You are on page 1of 117

Value-oriented Equity Investment Ideas for Sophisticated Investors

A Monthly Publication of BeyondProxy LLC  Subscribe at manualofideas.com

“If our efforts can further the goals of our members by giving them a discernible edge
over other market participants, we have succeeded.”

Investing In The Tradition of
Graham, Buffett, Klarman

WIDE-
Year VI, Volume VII
July 2013

When asked how he became so
THE

MOAT I
successful, Buffett answered:
“We read hundreds and hundreds
of annual reports every year.”

Top Ideas In This Report
SSUE
DirecTV
(NYSE: DTV) …………………….. 34 ► MOI Members Share Their Insights into Moats
Norfolk Southern
(NYSE: NSC) ……………………. 66
► Exclusive Interview with David Rolfe
Oracle ► 20 Companies Profiled by The Manual of Ideas Research Team
(Nasdaq: ORCL) ………………… 70
► Proprietary Selection of Top Three Candidates for Investment
Also Inside
► 10 Essential Screens for Value Investors
Editorial Commentary ……………… 3
MOI Members on Moats …………… 7
Interview with David Rolfe ……….. 14 Companies profiled include Abbott Labs (ABT), Danaher (DHR),
20 Wide-Moat Companies ……….. 26 DIRECTV (DTV), Express Scripts (ESRX), Hershey (HSY), Intel (INTC),
10 Essential Value Screens ……… 106 Jack Henry (JKHY), Johnson & Johnson (JNJ), McCormick (MKC),
MSCI Inc. (MSCI), Norfolk Southern (NSC), Oracle (ORCL), Pfizer (PFE),
About The Manual of Ideas Procter & Gamble (PG), Republic Services (RSG), Stratasys (SSYS),
Our goal is to bring you investment
Tyco International (TYC), Union Pacific (UNP), Wal-Mart (WMT),
ideas that are compelling on the and Walt Disney (DIS).
basis of value versus price. In our
quest for value, we analyze the top
holdings of top fund managers. We
also use a proprietary methodology
to identify stocks that are not widely
followed by institutional investors.
New Exclusive Videos
Our research team has extensive in the MOI Members Area
experience in industry and security
analysis, equity valuation, and (log in at www.manualofideas.com
investment management. We bring a or email support@manualofideas.com)
“buy side” mindset to the idea
generation process, cutting across
industries and market capitalization
ranges in our search for compelling  Rupal Bhansali on contrarian investing strategies
equity investment opportunities.
 Ken Shubin Stein on building a successful process

 Ideas: Sealed Air, Haynes International, Berkshire Hathaway

Register at ValueConferences.com

Copyright Warning: It is a violation of federal copyright law to reproduce all or part of this publication for any purpose without the prior written consent of
BeyondProxy LLC. Email support@manualofideas.com if you wish to have multiple copies sent to you. © 2008-2013 by BeyondProxy LLC. All rights reserved.

Table of Contents
EDITORIAL COMMENTARY ..........................................................................3

