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Lampert's Piggybank 1 Lampert’s Piggybank © 2013 · Phoenix Capital Research, OmniSans Publish, LLC. All Rights Reserved. Protected by copyright laws oF the United States and international treaties. This newsletter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission oF OmniSans Publishing, LLC. · All Rights Reserved. Disclaimer: The information contained on this newsletter is for marketing purposes only. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice by Phoenix Capital Research or any of its affiliates, nor is it to be relied upon in making any investment or other decision. Neither the information nor any opinion expressed on this newsletter constitutes and offer to buy or sell any security or instrument or participate in any particular trading strategy. The information in the newsletter is not a complete description of the securities, markets or developments discussed. Information and opinions regarding individual securities do not mean that a security is recommended or suitable For a particular investor. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial proFessional to determine the suitability of any investment. Opinions and estimates expressed on this newsletter constitute Phoenix Capital Research's judgment as of the date appearing on the opinion or estimate and are subject to change without notice. This information may not reflect events occurring after the date or time of publication. Phoenix Capital Research is not obligated to continue to oFFer information or opinions regarding any security, instrument or service. Information has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. Phoenix Capital Research and its officers, directors, employees, agents and/or affiliates may have executed, or may in the future execute, transactions in any of the securities or derivatives of any securities discussed on this newsletter. Past performance is not necessarily a guide to future performance and is no guarantee oF future results. Securities products are not FDIC insured, are not guaranteed by any bank and involve investment risk, including possible loss of entire value. Phoenix Capital Research, OmniSans Publishing LLC and Graham Summers shall not be responsible or have any liability for investment decisions based upon, or the results obtained From, the information provided. Phoenix Capital Research is not responsible for the content of other newsletters to which this one may be linked and reserves the right to remove such links. OmniSans Publishing LLC and the Phoenix Capital Research Logo are registered trademarks of Phoenix Capital Research. OmniSans Publishing LLC - PO BOX 6369, Charlottesville, VA 22906 1 Lampert’s Piggybank September 25, 2013 It wasn’t the phone call to his wiFe, the motel bill, or the supposed ransom oFFer oF $5 million that got Eddie Lampert away from his In This Issue kidnappers... it was the pizza that one oF his captors ordered using the billionaire hedge • The favorite investment of Fund manager’s personal credit card. the “next Buffett” is on sale Most investors dream oF amassing fortunes now. through their investment savvy. But nobody wants to be so talented and wealthy that they become a target for hostage takers. Lampert, • Buying at a better price than the selF-made billionaire and founder oF ESL an investment legend. Investments - and the man who has outperFormed Warren BuFFett for 18 years - has this distinction. • Doubling sales and profitability. Four attackers jumped Lampert on the way to his car at 7:30 p.m. Friday, January 10, 2003. Soon aFter, he found himselF sitting on a motel • Time to buy! toilet with his hands and feet bound and his head covered by a cloth hood. He would remain in this position for the next 39 hours, having his hands released and hood removed only once when his captors gave him some fried chicken to eat. According to the media’s coverage oF the ordeal, Lampert convinced his captors he’d pay them $5 million iF they let him go. However, a mistake was made: one oF his captors foolishly called in a pizza order using Lampert’s credit card. Realizing the mistake, Lampert told them their only chance oF not getting caught was to 3 2 simply let him go. AFter all, he hadn’t seen any oF their faces because they were wearing masks. However, iF they were caught while he was still a hostage, or worse still, iF they harmed him, there would be very serious legal consequences. Lampert is known for his “in your face” questioning oF directors and executives at multi-billion dollar corporations like Sears, Deluxe, and