Southeastern Asset Management is out with its 2012 year end shareholder letter. Mason Hawkins, CFA, founder of the value oriented fund has been in the news due to his disagreement with the price being paid to take DELL private. In the year end letter Hawkins has some interesting input on the high US corporate profits debate. Mason Hawkins believes that due to structural changes there does not necessarily have to be a reversion to the mean for profits. That brief excerpt from Mason Hawkins is copied below, followed by Southeastern’s full 2012 shareholder letter embedded in scribd:
The beliefs that U.S. profit margins will decline to their historic mean and that earnings will grow at rates in line with permanently lower future GDP growth have exacerbated skepticism over future equity returns. We are not macro-based investors, but we have a different view based on two permanent structural changes as well as top line growth prospects over the next five years. First, higher profit margins are sustainable because many low margin businesses have migrated from the U.S., leaving an era of more profitable companies based on intellectual capital such as Apple, Facebook, Google, and their successors. Second, more traditional manufacturers have improved margins employing the U.S. comparative advantages of lower energy, capital, and labor costs (automated facilities run by a minimal number of highly trained staff have replaced much manual labor). Beyond structural changes, margins should benefit additionally from top line growth providing operating leverage in numerous regions. Given where we are in the economic cycle, top lines are likely to grow more in the next five years than in the recent past. In both the U.S. and Europe, revenues remain far below peak with significant capacity available. Top lines should also grow as companies earning nothing on corporate cash in many developed countries see interest rates increase.