I was surprised he said "Someone comes in at a high price and wants to buy the Company, we'll talk to them." But these two comments from Bill below from yesterday's call don't sound like a company in active negotiation:
"First of all, on October 31, I will step down as Chief Executive and Rob is going to take over. So it will be not five decades, but I'll be out on this box at this point and he'll take care of it and then I'll be Chairman. And then I get to harass everybody else."
"So, I think that the consolidation that's happening now is frequently about management ego or management rewards and less about -- less than it is about what you need to run your business."
I think the more interesting item from the call yesterday was the discussion of finding a solution to lower WRB's tax rate from the high 20s to the high single digits. That would be a huge lever for them, juicing net earnings by 25%. Not too many companies out there that can flip a switch like that one.
With all this said, stated book value still languishes at $37, so it's hard to imagine WRB stock doing well anytime soon with a price/book of 1.48x, just meeting analyst's expectations on the numbers, and another multi-quarter international issue to resolve.
I'll stick it out, though. I'm a much better value investor than a market timer.
Yeah, me too. I suspect Bill will:
(1) Say this is a good thing, as capacity is being taken out of the industry via cash payouts and a reduction in the number of players.
(2) Dash the hopes of those who believe WRB would consider putting itself up for sale.
I am also curious how large the buyback was this past quarter. Based on WRB re-upping its buyback to 10mm for the first time in over a year, and the higher volume trading we saw this quarter, I suspect it was in the 3-5mm range. That alone could add 5 cents to earnings this quarter, and would be a positive sign of Bill's conviction, as WRB does not blindly buy back shares, especially when they are trading at 1.3-1.4x book.
Bill and Rob together own about 21% of the shares. With $1B+ in their pockets, I think they could care less about making 20%-40% in a buyout and then being left with nowhere to stick the proceeds in this viciously overbought investment environment. The whole point of WRB is for Bill to carefully leverage his wealth on his own terms.
Now, I know there was recently some strong no voting against the say-on-pay package and one of the directors. But if it comes to down to a proposed buy out, I think Bill would pull out all the stops to refuse it.
I would change my mind about all this if Rob decided to bail out on the business. Then I could see it as a way for Bill to take a curtain call. But considering Rob is slated to become CEO this year, it seems unlikely.
Personally, I would be bummed if WRB got bought out here for a 20-40% premium. It is the only investment idea I like for the long term. This company is primed to make 18% a year for the next decade. Whereas the US stock and bond markets are primed for about 2% a year over that timeframe. I want that 500% compounded gain over the next 10 years. And would be willing to give up the short-term gain to get it.
Ultimately I think all the recent mergers should serve WRB well, as fewer names will reduce competition and large payouts will reduce industry capacity.
Whatever happens here, it seems like WRB is in the catbird seat here.
That vote lifted one of my eyebrows too. 48mm For and 55mm Against is pretty surprising, when you consider that Bill and Rob have about 26mm votes between them. I wonder who coordinated the vote Against? Also, it was interesting to note that all the board members were easily approved except Jack Nusbaum, who had 64mm For and 40mm Against. I'm really not familiar enough with this kind of thing to know if any of this is significant. I've heard several analysts mention that WRB is overly generous with its executive compensation. And while it may be so, even if they are overpaying them by $10mm-$20mm a year, we're only talking about 10 cents per share or so. If my estimate is right, I don't think that's too steep a price for the performance they deliver. I'd rather that than Bill take the company private! With all that said, it does appear without its massive insider ownership and consequent voting power, WRB would have had a little shakeup this year.
In the 3Q14 con call, Bill said the value of HQY was "not being reflected anyplace", by which I think he meant it is on the books at virtually zero. At the time, I think he mentioned the stock was worth about $1.50 a share after tax to WRB shareholders, and that is when HQY was trading around $20. So HQY is probably an after-tax windfall of around $2 a share to WRB stock at today's levels. Should help keep upward pressure on book value per share as these shares get monetized. Secretly hoping he is cashing in HQY this quarter to fund buyback of WRB shares. There was a fairly big offering of HQY about 4 weeks ago, which included some sales by existing shareholders.........
Unfortunately, I think there's currently plenty of shares for WRB to find the right price. Even with all those locked up insider shares, and half as much float for individuals as their competitors, WRB still trades like paint drying with a beta of 0.77. Almost no one even knows this company exists.
But I like it that way......it's like having insider info.....legally!
The buyback is an interesting topic. During the last soft market, Bill went hog wild, bringing the share count down from 203mm to 143mm in the 4 years between 2007-2011 (yes, an average of 15mm shares bought back a year.) During that time time WRB was buying shares all the way down from 1.4x book to 1.0x book.
The last 4 years (2012-2015), as the market has firmed, the pace has slowed to a crawl, with the share count only dropping from 143mm to today's 132mm. (only about 3mm shares bought back a year).
Bill has mentioned a challenge to buying back shares the past few years has been limited availability. After the 1Q15 public filings, of the basic shares, company insiders owned 28mm shares, institutional holders had 92mm, and the rest of us got to fight over the remaining 7mm shares. Historically, that is on the tighter side of the range (6mm-10mm shares in recent years). And that number does not include the 1Q15 buybacks.
Bill also mentions WRB is limited by a long quiet period (I have never quite figured out how many days before and after earnings that is for WRB).
So, instead of buying back shares, we have seen 2 special dividends of $1.00 over in recent years. Even as the stock has been in the 1.15x-1.45x book range during that time.
Based on the stronger buyback in 1Q15, and your correct point that there is value not showing on the books (Bill said it was $5.00+ after-tax), I think WRB will indeed step up buybacks if the shares languish in the $40s this quarter, and are available in any kind of size.
Although, amazingly, both the day before and after earnings this week, I noticed the stock traded fewer shares than its 90-day average, which I don't think I've ever seen before. This makes me think there may be VERY few trading shares around these days.....