average revenue of 1992 thru 1996 was $966 miliion, the next five years was $1,715, a bit abnormally high. I'd think the next five year ought to be about $2,100 million on average.
Though cyclical, the historical average net margin was about 6% excluding half of the 2000 earning. That implies average earnings of $120 million, or $0.75 per share.
Current price is about $9.50, not quite 13 times of the next five year average earning. So it's not cheap. But, the book is at $15. Even after another year's loss, it should still be over $12. Take over by management is a real possibility.