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Ingrid R. Hendershot
President
Hendershot Investments, Inc.
8/22/2014
Hendershot Investments, Inc.
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Investment Philosophy:
We seek to buy HI-quality businesses at
reasonable valuations and hold them for the
long term.
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What is long term?
•
•
•
•
For a high-frequency trader, it is a
nanosecond.
For a day-trader, it is between lunch and
dinner.
For Uncle Sam, it is one year
For Hendershot Investments, it is a decade
or more.
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Our favorite holding period is forever.
Only buy something that you'd be perfectly happy
to hold if the market shut down for 10 years.
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HI-Quality Investment Criteria:
A business which has a durable, competitive
advantage as evidenced by consistently high
ROE’s. Competitive advantages come in a
variety of flavors, but they all yield pricing
power and market expansion opportunities.
COMPETITIVE ADVANTAGES = MOATS
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A few examples would be:
Patents- Johnson & Johnson
Proprietary Technology-Apple
Strong Brand-PepsiCo, Coca-Cola
 Low-cost Provider- Wal-Mart, GEICO
Networking Effect – Paychex
.
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“The key to investing is not assessing how much an
industry is going to affect society, or how much it will grow,
but rather determining the competitive advantage of any
given company and, above all, the durability of that
advantage.”
Warren Buffett
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HI-Quality Investment Criteria:
We also seek businesses with strong
balance sheets, preferably with little or
no long-term debt. The more cash and
the less debt on the balance sheet, the
better we like the business.
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Warren Buffett calls borrowed money:
A dagger tied to a company’s steering
wheel, pointed straight at its heart.
Someday it may hit a pothole.
Sorry, I’m just a
pothole.
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HI-Quality Investment Criteria:
We also like to see businesses which have predictable growth
in sales, earnings, and dividends.
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Firm
Dividend
Yield
Latest
Dividend
Increase
Dividend
Payout
Years
Div.
Raised
ABT
2.3%
57%
37%
42
ADP
2.5%
10%
61%
39
BDX
1.9%
10%
42%
42
BFB
1.6%
14%
36%
30
CLX
3.3%
11%
63%
36
HRL
1.7%
18%
35%
48
MSFT
2.9%
22%
35%
10
MMM
2.6%
35%
38%
56
PEP
2.9%
15%
52%
42
TJX
1.0%
21%
20%
18
TROW
2.2%
16%
39%
28
WAG
1.9%
15%
45%
38
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HI-Quality Investment Criteria:
Strong free cash flow
Free cash flow =
The cash flow a business generates from its
operations
Less the capital expenditures to maintain and grow
the business
.
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Focus on Free Cash Flow
Seek intelligent capital allocation by management:
Use cash flow for the benefit of shareholders
•Grow the business through strategic acquisitions
•Pay dividends
•Buy back shares at reasonable valuations
Better
yet , find companies
with the ability to do all three
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Focus on Free Cash Flow
Free Cash Flow Yield=
Free Cash Flow/per Share
Stock Price
Compare Free Cash Flow Yield to Alternative
Investments
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Focus on Free Cash Flow
Company
Projected Free Cash Flow
Yield
Express Scripts
12.4%
Gilead Sciences
11.4%
Oracle
10.6%
Emerson
9.0%
Accenture
8.9%
United Technologies
8.0%
High Free Cash Flow Yields
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Express Scripts manages more than a billion
prescriptions each year for tens of millions of patients
of employers, health plans, unions and governments.
Fiscal Year
(000,000)
2012
$4,751
2011
2010
2009
Operating Cash Flow
2013
$4,769
$2,193
$2,105
$1,752
Capital Expenditures
(423)
(160)
(144)
(120)
(148)
Free Cash Flow
4,346
4,591
2,049
1,985
1,604
(15)
(10,326)
-
-
(4,673)
-
-
-
-
-
(4,055)
-
(2,516)
(1,276)
-
Acquisitions
Dividends
Share Buybacks
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Gilead Sciences is a leading biopharmaceutical
company with treatments for HIV and Hepatitis C
among other life-saving therapeutics.
Fiscal Year
(000,000)
2012
$3,195
2011
2010
2009
Operating Cash Flow
2013
$3,105
$3,639
$2,834
$3,080
Capital Expenditures
(191)
(397)
(132)
(62)
(230)
Free Cash Flow
2,914
2,798
3,507
2,772
2,850
Acquisitions
(379)
(10,752)
(589)
(91)
(1,248)
-
-
-
-
-
(583)
(667)
(2,383)
(4,023)
(998)
Dividends
Share Buybacks
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Oracle develops and supports database and
middleware software , application software, cloud
infrastructure, hardware systems and related services.
