Investment Analysis
.
***The below is directly reproduced from Buffett's Partnership Letter dated 1-30-1961***
In 1960, Buffett Partnership invested a very high and unusual proportion - 35% of net assets in one investment - Sanborn Map Co. The investment was made at a substantial discount from asset value based on market value of their securities and a conservative appraisal of the operating business. While there is no clear information on how Buffett came across Sanborn, other than the fact that in late 1958 he was successful in finding a special situation and became the largest shareholder of Sanborn by selling out his investment in Commonwealth Trust Co. of Union City, NJ.
*Sanborn Map Co. was engaged in the publication and continuous revision of extremely detailed maps of all cities in the United States. This detailed information showing city structures, diameter of water mains underlying streets, location of fire hydrants, composition of roof etc., was primarily of use to fire insurance companies. The bulk of Sanborn's business was done with about thirty insurance companies although maps were also sold to customers such as public utilities, mortgage companies, and taxing authorities.
For seventy-five years the business operated in a more or less monopolistic manner with profits realized in every year accompanied by almost complete immunity to recession and lack of need for any sales effort. Sanborn had a low-cost durable competitive advantage without having to expend great sums of capital to maintain it. For ex. the cost of keeping the maps revised to a Omaha customer would run around $100 per year.
In early 1930's Sanborn had begun to accumulate an investment portfolio. As there were no capital requirements to the business, all retained earnings were devoted to this project. Over a period of time about $2.5M was invested, roughly half in bonds and half in stocks. In the early 1950's, a competitive method of underwriting known as "carding" made inroads on Sanborn's business and after-tax profits of the map business fell from an average annual level of over $500,000 in the late 1930's to under $100,000 in 1958 and 1959. Thus, over the 1950's, the investment portfolio blossomed while the operating map business wilted. The extreme divergence of these two factors is shown below
1938 1958
DJIA 100 - 120 range 550 range
Sanborn $110 per share $45 per share
During this same period the value of Sanborn investment portfolio increased from about $20 per share to $65 per share. Sanborn had a sales volume of about $2.5M per year and owned about $7M worth of marketable securities in 1959 with 105,000 shares outstanding.
- Investment Portfolio $20 per share $65 per share
This means, in effect, that the buyer of Sanborn stock in 1938 was placing a positive valuation of $90 per share on the map business in a year of depressed business and stock market conditions. In the tremendously more vigorous climate of 1958 the same map business was evaluated at a minus $20 with the buyer of the stock unwilling to pay more than 70¢ on the dollar for the investment portfolio (70% of $65 per share) with the map business thrown in for nothing.
- Map business $90 per share ($20) per share
How could this come about? Sanborn in 1958 as well as 1938 possessed a wealth of information of substantial value to the insurance industry. To reproduce the detailed information they had gathered over the years would have cost tens of millions of dollars. Despite "carding" over $500M of fire premiums were underwritten by "mapping" companies. However, the means of selling and packaging Sanborn's product, information, had remained unchanged throughout the years and finally this inertia was reflected in the earnings.
* Buffett's Partnership Letters 1959, 60
***The below is directly reproduced from Buffett's Partnership Letter dated 1-30-1961***
In 1960, Buffett Partnership invested a very high and unusual proportion - 35% of net assets in one investment - Sanborn Map Co. The investment was made at a substantial discount from asset value based on market value of their securities and a conservative appraisal of the operating business. While there is no clear information on how Buffett came across Sanborn, other than the fact that in late 1958 he was successful in finding a special situation and became the largest shareholder of Sanborn by selling out his investment in Commonwealth Trust Co. of Union City, NJ.
*Sanborn Map Co. was engaged in the publication and continuous revision of extremely detailed maps of all cities in the United States. This detailed information showing city structures, diameter of water mains underlying streets, location of fire hydrants, composition of roof etc., was primarily of use to fire insurance companies. The bulk of Sanborn's business was done with about thirty insurance companies although maps were also sold to customers such as public utilities, mortgage companies, and taxing authorities.
For seventy-five years the business operated in a more or less monopolistic manner with profits realized in every year accompanied by almost complete immunity to recession and lack of need for any sales effort. Sanborn had a low-cost durable competitive advantage without having to expend great sums of capital to maintain it. For ex. the cost of keeping the maps revised to a Omaha customer would run around $100 per year.
In early 1930's Sanborn had begun to accumulate an investment portfolio. As there were no capital requirements to the business, all retained earnings were devoted to this project. Over a period of time about $2.5M was invested, roughly half in bonds and half in stocks. In the early 1950's, a competitive method of underwriting known as "carding" made inroads on Sanborn's business and after-tax profits of the map business fell from an average annual level of over $500,000 in the late 1930's to under $100,000 in 1958 and 1959. Thus, over the 1950's, the investment portfolio blossomed while the operating map business wilted. The extreme divergence of these two factors is shown below
1938 1958
DJIA 100 - 120 range 550 range
Sanborn $110 per share $45 per share
During this same period the value of Sanborn investment portfolio increased from about $20 per share to $65 per share. Sanborn had a sales volume of about $2.5M per year and owned about $7M worth of marketable securities in 1959 with 105,000 shares outstanding.
- Investment Portfolio $20 per share $65 per share
This means, in effect, that the buyer of Sanborn stock in 1938 was placing a positive valuation of $90 per share on the map business in a year of depressed business and stock market conditions. In the tremendously more vigorous climate of 1958 the same map business was evaluated at a minus $20 with the buyer of the stock unwilling to pay more than 70¢ on the dollar for the investment portfolio (70% of $65 per share) with the map business thrown in for nothing.
- Map business $90 per share ($20) per share
How could this come about? Sanborn in 1958 as well as 1938 possessed a wealth of information of substantial value to the insurance industry. To reproduce the detailed information they had gathered over the years would have cost tens of millions of dollars. Despite "carding" over $500M of fire premiums were underwritten by "mapping" companies. However, the means of selling and packaging Sanborn's product, information, had remained unchanged throughout the years and finally this inertia was reflected in the earnings.
* Buffett's Partnership Letters 1959, 60