MEMBERS SHARE THEIR INSIGHTS INTO MOATS ...................................7

EXCLUSIVE INTERVIEW WITH DAVID ROLFE ......................................... 14

PROFILING 20 WIDE-MOAT INVESTMENT CANDIDATES ...................... 26

ABBOTT LABS (ABT) – GEODE, GMO, MFS, JENNISON, PRIMECAP, SOUTHEASTERN ................ 26
DANAHER (DHR) – T ROWE, MFS, WINSLOW , VIKING, CAP RE, NEUBERGER ............................ 30
DIRECTV (DTV) – AKRE, BAUPOST, BERKSHIRE, LANE FIVE, SOUTHEASTERN, WEITZ................ 34
EXPRESS SCRIPTS (ESRX) – CAP WORLD, DAVIS, GMO, T ROWE, WEDGEWOOD, W EITZ ......... 38
HERSHEY (HSY) – HERSHEY TRUST, CAP WORLD, FMR, JPM, PIONEER, RENTECH ................. 42
INTEL (INTC) – W ELLINGTON, HARRIS, FRANKLIN, GEODE, BLEICHROEDER, WALTER SCOTT...... 46
JACK HENRY (JKHY) – FINDLAY PARK, JPM, KAYNE ANDERSON, ROYCE, TIMESSQUARE .......... 50
JOHNSON & JOHNSON (JNJ) – FAIRFAX, FRANKLIN, MFS, WELLINGTON, WEST COAST ............. 54
MCCORMICK (MKC) – T ROWE, FRANKLIN, PARNASSUS, MS, NEUBERGER, GEODE .................. 58
MSCI (MSCI) – BAMCO, DELAWARE, GSAM, IFP, MSIM, T ROWE, VALUEACT ....................... 62
NORFOLK SOUTHERN (NSC) – CAP RE, CAP WORLD, CITADEL, DFA, GEODE, MS, T ROWE ...... 66
ORACLE (ORCL) – CAP RE, CAP WORLD, MFS, FMR, GMO, HARRIS, EAGLE, T ROWE ............ 70
PFIZER (PFE) – WELLINGTON, T ROWE, FMR, MFS, CAP WORLD, DODGE & COX, GMO .......... 74
PROCTER & GAMBLE (PG) – BERKSHIRE, CAP W ORLD, PERSHING SQUARE, YACKTMAN, GMO . 78
REPUBLIC SERVICES (RSG) – CASCADE, SENTRY, FRANKLIN, SASCO, CAP RE, ARTISAN........... 82
STRATASYS (SSYS) – KORNITZER, PRIMECAP, SAMSON, TIGER TECH, TURNER, WELLS ............ 86
TYCO (TYC) – CITADEL, CLEARBRIDGE, DODGE & COX, IRIDIAN, MFS, THREADNEEDLE ............ 90
UNION PACIFIC (UNP) – CAP W ORLD, CAP RE, T ROWE, WINSLOW , JPM, DFA, PRIMECAP ....... 94
WAL-MART (WMT) – BERKSHIRE, CAP WORLD, EAGLE, FRANKLIN, GMO, MARKEL ................... 98
WALT DISNEY (DIS) – CHILDREN’S, DAVIS, FMR, MARKEL, TIGER GLOBAL, T ROWE ............... 102

10 ESSENTIAL SCREENS FOR VALUE INVESTORS ............................ 106

“MAGIC FORMULA,” BASED ON TRAILING OPERATING INCOME ................................................. 106
“MAGIC FORMULA,” BASED ON THIS YEAR’S EPS ESTIMATES ................................................. 107
“MAGIC FORMULA,” BASED ON NEXT YEAR’S EPS ESTIMATES ................................................ 108
CONTRARIAN: BIGGEST LOSERS OVER PAST 52 WEEKS (DELEVERAGED & PROFITABLE) ........... 109
CONTRARIAN: CHEAP FREE CASH FLOW GUSHERS ................................................................ 110
VALUE WITH CATALYST: CHEAP REPURCHASERS OF STOCK ................................................... 111
PROFITABLE DIVIDEND PAYORS WITH DECENT BALANCE SHEETS............................................ 112
DEEP VALUE: LOTS OF REVENUE, LOW ENTERPRISE VALUE ................................................... 113
DEEP VALUE: NEGLECTED GROSS PROFITEERS .................................................................... 114
ACTIVIST TARGETS: POTENTIAL SALES, LIQUIDATIONS OR RECAPS ......................................... 115

Value-oriented Equity Investment Ideas for Sophisticated Investors

Editorial Commentary

T
he search for great businesses is both harder and easier than the search for
cheap but mediocre businesses. It is harder because truly great businesses—
those with sustainable competitive advantage—are rare.

Making matters worse, “imposters” abound, as CEOs are naturally inclined to
portray their companies as great, and as many businesses manage to earn high
returns on growing amounts of capital over multi-year periods. Try Green
Mountain Coffee Roasters (GMCR), Lululemon (LULU), or Priceline (PCLN).
Each company has had strong operating momentum, rightfully earning the label of
“great business” at this time. Unfortunately, the market’s apparent judgment that
each of these businesses is sustainably great—as deduced from the stocks’
aggressive market quotations—may prove incorrect. The likely imposters GMCR,
LULU and PCLN have managed to “fool” the majority of investors, even as a
handful of smart, value-oriented investors may have sold short shares of one or more
of the companies. Perhaps GMCR, LULU and PCLN will prove to have been the
real deal in terms of the prospective returns for shareholders, but we have our doubts.