Fiscal Year
(000,000)
2013
$14,224
2012
2011
2010
Operating Cash Flow
2014
$14,921
$13,743
$11,214
$8,681
Capital Expenditures
(580)
(650)
(648)
(450)
(230)
Free Cash Flow
14,341
13,574
13,095
10,764
8,451
Acquisitions
(3,488)
(3,305)
(4,702)
(1,847)
(5,606)
Dividends
(2,178)
(1,433)
(1,205)
(1,061)
(1,004)
Share Buybacks
(9,813)
(11,021)
(5,856)
(1,160)
(992)
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Emerson is a global diversified company that supplies
products and technology and delivers engineering
solutions to industrial, commercial, and consumer
markets.
Fiscal Year
(000,000)
2012
$3,053
2011
2010
2009
Operating Cash Flow
2013
$3,649
$3,233
$3,292
$3,086
Capital Expenditures
(678)
(665)
(647)
(524)
(531)
Free Cash Flow
2,971
2,388
2,586
2,768
2,555
(19)
(187)
(232)
(2,843)
(776)
Dividends
(1,181)
(1,171)
(1,039)
(1,009)
(998)
Share Buybacks
(1,110)
(797)
(935)
(100)
(718)
Acquisitions
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Accenture provides management consulting,
technology, and business process outsourcing
(BPO) services worldwide.
Fiscal Year
(000,000)
2012
$4,257
2011
2010
2009
Operating Cash Flow
2013
$3,303
$3,442
$3,092
$3,160
Capital Expenditures
(370)
(372)
(404)
(238)
(243)
Free Cash Flow
2,938
3,885
3,038
2,854
2,917
Acquisitions
(804)
(174)
(306)
(41)
(27)
Dividends
(1,122)
(951)
(644)
(824)
(378)
Share Buybacks
(2,544)
(2,099)
(2,172)
(2,071)
(1,855)
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United Technologies provides technology
products and services to the building systems
and aerospace industries worldwide.
Fiscal Year
(000,000)
2012
$6,605
2011
2010
2009
Operating Cash Flow
2013
$7,505
$6,460
$5,720
$5,083
Capital Expenditures
(1,688)
(1,389)
(929)
(838)
(773)
Free Cash Flow
5,817
5,216
5,531
4,882
4,310
Acquisitions
(151)
(18,620)
(372)
(2,781)
(676)
Dividends
(1,908)
(1,752)
(1,602)
(1,482)
(1,356)
Share Buybacks
(1,200)
-
(2,175)
(2,200)
(1,100)
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Reasonable Valuation
Once we have identified a HI-quality company,
the most important part of the investment
equation is to only buy it at a Reasonable
Valuation... as the price you pay will determine
your return.
If you pay too high a price, even for a great
company, your returns won’t be so great.
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Reasonable Valuation
Intrinsic value= present value of the future
discounted cash flows that can be taken out of
the business over its lifetime.
We’d rather buy a great business at a fair value,
rather than a fair business at a great value.
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The three most important investing lessons
are:
1. Think of a stock as part of a business and
seek to own a group of high-quality
businesses.
2. Use the stock market to serve you, not to
instruct you.
3. Always buy with a margin of safety.
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Mr. Market is like Dr. Jekyll and Mr.
Hyde – with wild swings in behavior
from calm and friendly to monstrous.
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Buffett’s Secret to Wealth
Be fearful when others are
greedy.
Be greedy when others are
fearful.
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Volatility is not Risk
“Risk comes from not
knowing what you are doing.”
Risk = Permanent loss of capital
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In the short run, the market
is a voting machine, but in
the long run it is a weighing
machine. Ben Graham
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The three most important words in investing:
“Margin of Safety”
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Rule #1: Never lose money.
Rule #2: Never forget Rule #1.
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Selling Criteria
We sell for a few reasons:
1.
2.
3.
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If the business fundamentals deteriorate and
the problem doesn’t appear temporary.
If the stock price moves significantly ahead of
underlying business value, trim the position.
If we see a substantially better investment
opportunity.
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Selling Criteria
As Ben Graham said in The Intelligent Investor,
“Price fluctuations have only one significant
meaning for the true investor. They provide him
with the opportunity to buy wisely when prices
fall sharply and to sell wisely when they advance
a great deal.”
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Will Rogers had two rules for
selling:
Rule #1: When the stock doubles, sell it.
Rule #2: If the stock doesn’t double, don’t buy it.
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Phil Fisher, Common Stocks and
Uncommon Profits, said, “If the job has
been done correctly when a common
stock is purchased, the time to sell is
almost never.”
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With HI-quality stocks sporting free cash flow
yields significantly higher than low-yielding bonds,
investors should follow the cash to build an
investment stash!!
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