Weitz Value Fund commentary for the second quarter ended June 30, 2015.
Weitz Value Fund - Year-to-Date Contributors
Valeant Pharmaceuticals International is a specialty pharmaceutical and medical device company that develops, manufactures and markets a range of generic and branded generic pharmaceuticals, over-the-counter products and medical devices. Valeant reported terrific first quarter results in late April, just weeks after successfully closing its $15 billion purchase of Salix Pharmaceuticals. In May, Valeant received positive news from the FDA regarding the approval of Salix’s most important drug, Xifaxan, used to treat IBS-D (inflammatory bowel syndrome–diarrhea), creating a potentially lucrative opportunity for the company. Despite our healthy outlook for the business over the coming years, we sold shares during first and second quarter as Valeant’s stock price closed the gap with our intrinsic value estimate.
Martin Marietta Materials is a producer of granite, limestone, sand, gravel and aggregates (products for the construction industry). In February, Martin increased its synergy target for the Texas Industries acquisition from $70 million to $100 million annually and announced a 20 million share buyback plan, which would equate to 30% of shares outstanding. Furthermore, volumes and pricing in their aggregates segment have outpaced consensus expectations, specifically in their public infrastructure end-market. Martin has a strong competitive advantage in an industry with high barriers to entry. We believe they will continue to compound value.
Catamaran Corporation is a provider of pharmacy benefit management services and healthcare IT solutions to the healthcare benefit management industry. Near the end of the first quarter, Catamaran announced an agreement to sell itself to OptumRx (a division of UnitedHealth Group) for $61.50 per share in cash. While we are disappointed to lose a potential "compounder" early on in our investment, we believe we are receiving a fair price for the business. Our intrinsic value estimate of ~$60 per share included the assumption of future M&A success that OptumRx may be unable to capture in the future. We have sold the Catamaran shares we own that qualify for long-term tax treatment and plan to sell the remainder as they become eligible. The Optum-Catamaran merger is expected to close sometime during the third quarter.
Weitz Value Fund - Year-to-Date Detractors
Twenty-First Century Fox is a diversified media and entertainment company. Creative struggles at the Fox Broadcast Network, combined with significant foreign exchange impacts on international earnings, continue to pressure the company’s shares. Furthermore, ratings across the industry have been under pressure as viewers move toward currently unmeasured platforms like online video and video on demand. Investors are broadly anticipating that these pressures will likely lead to a further reduction in management’s outlook for fiscal 2016. The company also announced a generational shift in leadership, as founder Rupert Murdoch’s sons, James and Lachlan, will become CEO and Co-Executive Chairman, respectively, while current Co-COO Chase Carey will hold the title of Executive Vice Chairman through June 2016. We remain attracted by the company’s strong position in news and sports, visible affiliate fee growth opportunities, recurring cash flows and shareholder friendly capital allocation. In addition, we feel comfortable with the shift in management. We added to our position as the stock price declined.
Berkshire Hathaway is a conglomerate holding company owning subsidiaries engaged in a number of business activities. We don't believe the current share price reflects improvements at Berkshire’s Burlington Northern subsidiary that recently has been plagued with congestion, confusion and delay. Berkshire has spent aggressively to rectify the problem and Burlington Northern remains a premier railroad. Berkshire's insurance unit continues to show excellent discipline in underwriting, which results in temporary declines in premiums, but means the company will have significant capacity when insurance pricing returns.
Precision Castparts is a manufacturer of complex metal components and products that provides investment castings, forgings and fasteners/fastener systems for critical aerospace and power applications. Falling oil prices and disappointing organic growth across its aerospace businesses have pressured shares of Precision Castparts over the past 12 months. Most of the stock’s weakness this year came during the calendar first quarter; management pre-announced difficult fiscal Q3 results and formally backed away from its prior goal of $15.50 to $16.50 in fiscal 2016 earnings per share. We added to our position on the news, and continue to find the company’s longer-term opportunity set and capital discipline attractive. Precision’s management has identified several attractive potential acquisition candidates and plans to repurchase a meaningful amount of stock over the coming year.
Weitz Value Fund - Quarterly Contributors
Valeant Pharmaceuticals International Please see the Year-to-Date synopsis for quarterly contribution details.
Discovery Communications is a leading provider of Pay-TV programming with an emphasis on lower-cost, fully-owned, non-fiction content that appeals to passionate global audiences. Discovery’s stock rebounded in the second quarter as ratings trends improved and domestic advertising results were better than expected. We think that the core business will continue to prove more resilient than many investors fear, especially overseas where the company has strong competitive advantages. Discovery is well positioned to benefit from the long-tailed wave of increasing Pay-TV adoption outside the U.S. We project per share cash flow growth in the teens over the next several years, fueled by the international business.
MasterCard Incorporated is a technology company in the global payments industry, which connects consumers, financial institutions, merchants, governments and businesses around the world, enabling them to use electronic forms of payment. MasterCard’s business continues to enjoy considerable momentum despite pockets of economic weakness in Latin America and the Asia Pacific region. Last quarter, sales grew by 8% in constant currency and EPS increased just shy of 30% over the prior year. While the strong U.S. dollar remains a headwind in the near term, we continue to be attracted to the durability and visibility of MasterCard’s underlying growth opportunities as well as its pristine balance sheet.
Weitz Value Fund - Quarterly Detractors
Pioneer Natural Resources is an independent, U.S. based, oil and gas exploration and production company. Shares of Pioneer Natural Resources ended the second quarter back near their 52-week low as optimism surrounding a potential second half rebound in oil faded. Concerns around the scale of non-drilling capital expenditures necessary to support Pioneer’s anticipated ramp in the Midland Basin also continue to weigh on its shares. We generally agree that necessary investments in water lines, tank batteries, gas processing and frac sand capacity make some of the more bullish scenarios for Pioneer less likely, but we still believe its shares are significantly undervalued.
Endo International is a specialty healthcare company engaged in developing, manufacturing, marketing and distributing branded pharmaceutical and generic products as well as medical devices. Endo’s agreement to purchase generic drug manufacturer Par Pharmaceuticals for $8.1 billion in mid-May was greeted with skepticism. While the generic drug industry isn’t as attractive as it was 5-10 years ago (and is presently unpopular on Wall Street), the Par transaction makes sound strategic sense and is modestly accretive to Endo’s business value. Longer term, we believe it is a logical step in Endo’s evolution toward becoming a leading, diversified global specialty pharmaceutical