The search for great businesses may be easier than the search for cheap but mediocre
equities, as great businesses tend to stay great for long periods of time. This makes
knowledge more highly cumulative than is the case with mediocre businesses, which
come and go or are forced to drastically reshape operations due to outside pressures.
An investor looking chiefly for statistical bargains is constantly running screens and
climbing the research curve on new equities, many of which will look materially
different in just a few short years. On the other hand, Buffett-style investors can read
about businesses over many years, building up a base of long-term knowledge and
context in specific companies. Buffett had likely followed the business and culture of
Goldman Sachs (GS) for decades prior to swooping in with an investment during
the financial crisis. Similarly, when the call came to consider the acquisition of
Heinz, Buffett could draw on decades of accumulated knowledge about the business.
The likelihood of missing a major driver of value or a major risk is considerably
lower in such a scenario than in the case of an investor who must quickly “get up to
speed” on a mediocre business that may be available at a temporarily low price.

Many fellow members of The Manual of Ideas who seek to invest in great businesses
at reasonable prices have built up watch lists of such businesses, tracking the width
of their competitive moats over time. This is not a quantitative process but rather a
matter of ongoing judgment. Buffett must have felt the monopolistic pricing power
of local newspapers start to erode quite a bit before their financials removed any
doubt that major changes were afoot in the media landscape. Similarly, those who
have followed cable operators for a long time must be growing ever more concerned
about the evolution of their competitive position vis-à-vis Internet-based video. On
the other hand, investors who have followed U.S. railroads for a long time probably
started seeing major improvement in railway economics quite a bit before the rest of
the investment community caught on. As such, an investment process that relies on
knowledge accumulation over time can deliver an edge in judgment at key inflection
points in the attractiveness of certain companies or industries. Such an edge may be
less available to those who focus on screening-based deep value approaches.

Inside, we bring you a variety of perspectives on wide-moat investing, including our
recent in-depth interview with value investing thought leader David Rolfe, chief
investment officer of Wedgewood Partners, a multi-billion dollar investment firm
founded in 1988 and based in St. Louis, Missouri. David is also a keynote instructor

© 2008-2013 by BeyondProxy LLC. All rights reserved. JOIN TODAY! www.manualofideas.com July 2013 – Page 3 of 117

We also bring you other MOI member perspectives on wide-moat investing. We view the recent quotation of 8x 2012E EPS. where the company generates EBIT margins in the mid-30s. Ecko Unltd. $91 per share. $16 per share.  Before we delve into this month’s three highlighted ideas. Starter. While the company’s negotiating leverage and licensing opportunities would diminish in a weak economy. Goldman Sachs (NYSE: GS.com). So.S. If you read them a year ago. published on July 1. MV $2. Peanuts. 7x 2013E EPS and 0. $30 per share. Nonetheless. why? We were quite simply lucky to some extent. 2012: Abercrombie & Fitch (NYSE: ANF. Management has assembled a portfolio of attractive lifestyle brands and operates a model with low capital intensity and high returns. Recent stock repurchases also reflect positively on Iconix’ cash-generative model and could increase per-share intrinsic value. 2012. Value-oriented Equity Investment Ideas for Sophisticated Investors at Wide-Moat Investing Summit 2013 (online at ValueConferences. though this is not necessarily evident in a lower comp ratio. so the question is.. and I’m not sure we would be reviewing the selections had they worked out poorly. what did you think of them? Why did you invest. ANF has achieved returns on capital in excess of 30% in “normal” years. While ANF’s large FQ1 share repurchases may have been badly timed. the firm’s franchise is not yet seriously threatened. perhaps you’ll enjoy considering what you might have done with the following three ideas last July. they reflect management’s judgment that the stock is undervalued. and Sharper Image. making GS their preferred place for building a long-term career. including Joe Boxer. it’s interesting to consider each of the three theses below. JOIN TODAY! www. but we have warmed up to the company over time.5 billion) Abercrombie & Fitch enjoys premium brand equity in the teen apparel market. All rights reserved. We believe ANF retains significant growth opportunities internationally. Many GS partners would earn much less if they worked elsewhere. take this exercise with a grain of salt. Continued repurchases and international expansion should create incremental value on a per-share basis. or why not? (If you are a new member of The Manual of Ideas. Each of the three ideas went on to perform strongly over the subsequent twelve months. Iconix (Nasdaq: ICON.1 billion) Iconix makes for a difficult judgment call. we hope you’ll uncover some new nuggets of wisdom on the following pages. While some cracks have appeared in Goldman’s the-client-comes- first façade. Iconix undeniably owns brands retailers want to have. I’d like to review the top selections from last year’s Wide-Moat Issue.manualofideas. We view the equity as compelling at the recent price of $30 per share.com July 2013 – Page 4 of 117 . Even as a wealth of literature already exists on the topic of investing in great businesses. MV $1. propelling the company’s stores to industry-beating returns. enabling the company to reduce leverage. We are comforted by the fact that Iconix generates both strong GAAP earnings and FCF. Danskin. Rocawear. as evidenced by both store growth and same-store-sales growth.7x tangible book as sufficiently compelling to consider an investment. MV $46 billion) Goldman Sachs can legitimately claim to be one of few investment banks whose intrinsic value resides more in the franchise than in top-performing staff.  © 2008-2013 by BeyondProxy LLC.) A look back: Top three ideas highlighted in The Manual of Ideas on July 1. This trend continues today outside the U.

