“You’ve got to study all the greats. You’ve got to learn what made them successful and what made them unsuccessful.”
– Michael Jackson encouraging Kobe Bryant to learn from other masters of their craft.
The year ended with all eyes focused on Tax Reform. In our September letter, we discussed the possible outcomes if the White House Administration was successful (or not) in their tax reform pursuits. Less than three months later, the administration signed into law a plan expected to reduce taxes for many Americans and provide a tax holiday for corporations to repatriate overseas cash. Market strategists estimate that the tax plan will fuel corporate earnings by 7% to 9% and that these expected increases are not fully reflected in current stock prices. Roughly translated, barring unforeseen events, many believe that more stock gains are expected for 2018.
How can we make sure that our portfolios not only participate in these gains, but also exceed market returns for 2018 and years to come?
As we have discussed in previous letters, we don’t focus on the macro environment. Instead, we invest in great companies and allow those companies to navigate any upcoming market turbulence, changes in interest rates, or economic recessions. If we are invested in the right companies, they will outperform their peers. Finding those great companies is the hard part.
One of the many characteristics we look for in our investments is whether outstanding leaders are at the helm. These leaders are responsible for driving corporate culture, making capital allocation decisions, and mapping out both short and long term strategy. These leaders differentiate themselves through consistent execution. And that execution is then reflected in corporate earnings.
In today’s letter, I highlight a couple of the leaders heading companies that we have invested in. These two individuals have made a strong impression on me, and I believe that you will share my enthusiasm for being invested with these winners.
Sergio Marchionne, CEO of Fiat Chrysler Automobiles (FCAU)
Marchionne is revered in the auto industry for his ability to drive cost efficiencies and he is a master at reversing the fortunes of troubled companies. He was promoted to CEO of the Fiat Group in 2004 when the company was losing $2.4M a day and not expected to survive. He returned Fiat to profitability in less than two years. This feat was especially notable given that he had no prior engineering experience or experience managing an automotive business.
He achieved profitability at Fiat by downsizing and restructuring management, and speeding the introduction of new models, most notably the retro-styled minicar, the Fiat 500.
In June 2009, the American auto manufacturer Chrysler found itself in a tailspin in the wake of the financial crisis and appeared headed for liquidation. With the support of the US and Canadian governments as well as the auto trade unions, Fiat purchased Chrysler in a deal that brought the company out of bankruptcy. Chrysler was in such bad shape, that Fiat essentially purchased it for “no money down.” Prior to the sale, President Obama had forced Chrysler into federal bankruptcy protection as part of the government’s broader restructuring of the struggling American auto industry.
Marchionne’s plan was to quickly eliminate weaknesses in Chrysler’s product line while working to combine the small car, small engine specialty of Fiat with Chrysler’s predominantly large-vehicle portfolio. The two combined product lines gave Fiat the product offerings to become a more global company. Chrysler returned to profitability less than two years after emerging from Chapter 11 and repaid all its government loans. In 2014, Fiat and Chrysler merged into a new holding company to form Fiat Chrysler Automobiles, now the seventh-largest automobile manufacturer in the world.
We purchased our shares of Fiat Chrysler in late 2016, long after their emergence from bankruptcy. However, at the time, the company was still valued as if re-entering bankruptcy was a possibility. We have achieved over 150% gain on our purchase and I see an additional 50% upside based on current financial metrics and even higher in a takeout/spin-out scenario.
If you can turn around one struggling company, you may have been lucky. But if you can do it twice, you’re good. Marchionne has earned his moniker as a “turnaround wizard”. He is reported to carry five cell phones with him at all times and he will do whatever it takes to ensure that Fiat Chrysler succeeds.
Ajay Banga, President and CEO of MasterCard (MA)
Mr. Banga is a native of India and his early career focused on brand management. He helped introduce the Pizza Hut and Kentucky Fried Chicken brands to India. He later spent a large portion of his career managing Citigroup’s Asia Pacific credit card and consumer banking businesses while splitting his time between Manhattan and Hong Kong. He was hired away from Citigroup to become MasterCard COO in 2009 and was promoted to CEO in 2010.
I frequently listen to or read Mr. Banga’s quarterly earnings calls where he provides unique insights into the global economic landscape based on purchasing data aggregated from consumer credit card transactions around the world. The first time I heard one of his calls, I was blown away by his command of data and his ability to correlate data points to broader market trends. His insights on these calls help me with my market assessments and provide me with perspectives for other investment decisions.
On multiple occasions, I have had the opportunity to see him speak at investor conferences. My first thought on seeing this man speak in person….
With all of the challenges that we face here in America, the prejudices that exist both conscious and subconscious…How much better, smarter, faster did he have to be than all of his peers to be promoted to the rank of President and CEO of a Fortune 500 company?
He’s better than good!
Mr. Banga often reminds listeners that he did not attend an elite American University as is typical with most Fortune 500 CEOs. He received a bachelor’s degree in economics from Delhi University in India and an MBA from the Indian Institute of Management in Ahmedabad. He is a practicing Sikh and wears a turban that distinguishes worshippers of this religion.
His leadership at MasterCard has emphasized innovation in areas such as mobile payments and online commerce while diversifying the company’s revenue stream across the globe. He has declared a “war on cash” to eliminate cash based transactions around the globe. Currently, 85% of the world’s transactions are still completed using hard currency, and there remains a tremendous opportunity in emerging markets such as India and Brazil where large portions of the population are unbanked despite a growing middle class.
Banga has also focused on security in mobile and online transactions. In April 2016, former President Barack Obama appointed him to a key administration post as a member of the Commission on Enhancing National Cybersecurity to “identify the steps that our nation must take to ensure our cybersecurity in an increasingly digital world.”
We acquired our shares of MasterCard in September 2012 and have achieved over 275% return on our initial investment (not including dividends) for a ~28% IRR. As we think about the prospects for cashless payments, the opportunities in the space are tremendous. The move toward a largely cashless society is inevitable as apps such as Venmo, Paypal, and Cash create opportunities to facilitate small payments all of which are conducted through the systems of credit card processors. The frequency of these transactions will increase, and both MasterCard and Visa are positioned to take the lion’s share of the profits.
Our prospects for our investments in both Fiat Chrysler and MasterCard look bright.
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