Valuing Behemoths, Redux


By David Merkel of Aleph Blog

A few things I left out last night.  Here’s a country breakdown for Behemoths trading on US exchanges:

Note: if I had a Bloomberg terminal and could give you global data, this would look much less US-centric.

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And, here is a sector and industry breakdown:

Going cell-by-cell, Oil & Gas – Integrated had the largest concentration. The companies were Exxon Mobil Corporation, Royal Dutch Shell plc (ADR), Chevron Corporation, Petroleo Brasileiro SA (ADR), BP plc (ADR), and TOTAL S.A. (ADR).  Oil & Gas Operations was not all that different, and that company was PetroChina.  These are simple companies, as I view them, mining all over the world to find energy for a hungry planet.

Then there is Schlumberger, in the Oil Well Services & Equipment industry.  They are the elephant in their industry, though small compared to the majors, and smaller compared to the national oil companies that control most of the world’s oil resources.

Computer services are IBM and Google, two very different companies.  Software & Programming is Microsoft and Oracle, also very different.  Apple is Computers & Hardware.  Intel is Semiconductors.  The hard question with this group is who is managing their companies to use free cash flow wisely.  This is a maturing industry, and the best companies in the future will treat their capital providers well.

In Healthcare the differences in industries is not worth considering.  The companies are: Johnson & Johnson, Merck, Pfizer, Novartis AG (ADR), Roche Holding Ltd. (ADR), GlaxoSmithKline plc (ADR).  They are all big pharmaceutical developers, though J&J has significant hardware businesses.

Communications Services boils down to China Mobile Ltd. (ADR), AT&T Inc., Vodafone Group Plc (ADR), Verizon Communications Inc.  Big companies pursuing their advantages in the US, UK and China, with wireless dominating over wireline.

As for Retail, that is WalMart.  Who else could it be?  No other company in retail is so extensive. The hard question for them is how they move the needle.  Are there no more worlds to conquer, a la Alexander?

Those that call regional banks are not so — JP Morgan and Wells Fargo are Money Center banks.  HSBC (ADR) is as well.

Rounding out the financials are two nontraditional companies — Berkshire Hathaway, and General Electric.  BRK is an insurance company funding an industrial conglomerate.  GE is an industrial company with a finance arm attached to it.

Beverages (Non-Alcoholic) are simple. Coke and Pepsi.  What could be simpler?

The other three in Consumer Non-Cyclical are Unilever N.V. (ADR), Procter & Gamble, and Philip Morris.  It would be very difficult to reverse-engineer the competitive advantages that these companies have built up.

With Metals Mining it is BHP Billiton Limited (ADR), Vale (ADR), and Rio Tinto plc (ADR).  They have become almost an oligopoly for a variety of minerals.

Finally, among auto and truck manufacturers, there is Toyota Motors, a well-run company that has had its share of problems lately.


Most of these companies are likely to be slow growers.  One exception is some of the tech and pharmaceutical companies, where they will fight for new markets versus obsolescence of old markets.  Unless one is an industry expert, hard to see how the battle comes out.

And, as I commented on last night’s piece:

Maynard, that’s a concern of mine as well. Will they dispose of noncore assets attractively? Even slack cash, after a suitable buffer, is noncore. How will management use the free cash flow?

1) Dividends?
2) Small value-creating acquisitions that can be grown organically?
3) Buybacks at discounts to the firm’s private market value?

Those create value, but it is hard to manage a complex company — so growing via acquisition is tough without overpaying by buying scale, or creating a company that is even more complex, and unmanageable.

That’s why I think management is the key with large companies — will they make the right capital allocation choices or not?

Tough analysis — but to me it boils down to how shareholder friendly behemoth companies will be. Try to analyze what the main strategies are, and only invest where you think they are managing for the good of shareholders, rather than management.

Full disclosure: my clients are long CVX, PBR, TOT, VOD, WMT, INTC, ORCL

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.
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