barriers to entry are so high that existing players can enjoy improving economics for a long time as railroads become more appealing to shippers. This belies growth in Latin America where DirecTV is the largest pay-TV provider. DirecTV (NYSE: DTV. we highlight the following three wide-moat businesses as worthy of closer consideration.S. and DirecTV still growing in the U. $60 per share. Of the three ideas.S. we like the risk-reward. With that in mind. market into Latin America and other markets for a long time to come. MV $34 billion) $70 $60 $50 $40 $30 $20 $10 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 At a 10% forward earnings yield.com July 2013 – Page 5 of 117 . © 2008-2013 by BeyondProxy LLC. Norfolk Southern (NYSE: NSC. Despite concerns about competition and capital intensity. Even as equities have declined in price in recent weeks. as reasonable valuations seem harder to come by than only a year ago. Value-oriented Equity Investment Ideas for Sophisticated Investors We found this year’s choice of the top three wide-moat ideas more difficult. All rights reserved. we acknowledge that companies like Norfolk Southern are likely to create value for long-term shareholders even from recent elevated trading levels..manualofideas. While we may be inclined to wait for a recession or another adverse event before considering a long-term investment in a railroad. The 52-week low list is full of metals and mining companies. the fact that the business has gone from bad to good has not remained a secret. we find that the declines have been concentrated primarily in mediocre or commodity-based businesses. as well as increasing leverage. While railroads are a capital-intensive business. the market continues to treat DirecTV as if it had little to no growth prospects. MV $23 billion) $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Norfolk Southern’s model has improved over the past decade. as higher gas prices and traffic congestion have made the highway system less competitive. $73 per share. the valuation is attractive. What makes the situation compelling are exemplary capital allocation and the ability to reinvest capital from the maturing U. and railroads no longer trade at bargain prices. JOIN TODAY! www. With Latin America contributing ~25% of EBITDA. Unfortunately. we believe Oracle (ORCL) offers the most compelling risk-reward.

with quite a few members of The Manual of Ideas in attendance. Francisco Parames.com July 2013 – Page 6 of 117 . John Mihaljevic. as customers use complex Oracle solutions to power mission-critical applications. MV $142 billion) $40 $35 $30 $25 $20 $15 $10 $5 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Oracle is rivaled by only a handful of companies as a long-term success story in software. thanks in large part to the execution skill of CEO Larry Ellison. Speakers include Rupal Bhansali of Ariel Investments. and other leading investors. Be sure to say hello to them.com Sincerely.manualofideas. and have a great time! Join us at Wide-Moat Investing Summit 2013 on July 9-10. All rights reserved. Italy. CFA and The Manual of Ideas research team © 2008-2013 by BeyondProxy LLC.  Fellow member Ciccio Azzollini has once put together a wonderful value investing conference to take place in Molfetta. The recent revenue growth disappointment provides an opportunity. with per-share value creation helped by friendly capital allocation policies. adjusted for net cash. To register. As a result.. Joel Cohen. The company has ably leveraged strength in relational databases into application software as well as hardware. visit ValueConferences. Dave Sather of Sather Financial Group. modestly growing FCF machine. JOIN TODAY! www. The company benefits from some of the highest switching costs in the IT industry. Paul Lountzis of Lountzis Asset Management. The fully online Summit will feature the best investments among competitively advantaged companies. Pat Dorsey of Sanibel Captiva Investment Advisers. and David Poulet are just a few fellow members who will be speaking at the event. $30 per share. The 10th Value Investing Seminar will be held on July 11-12. as shares trade at an FCF yield. David Rolfe of Wedgewood Partners. Jeff Stacey of Stacey Muirhead Capital Management. both via acquisitions. Robert Robotti. Oracle has become a predictable. of ~11%. Guy Spier. Value-oriented Equity Investment Ideas for Sophisticated Investors Oracle (Nasdaq: ORCL. Don Yacktman of Yacktman Asset Management.

