Here are some examples of businesses that we have chosen not to invest in and our rationale for our decision:
- A major international retailer with a strong position in business supplies and a significant e-commerce business. The company generates high returns on capital and free cash flow and the management team has been in place for over a decade. We passed on this potential investment due to our expectation of a slow recovery in employment and the secular threat posed by the Internet in reducing barriers to entry.
- One of the world’s largest transaction processors. Operating profits margins exceed 50%, returns on equity are 40% and earnings tripled during 2008-2011. We feared that regulatory changes would depress industry pricing, impairing the company’s earning power, and decided to move on to explore better opportunities.
- A rapidly growing international drug company. This company generated pre-tax profit margins in excess of 40% and created billions of dollars of shareholder value via astute acquisitions over the past few years. However, the accounting was overly complicated and would have required us to put a great deal of faith in a management team that we did not know and had no history with in order to confidently estimate current & future earning power.
- An international logistics company. This company was built up over the past quarter-century by an astute CEO, generates returns on equity of over 20%, has over $1 billion of cash on its books and more than tripled its business over the last decade. However, what was once its key strength had turned into a major drag: a major source of its business was the exporting of products from China to the developed world, a process that has slowed dramatically due to the over-indebted nature of Western consumers.