AutoNation. Still, berating management is a whole diFFerent ball game from negotiating for your liFe with four highly-strung kidnappers. But Lampert did it. And so Eddie Lampert became a free man at exit 3 oF highway I-95 on Sunday morning January 12. He simply walked to the nearest police station to file a report on his assailants, and then returned home to his understandably hysterical family. At age 40, with a net worth oF several billion dollars, Lampert could have easily let the kidnapping finish his career. As the head oF ESL investments, a $15 billion hedge fund, he’d averaged 29% aFter fees for 18 years straight. To put these returns in perspective, Warren BuFFett has averaged 25%. Granted, BuFFett has maintained his average for twice as long, but Lampert is already worth more than BuFFett was at the same age. Lampert didn’t rest long though... he took a few days oFF, then continued his plans to reFinance k-Mart from bankruptcy, turning his firm’s initial $1.3 billion stake into $5.4 billion (a 315% gain) in just under 18 months. The most famous oF Lampert’s deals was the K-Mart reFinancing and subsequent merger with Sears. However, since 1997, Lampert’s been involved with another, less troubled company... In fact, this was one oF the companies that Lampert first made his multi-billion dollar fortune in. It was also one oF the first companies where he took an active role in management: within two years, Lampert owned 15.7% oF the shares outstanding and voted himselF onto the board. Eddie Lampert started his own hedge fund, ESL Investments, with $28 million in 1988. Since that time, he’s shown investors average annual returns oF over 20%. Today, ESL includes most oF Lampert’s money as well as private accounts for David GeFFen, Dell Founder Michael Dell, and the Tisch family. IF you’re wondering what kind oF money a return oF over 20% a year for more than two decades years will make you, you’ll enjoy David GeFFen’s quote: “I’ve made more money from Eddie than 4 3 from all the businesses I’ve created and sold.” GeFFen claims that had he not removed part oF his initial $200 million investment for diversiFication, he’d now be sitting on more than $9 billion. Lampert’s favorite technique is buy a large stake in a company and vote himselF onto its board. He then pushes the company’s management to cut costs and improve its margins with the goal oF generating as much cash as possible. Which is precisely what he did with Autozone (NYSE: AZO). Lampert is most famous for his involvement in Sears Holdings… which has turned out quite poorly. However, the single largest investment he made for some time was in AZO. It was also one oF the most proFitable. Indeed, AZO was Lampert’s piggy bank for the better part oF a decade. Lampert first bought AZO in 1998. He joined the board in 1999. The results speak for themselves. ($ in 1999* 2013 millions) Sales $4,116 $9,148 Cost of $2,385 $4,407 Sales Gross 42% 51% Margin Op. Cost $1,298 $2,968 Op. Margin 10% 19% Net Margin 5% 11% *the year Lampert joined AZO’s board. And since that time the company has more than doubled revenues, increased gross margins by 9% and more than doubled proFitability. Aside from increasing AZO’s proFitability, Lampert drastically increased its returns to investors. 5 4 Lampert has actually created an incredible opportunity in the company today. You see, Lampert’s involvement in Sears Holdings has been extremely diFFicult. Lampert first became involved with Sears in 2005 when he merged it with Kmart. The situation has not gone well. Sears has posted 29 straight quarters oF sales declines. The only thing keeping the company out oF bankruptcy has been a steady inFlux oF cash in the form oF lending and commercial paper from Lampert or his hedge fund. 6 5 Rather than backing oFF, Lampert has become even more involved in Sears’ business, becoming First Chairman and then CEO earlier this year. The results have been less than rosy for his hedge fund. As a result oF this, Lampert has been liquidating his stakes in a number oF other positions, including AZO. Investors, believing that Lampert is the only thing going for the company, have dumped shares as well. As a result, we have the opportunity to buy a world-class business that is even better shape than beFore Lampert became involved… and we can buy it at an even BETTER valuation. Indeed, AZO was actually MORE expensive in 1999, when Lampert joined the company, than it is today. AZO 1999 2013 P/E 17.3 16.0 P/S 1.0 1.9 P/CF 13.8 11.8 7 6 However, it’s also a larger, far more proFitable company as well.
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