Apr 10, 2008 ... The Dhandho Startup. i l b ' h dh ... Charge a bit more. An Entrepreneurial
Barber's Dhandho Journey ... never invested in before. $128.
Dh dh ! Dhandho! Risk vs. vs Uncertainty
Breathtaking Waterfalls www.pabraifunds.com
Risk vs. Uncertainty
Heads I win! Tails, I don’t Lose Much! www.pabraifunds.com
The Dhandho Startup An Entrepreneurial i l Barber’s b ’ Dhandho h dh Journey
Town A Pop: 40,000
• Start with 1-2 Chairs. • Charge a bit more. more • Expand as business grows • Upside: Good; Downside: Minimal • Eventually premium disappears. Town B Pop: 30,000
Heads I Win; Tails I Don’t Lose Much
Emerging Town C Pop: 200 to 1000
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Low Risk + High Uncertainty = High Rewards
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Smoke-Filled Theatres Lead to Waterfalls
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A Few Waterfalls ¾ 1960s Ame American ican Express E p ess Salad Oil Crisis C isis ¾ GEICO (1976) - From $60 to $2.50 ¾ Embraer (9/11) – From $40 to $12 ¾ Stewart Enterprises (1999-2000) – From $20 to $2 ¾ Pinnacle Airlines (NWA BK– 2005) – From $14 to $4 ¾ Frontline ((2003)) – From $ $15 to $ $3
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How does one find/invest in waterfalls? ¾ On Dec Dec. 10 10, 2007 2007, Fai Fairholme holme Funds F nds filed a Form Fo m 13G indicating a 16.1% ownership in a company they had never invested in before. $128
13G Filed
$21
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Reverse Engineering the Fairholme Decision ¾ October Octobe 24, 24 2007 – Raid by b 200 Federal Fede al Agents. Agents ¾ Nov. 2: WSJ gets unnamed source - $35M excess billing to Medicare Medicare. ¾ Nov. 20: CIBC reports they’ve got a copy of the Search Warrant and 60+ page inventory of item seized. ¾ Nov. 20 – Dec. 4: Stock trades between $ $35 – 40. ¾ 13G must be filed within 10 days of going over 5%
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Why did Fairholme bet on WellCare (WCG)? ¾ Fairholme Fai holme timing suggests s ggests all buys b s done between bet een Nov. 21 – Dec. 7. They went over 5% on or after Nov. 30. Reliance on warrant and search inventory data. ¾ Warrant/Search inventory strongly suggested govt. focused on Wellcare’s Florida Medicaid Behavorial Health l h business b i – lined li d up with i h WSJ S story. $3 $35MM ¾ Research into Qui Tam. Former employee of the company’s Special Investigations Unit was terminated on Oct. 1. Filed Lawsuit on Oct. 25
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Qui Tam Research ¾ Law La favors fa o s whistleblowers histleblo e s going to govt. go t vs. s company. Get 5-25% of judgment. ¾ 3x limit on amount at risk. risk If $35MM then Wellcare could get fined $105 Million and employee gets $5-26 Million. ¾ Wellcare may face another $100 Million in legal fees. ¾ Over last 20 y years,, only y 5 Qui Q Tam cases (out ( of hundreds) have resulted in fines over $500 Million
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Qui Tam Research ¾ Fines over o e $500 MM were e e for fo extreme e t eme egregious eg egio s acts – Tenet Healthcare, HCA (twice!) etc. ¾ None put out of business. business ¾ One can buy WCG today at prices similar to Fairholme in December with following add add’ll data: ¾ CEO, CFO, General Counsel fired and replaced. ¾ New Exec. Exec Chairman Berg went to Oxford after scandals and turned it around. Sold to UnitedHealth
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Nov. ‘07 – April ‘08 ¾ Data suggests s ggests no impact on WCG continuing contin ing to g grow o and scale. ¾ e.g. e g Medicare Advantage enrollment grew from 9.72 Million to 9.84 Million in March ’08 – 1.2% ¾ Wellcare grew from 201.6K to 213.1K – 5.7% ¾ Expanded into hundreds of counties since Nov. ¾ New Gen. Gen Counsel former Asst. Asst US Attorney ¾ WellCare has a wide open field for growth www.pabraifunds.com
The Numbers ¾ High-growth; High g o th High se service ice compan company. ¾ 2004: $1.4B; 2005: $1.9B; 2006: $3.8B ¾ 2007: $5.4B – Estimated ¾ Analysts Consensus EPS: >$5/share in ‘07, ‘08, ’09 Could ’09. C ld be b as high hi h as $6-7/share $6 / h i 2009 in 2009. ¾ Buy in Q208; Sell in Q210; $5-6/sh. earnings stream is worth atleast $75-90/share $75 90/share (15x) ¾ Add 2 years of FCF: >$10/share www.pabraifunds.com
The Numbers ¾ Excess E cess Capital: Capital $527MM at end of Q108; Q108 After Afte settlement and legal expense: ~$7.75/share ¾ Base IV: $93-108/share ¾ Further Possible Upside ¾ EPS S iis much h lless than h FCF. C ¾ Historically reserves have been very conservative (adding $1 $1-2/share 2/share in EPS). EPS) ¾ Ignoring float of over $1 Billion. ($1.8 Billion MC) www.pabraifunds.com
Nightmare Scenerio: Sale at $75! ¾ If WCG g grows o s at 15-20% 15 20% and EPS g grows o s at same rate, then 2010 earnings could be > $8/share ¾ CEO is a turn-around/deal guy guy. Has significant options etc. at $40. Will settle ASAP and let stock price surge after all filings are current and then sell at premium i price. i
“I have only one nightmare … I wake up and see the headline “UnitedHealth buys WellCare for $75/share” headline, - Bruce Berkowitz, Fairholme, April 10, 2008 www.pabraifunds.com
Downside Protection: Margin of Safety ¾ Fine+legal upto pto $750 Million can easily easil be paid by b Wellcare and only eliminates excess capital (~$18/sh) ¾ In this case IV = 15x EPS in 2010 ¾ If 2010 EPS is $2.67/share, IV = $40 (-50%) ¾ We begin b i to llose money if fi fine exceeds d $ $750 0 Million illi AND Earnings take a greater than 50% hit. ¾ Odds of this scenerio are less than 1% ¾ We have picked losers in the past. Do your own DD! www.pabraifunds.com
Buy after the Waterfall; Sell after the Cliff
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The Dhandho Framework Invest in i … 1. 2 2. 3. 4. 5 5. 6. 7. 8. 9.
Simple Businesses Existing Businesses Distressed Businesses in Distressed Industries Durable Moat Few Bets, Bets Big Bets, Bets Infrequent Bets Businesses with a Margin of Safety Arbitrage-type Businesses Low-Risk; Low Risk; High High-Uncertainty Uncertainty Business Copycats. Don’t look for innovators.
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Thank You. Mohnish Pabrai Managing Partner P b i IInvestment Pabrai t t Funds F d Irvine, California, USA
[email protected] Tel. +1949.453.0609 www.pabraifunds.com www.pabraifunds.com