The July 2012 Wide- Moat Issue included the wisdom of Pat Dorsey. and other MOI members. The latter exists only when a firm clearly understands customer needs and uniquely and decisively configures their own assets and activities to deliver against those needs better than any other firm—an advantage so great that it is not replicable no matter how much a competitor spends. Today. (For institutions. significant market share. One hundred years. Today. Low prices can only Steinway had strong market be maintained over time if the company in question has a lower cost structure. and the advantage will not endure.com July 2013 – Page 7 of 117 . other firms will build the capabilities. ago. but each one of these is susceptible to erosion. it is durability. He was focused are still short of Buffett’s on the one thing that mattered in his business. we highly recommend downloading it from The Manual of Ideas online members area at http://www. he would detail concert pianists. For commodity products. Michael McKee. they remain a In non-commodity businesses the needs vary. institutions. and 3) “We have in our living room the fit between those two things relative to other firms. and high returns on capital. One hundred years. the summer home of the Boston Symphony Orchestra.com/protected ETHAN BERG. but the analysis is the same. a piano made by Steinway. candidate. a good reputation. they remain a candidate. 2) a company’s assets and activities. A company may have good products. it has strong market share amongst concert pianists.manualofideas. Steinway had strong market share amongst concert pianists. it is type of wood and size. what strikes me is how genuinely rare it is to find sustainable competitive advantage. My wife and I occasionally host chamber music concerts. the need is what is called the “voice”. and families. Value-oriented Equity Investment Ideas for Sophisticated Investors Members Share Their Insights into Moats We invited our members to share their thoughts on identifying companies with sustainable competitive advantage. I live a few minutes from Tanglewood. Daniel Gladiš.” He market share amongst configured the company to be a low-cost producer. ago. While they the full costs of production for him and others in his industry. If you have not seen last year’s issue. preferred holding period of forever. While they are still short of Buffett’s preferred holding period of forever. furniture buyers (!). Focusing on the concert pianists. For © 2008-2013 by BeyondProxy LLC. Otherwise. Josh Tarasoff. The three most important things to look at in searching for competitive advantage are 1) customer’s needs. G4 PARTNERSHIP While there are numerous potential sources of advantage. JOIN TODAY! www. We have in our living room a piano made by Steinway [LVB]. We polled members for their insights last year as well. We present selected responses below.manualofideas. the need is almost always price. Helpfully. For furniture buyers. CHIEF INVESTMENT OFFICER.” Good strategy in non-commodity businesses begins with an understanding of who the customers are and what their needs are. if the opportunity is good enough. Guy Spier. All rights reserved. none of those factors indicates sustainable competitive advantage. Each segment has specific needs. there are four primary segments: professional/serious players. it has strong the natural gas and oil business is to be among the lowest cost producers. “The only competitive advantage in pianists. As Ken Peak correctly pointed out in his Contango [MCF] roadshow when he share amongst concert discussed their core beliefs since inception. By themselves. The advantage should almost seem unfair. which is Steinway’s legendary sound. There are quite explicit reasons their advantage has endured and will continue to endure. Generally speaking. within the piano market.

