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A Case Study In Financial BrillianceTeledyne, Inc.Dr. Henry E. SingletonLeon G. CoopermanChairman and CEOOmega Advisors, Inc.Omega Advisors, Inc.November 28, 20071
Exhibit 2Omega Advisors, Inc.2
Exhibit 3Buffett considers that Henry Singleton of Teledyne has the best operatingand capital deployment record in American Business. When I asked if he did notconsider Tom Murphy of Capital Cities to be equally outstanding, Buffett smiled andsaid, “Well, Murph plays a simpler game,” but added that part of the great businessability is to get into simple games. Singleton’s return on assets, calculated in the waythat Buffett likes to do it (Inventory plus fixed assets), is unique. All four major industrygroups in Teledyne are in fully competitive areas; none has a special protected niche;and yet all four earn 50 percent on assets. The company earns 250 million after tax,with very conservative accounting.Singleton bought 130 businesses for “Chinese paper,” as it used to be called,when his stock was riding high. Then when the market, and his stock, fell he reversedfield and the last eight years hasn’t acquired a single company; on the contrary, bybuying his stock back he has shrunk his capital from 40 million shares to 12 million.According to Buffett, if one took the top 100 business school graduates andmade a composite of their triumphs, their record would not be as good as that ofSingleton, who incidentally was trained as a scientist, not an MBA. The failure ofbusiness schools to study men like Singleton is a crime, he says. Instead, they insiston holding up as models executives cut from a McKinsey & Company cookie cutter.Excerpt from Pages 24 & 25 of The Money MastersAuthor: John Train, Publisher: Harper & Row, Published: 1980Omega Advisors, Inc.3
Exhibit 4Teledyne, Inc. Historical 964196319621961Net IncomeSalesNet Income Per Share 3,241.4 238.3 10.40.20.024.50.10.01Shareholders'AssetsEquity 2,744.2 66.534.835.013.723.98.610.83.53.72.5In millions except per share amounts.As reported in the Company's annual reports, adjusted for stock dividends and splits.Years 1967 through 1982 w ere restated for certain accounting changes.Omega Advisors, Inc.4
Exhibit 5The Strategic Positioning of TeledyneStrategy One – Growth Through Acquisition – 1961-1969Strategy Two – Intensively Manage Your Business – 1970-1981Strategy Three – Repurchase Your Undervalued Equity – 1972-1984Strategy Four – Stocks Preferable to Bonds for the Taxable Investor –1976-1982Strategy Five – Simplify the Corporate Structure and Focus Management –1986-1992Omega Advisors, Inc.5
Exhibit 6Comparison of Selected Financial Characteristics(Data through 1981)Teledyne, Inc.10-Year3-YearS&P 40010-Year3-YearTeledyne Relativeto S&P 40010-Year3-YearEBIT margins(a)Return on assetsReturn on equitySustainable growth(b)Book value growthEPS 47Leverage1.91X1.64X1.86X1.90X1.03X0.86X(a) EBIT is earnings before interest and taxes.(b) ROE times retention rate.Omega Advisors, Inc.6
Exhibit 7Teledyne Self-Tender Offers1972-1984Share PriceAnnouncement On Prior Day( )Date9/14/72 52/6/7612.25325/2/8095.1255/9/84155.75Shares * Shares ** Shares Outstanding Shares TenderedTender PricePremium Offered TenderedPrior to TenderAs A Percent( )(%)(Millions) (Millions)(Millions)Of Outstanding 20 Cash22%18.931.927.9%14 Cash 50 cents28.741.623.26.9Broker Fee20 p.a. 10% deb.2613.922.217.6OID 67.75% 13.5516 p.a. 10% deb.4011.918.310.4OID 68.875% 11.0218 Cash4713.618.419.640 Cash 2512.513.618.425 cents Broker Fee160 p.a. 10% deb.3613.013.921.6OID 80.875% 129.40200 Cash2858.720.342.9* Alw ays had right to accept more** All shares tendered acceptedOmega Advisors, Inc.7
Exhibit 810-Year Treasury-Note Yield%%1616141412121010886610.247.52 7.684727374754767778798081828384Daily Data from 1972 to 198410-Yr Treausury-Note YieldSource: FRB, and Omega Advisors, Inc.Omega Advisors, Inc.8
