When golfer Phil Mickelson won The Open Championship in Scotland, he seemed to be playing a different game compared with his competitors. His aggressive play, amid his rivals’ more defensive strategies, helped him seal a well-deserved victory.
In business as in golf, iconoclastic mavericks often generate returns that others can only dream of. A business that executes well may gain a small advantage, but to make exceptional returns, like Mickelson, a business has to find a different, better way. Let’s look at three companies that have found new ways to produce great returns for investors.
Flying by the Seat of the Pants
Peter Lynch warned against the dangers of diworsification, and with good reason; about 70% of acquisitions fail. So you might regard a company that has made 27 acquisitions since IPO in 2006 with a little suspicion.
In addition, this company just raised $1.4 billion in debt — then paid shareholders a special dividend of $1.1 billion. Of the $5.6 billion in assets on its balance sheet, $4.1 billion are intangible. And with $5 billion in debt on its books, the company has just $600 million in equity left for shareholders.
Viewed rationally, the business looks hugely overleveraged, and the profligate dividend seems irresponsible. But aircraft parts supplier TransDigm Group Incorporated (NYSE:TDG) has a few surprises in store.
The parts Transdigm supplies represent a small proportion of the cost of an aircraft, allowing Transdigm to focus on quality and deliver investors a very juicy net margin of 15% after tax.
TransDigm Group Incorporated (NYSE:TDG)’s uses debt to make accretive acquisitions, drive up margins, and increase cash flow. The company returns value to shareholders through repurchases and special dividends.
Wall Street analysts may view this highly leveraged approach as a little too flighty for comfort. But from 1993 to 2012, TransDigm Group Incorporated (NYSE:TDG) delivered a compound annual growth rate on EBITDA of 26%. Shareholders can happily settle back and enjoy the ride.
Transdigm EBITDA. Source: TransDigm Group Incorporated (NYSE:TDG) investor presentation.
The Speciality Insurer
Most insurance companies like to take on well-known risks, which make it easier for them to set premiums at profitable levels. But Markel Corporation (NYSE:MKL) goes out of its way to find unusual risks that are difficult to assess.
Markel’s expertise in pricing awkward business frees it from the competitive pressures of the general market, which enables the company to generate high underwriting profits. But Markel’s unique approach doesn’t end there.
Most insurers are very cautious in how they invest their cash “float” — money received as premiums that are set aside to cover future claims. Markel Corporation (NYSE:MKL) takes a more aggressive approach. Talented asset manager Tom Gayner invests in equities to generate high returns. In addition, Markel is gradually acquiring a wide range of non-insurance businesses.
Warren Buffet used a similar approach to build up Berkshire Hathaway. And we know how that story played out.
Markel’s success can be measured by its growth in book value per share over the last decade.
Source: Markel annual reports.
Markel’s recent share price is less than 1.2 times book value. This is low – historically it has been as high as 2 times book value.
As the share price rises in relation to book value, and book value itself rises, investors can benefit from an attractive double gain.
The Future of Motoring
Cars run on gasoline, get sold through dealers, and get serviced at garages, right? Except, that is, when they run on batteries, get sold directly over the web, and get serviced at your home.
Tesla Motors Inc (NASDAQ:TSLA) has an approach to selling cars that is radically different to that taken by the Detroit based motor barons, hiring ex-Apple executive George Blankenship to create stylish, inviting stores in high-end retail locations.
In another unconventional move, Tesla Motors Inc (NASDAQ:TSLA) repaid its government loan early, to foster a taxpayer-friendly image.