current liabilities + short term debt - excess cash)].000 parts. That day KMX shares hit an all- time low. know-how in wood selection. “Carmax was once thought A more difficult challenge is to find a company whose financials do not yet to be a terrible business. it is primarily price. etc. which would it be and why? If you ask enough players in the space these questions. There are many ways to measure this. A long history of high ROIC is usually indicative of some kind of sustainable competitive advantage. The company spent millions of dollars building huge superstores all across America. All rights reserved. However. The stock fell nearly 90% from its IPO price. While there could be questions about size of the market. customers. The primary competitor who had forced them into a land-grab strategy had decided to quit. PRESIDENT. presentations. this was estimate the number of cars sold to within 100 cars out of 70. There just isn’t any easy way for this system of assets and activities to be replicated for this part of the market. This requires a lot of reading (SEC spent millions of dollars documents. they found themselves in a land grab war with AutoNation [AN]. racking up suppliers). it can help to speak with industry participants to deepen huge losses.000. AutoNation eventually A company with durable competitive advantage is Carmax [KMX]. 12. Additionally. I’m quite certain we were the first (in day KMX shares hit an all- 2003) to figure out how to scrape the company’s website every night and time low. One primary way of identifying a firm with competitive advantage is to look at the historical returns on invested capital. AutoNation eventually cried uncle and gave up. Finding a situation like that is every the late 1990s and early investors dream since the stock is likely to be mispriced by a wider margin. I learned about Carmax KMX at my former firm. the best possible news for KMX. the “concert bank. across America. you first have to find a firm that actually has a competitive advantage. they found themselves To determine the question of sustainability of returns and thus sustainability of in a land grab war with competitive advantage. industry research) on the company in building huge superstores all question and all the other companies in the ecosystem (competitors. Value-oriented Equity Investment Ideas for Sophisticated Investors families. the underlying assets and activities are technical excellence (more than 100 piano-related patents). Let’s say you find a company that has generated high ROIC. you’ll end up with a pretty good view of the market.” Carmax was once thought to be a terrible business. the collection of individual advantages results in sustainable advantage. who would it be any why? If you could pick one other company in your industry to own/run. We were the largest shareholders in the cried uncle and gave up. In the late 1990s and early 2000s. However. In demonstrate competitive advantage. craftsmen with 20+ years of experience. The stock fell your understanding of the advantages a company may have. Our preferred measure is [EBIT / (total assets . ANTHONY CAMBEIRO. Another favorite method is to ask a CEO a variation on these questions: Which one of your peers do you most admire and respect? If you could put a silver bullet in the head of one of your competitors. JOIN TODAY! www. Start looking to see why they generate these returns and if the reasons are sustainable or temporary. That KMX tracking stock in the early 2000s.) Regarding voice.” master piano technicians. The company and the reasons those returns exist.com July 2013 – Page 8 of 117 . 2000s. it requires a deeper understanding of the business model AutoNation.manualofideas. This allowed KMX to stop expanding and focus on optimizing the business. racking up huge losses. nearly 90% from its IPO price. transcripts. ANTHOLOGY CAPITAL To find a firm with sustainable competitive advantage. © 2008-2013 by BeyondProxy LLC. this was the best possible news for KMX.

The average for other investing in Carmax is that dealerships is closer to 40. This serves as a deterrent for a potential which is great for the longer. All rights reserved. And so they run you able to buy with both their own auctions for other dealers to come buy the cars KMX does not want to hands when the market is retail. advantages.” enough volume to make it worth their while. There are other advantages as well. Value-oriented Equity Investment Ideas for Sophisticated Investors What they developed over the coming years was a differentiated and unique business. KMX will purchase any car a customer continue to buy stock during brings into their stores. KMX stock has been quite volatile. The proven history of their paper allows them to continue to securitize at rates far better than a new participant. History in ABS market. à la carte offering of finance and extended warranties. support a single store of that size. Systems. and no other company is close to building something similar. buying over periods of weakness. Only by having conviction in the long-term advantages are you able to buy with both hands when the market is giving it to you. You can only get dealers to come to your own auctions if you have giving it to you. There are hundreds of little advantages which combine to create an enduring and significant advantage. This huge volume advantage allows the employees to become more efficient and allows the company to leverage fixed overhead and despite the long-term spend more on advertising to build a national brand. Here are a handful of the advantages we see KMX possessing: “My experience with Economies of scale. the stock market can still be overly concerned with near-term issues. My experience with investing in KMX is that despite the long-term advantages. KMX has created something that has never existed in the used car market—a brand associated with trust. The margins on cars purchased having conviction in the through this appraisal lane are better than cars bought at auction. © 2008-2013 by BeyondProxy LLC. KMX can only long-term advantages are buy at scale if they have an outlet for the cars they don’t want. Getting them to start at KMX thanks to the appraisal lane is a big advantage. Another benefit from this is that one of the first things a customer does before they buy a car is figure out how much they can get for their old car. Huge investment in systems has allowed KMX to know how to manage inventory and adjust quickly to changing market environments. entrant since the prospective returns on capital would not look attractive. KMX locations. which is great for the longer-term investor since you can continue to buy stock during periods of weakness. and fixed commissions for salesmen. KMX sells over 500 cars per location. KMX has a 15-year history in the securitization market. but this should give you a flavor of what makes the advantages of KMX durable.000 cars per year from their customer base. KMX has opened over 100 with near-term issues. This allows them to earn a better margin and keep accessing the market in tighter environments. The company stands behind the quality of their cars and the consumer offer—no-haggle pricing. Only by 400. and many are superstores in markets the company believes only stock has been quite volatile. incentivizing them to put you in the car best for you. This is not easily replicated.com July 2013 – Page 9 of 117 .manualofideas. JOIN TODAY! www. They have huge economies of scale. