Tom Gayner has been the president of Market Gayner Asset Management Corporation, a subsidiary to Markel Corp (MKL), since December 1990. He is also currently the president and Chief Investment Officer of Markel Corp. The company manages approximately $2 billion and is one of the largest companies in the property & casualty insurance industry. Under Gayner’s management, Markel generated a cumulative return of over 100% over the past decade, versus 16.4% for the S&P 500 index.
Recently, Gayner released the latest holdings of Markel in a 13F filing. Let’s take a closer look at the largest positions in his portfolio and decide whether these positions are worth investing in at this moment.
Carmax Inc (KMX): KMX is the largest position in Gayner’s 13F portfolio at the end of last year. As of December 31, 2011, Gayner had $158 million invested in this stock. A few other hedge fund managers were also bullish about KMX. At the end of 2011, there were 15 hedge funds with KMX positions in their 13F portfolios. For example, John Thaler’s JAT Capital Management had $54 million invested in KMX. Jeffrey Vinik’s Vinik Asset Management also had over $40 million invested in this stock.
KMX has a current P/E ratio of 18.92, relatively higher than the 17.69 for its peer AutoNation Inc (AN) and 12.74 for Penske Automotive Group Inc (PAG). KMX’s forward P/E ratio of 17.51 is also higher than Autonation’s 15.33 and Penske Automotive’s 12.3. The premium may be a result of Carmax’s higher profit margins. According to Finviz, KMX has a profit margin of 4.20%, versus 2.05% for AN and 1.53% for PAG. KMX plans to open five used vehicle stores in 2012, 10 in 2013, and 10 to 15 annually from 2014 to 2016. As a result, we see rising capital expenditures, higher depreciation and amortizations, and growing SG&A expenses in the next few years, which might limit KMX’s earnings growth. Analysts expect KMX to earn $1.79 per share in 2012 and $1.92 per share in 2013. Over the long term, its earnings are expected to grow at about 15% per year. However, analysts are more optimistic about AN and PAG. These two stocks not only have lower valuations, but also have higher growth expectations with an estimated EPS growth rate of 25% per year over the next 5 years.
Diageo Plc (DEO) is another large position in Gayner’s latest 13F portfolio. Gayner also had over $100 million invested in this position at the end of last year. There were also 15 hedge funds reported owning DEO at the end of 2011. Among them, Tom Russo was the most bullish money manager about DEO. Gardner Russo & Gardner had $180 million invested in DEO as of December 31, 2011. Bill Miller and Wallace Weitz were also bullish about this stock.
DEO has been successful with its “14 strategic brands” in recent years. DEO considers certain brands, such as Johnnie Walker scotch and Tanquerary gin to have the highest current and future earnings potential and markets these brands globally. The company outperformed the US spirits market and achieved improvements in various areas over the past few years. It also has large exposure to emerging and developing markets. About 40% of its revenue is derived from emerging markets, which posted double-digit growth rates in the past couple of years. Over the past year, organic sales growth was 10.3% in Asia Pacific area and 22.4% in Latin America and Carribean. DEO’s current P/E ratio is about 23, in line with the average of its peers. But the company has above-average growth prospects. In 2012, it is expected to make $5.81 per share, so its forward P/E ratio is 16.67. Its EPS is estimated to be $6.43 in 2013 and grow at around 10% annually over the next few years.
Some other large positions in Gayner’s portfolio include Brookfield Asset Management Inc (BAM), Exxon Mobile Corp (XOM), Wal-Mart Stores Inc (WMT), Walt Disney Co (DIS), and United Parcel Service Inc (UPS). We do not think it is a good time to purchase BAM as its forward P/E ratio of 23 is relatively high. On the other hand, the other four stocks have attractive valuation levels, especially XOM and WMT. WMT’s forward P/E ratio is 12 and XOM’s is about 10. Gayner was actually imitating Warren Buffett on WMT, UPS, and XOM as Buffett’s Berkshire Hathaway also invested in these three positions at the end of the third quarter. But Buffett sold out his XOM stakes over the fourth quarter. Gayner is clearly a Buffett follower as he also invested over $200 million in total in Berkshire Hathaway Inc (BRK-B and BRK-A).