Exhibit 9Omega Advisors, Inc.9
Exhibit 10Let’s Take a Closer Look at the 5/1984 Tender5/9/84 close 155 ¾ x 20.3mm shares 3.16 B Market CapBuyback 8.7mm shares x 200 1.74 BNew Shares Outstanding 11.6mm (42.9% reduction)90 Days LaterStock Price 300 x 11.6mm shares 3.48 B Market CapSo despite having 1.74 B less assets, the company’s market cap roseby 320mm! In that period, the overall market was largely unchanged.I would also note that Dr. Singleton used cash in the offer and not debt.He avoided getting caught with high cost fixed rate paper at a time wheninterest rates were set to decline.Omega Advisors, Inc.10
Exhibit 11“There are tremendous values in the stock market, but in buyingstocks, not entire companies. Buying companies tends to raise the purchaseprice too high. Don’t be misled by the few shares trading at a low multiple of6 or 7. If you try to acquire those companies the multiple is more like 12 or14. And their management will say, ‘If you don’t pay it, someone else will.’And they are right. Someone else does. So it’s no acquisitions for us whilethey are overpriced. I won’t pay 15 times earnings. That would mean I’d onlybe making a return of 6 or 7 percent. I can do that in T-bills. We don’t haveto make any major acquisitions. We have other things we are busy doing.As for the stocks we picked to invest in, the purpose is to make asgood a return as we can. We don’t have any other intentions. We do notview them as future acquisitions. Buying and selling companies is not ourbag. Those who don’t believe me are free to do so, but they will be as wrongin the future as they have been about other things concerning Teledyne in thepast.”February 20, 1978 Issue of Forbes MagazineQuote of Dr. Henry SingletonOmega Advisors, Inc.11
Exhibit 12Omega Advisors, Inc.12
Exhibit 13Stocks Are More Attractive Than BondsCompanyAetna Life & CasualtyBrockway GlassColt IndustriesConnecticut GeneralCrown Cork & SealCurtiss-WrightEltra Inc.Federal Paper BoardGAFInternational HarvesterKidde, Inc.Litton IndustriesNational CanReichold ChemicalRexnordSem TechTravelersUS Fidelity & Guaranty% 2 Ultimately got to 28%18.322.05.522.45.37.7* Fortune, 1/16/78 and Company FilingsOmega Advisors, Inc.13
Stock RepurchaseValue Creative or Value Destructive?Presentation to theValue Investing CongressLeon G. CoopermanChairman and CEOOmega Advisors, Inc.Omega Advisors, Inc.November 28, 200714
Exhibit 15AnswerYES!Omega Advisors, Inc.15
Exhibit 16Warren Buffett on Stock Repurchase One usage of retained earnings we often greet with special enthusiasm when practiced bycompanies in which we have an investment interest is repurchase of their own shares. Thereasoning is simple: if a fine business is selling in the market place for far less than intrinsicvalue, what more certain or more profitable utilization of capital can there be than significantenlargement of the interests of all owners at that bargain price?Source: 1980 Berkshire Hathaway Annual Report The companies in which we have our largest investments have all engaged in significantstock repurchases at times when wide discrepancies existed between price and value. Asshareholders, we find this encouraging and rewarding By making repurchases when acompany’s market value is well below its business value, management clearly demonstratesthat it is given to actions that enhance the wealth of shareholders, rather than to actions thatexpand management’s domain but that do nothing for (or even harm) shareholders. Seeingthis, shareholders and potential shareholders increase their estimates of future returns from thebusiness. A manager who consistently turns his back on repurchases, when these clearly are in theinterests of owners, reveals more than he knows of his motivations. No matter how often orhow eloquently he mouths some public relations-inspired phrase such as “maximizingshareholder wealth” (this season’s favorite), the market correctly discounts assets lodged withhim. His heart is not listening to his mouth—and, after a while, neither will the market.Source: 1984 Berkshire Hathaway Annual ReportOmega Advisors, Inc.16
Exhibit 17S&P 500Market OperatingBuyback DividendValueEarnings Dividends Buybacksover& Buyback Bill Bill BillDividend 12M Yield Bill06/30/2007 1,027.2903/31/200110,384.68 3 38.1134.5136.2737.5334.5833.83 mb. Yieldless 10-yrT-Note 3.65%3.03%2.61%2.62%2.91%2.44%2.63%0.58 2.15-2.07-2.83-2.423.76%-0.76 ppSource: Standard & Poor's Index Services, FRB, and Omega Advisors, Inc.Omega Advisors, Inc.17
Exhibit 18Observed Types of BuybacksType 1: No opinion on valuation, but management’s attempt to merely offset option dilution toavoid shareholder flack over option creep.Type 2: Very nefarious conduct on the part of management where companies actively buy backstock to accommodate executives happy to exercise options and sell their stock back to the companyat better prices than they would have otherwise received.Type 3: Management has no opinion on valuation, but is simply returning money to shareholdersvia repurchase as opposed to a dividend. The reasoning goes as follows: dividends are foreverwhereas if corporate circumstances change, they can always suspend the buyback program. When Ihear that, I remind managements that with the average stock yielding 2%, for every share acorporation buys back, they are buying back 50 years of dividends in one shot. In our view, if areasonable dividend turns out to be mistake, the corporate purchase program would turn out to be adisaster.Type 4: The last type of repurchase program is the one that we like and the one that Warren Buffettobviously identified with when he made his comments in the early ’80’s. That type of program iswhere managements have correctly identified a mispricing of their equity and by retiring shares theyare going to leverage returns to the long-term equity holder. Regrettably, all too few managementshave shown an astuteness in identifying such valuation.Omega Advisors, Inc.18
Exhibit 19Microsoft Corporation 40 oft Corporation (MSFT)200-day Moving Average2005200650-day Moving :10.7B20039.4B2004200520062007-80Weekly Data from October 2002 to 11/16/07MSFT Price Performance Relative to S&P 500 in Percentage Points Since October 2002Source: FactSet, and Omega Advisors, Inc.Omega Advisors, Inc.19
Intel Corporation 90807060504.6B 99819992000Intel Corporation200-day Moving Average200120022003200460-day Moving 100Monthly Data from August 1997 to 11/16/07Intel Price Performance Relative to S&P 500 in Percentage Points Since October 2002Source: FactSet, and Omega Advisors, Inc.Omega Advisors, Inc.20
Cisco Systems 356B9B10B8.3B7.7B 3530302525202015151010520032004Cisco Systems (CSCO)200-day Moving Average200550-day Moving 32004200520062007-50Weekly Data from October 2002 to 11/16/07CSCO Price Performance Relative to S&P 500 in Percentage Points Since October 2002Source: FactSet, and Omega Advisors, Inc.Omega Advisors, Inc.21
Lexmark International, Inc. 10090 3020032004Lexmark International (LXK)200-day Moving Average2005200650-day Moving 32004200520062007-150Weekly Data from October 2002 to 11/16/07LXK Price Performance Relative to S&P 500 in Percentage Points Since October 2002Source: FactSet, and Omega Advisors, Inc.Omega Advisors, Inc.22
Countrywide Financial Corporation 50 501.5B0.8B4040303020201010020032004Countrywide Financial (CFC)200-day Moving Average200550-day Moving -50-50-10020032004200520062007-100Weekly Data from October 2002 to 11/16/07CFC Pr
Value Earnings Dividends Buybacks over & Buyback Bill Bill Bill Bill Dividend 12M Yield 06/30/2007 13,349.73 214.19 59.44 157.76 2.65 5.43% 0.58 pp 03/31/2007 12,706.32 200.23 58.32 117.70 2.02 5.34% 0.66 12/31/2006 12,728.86 197.35 61.76 105.18 1.70 5.15% 0.52
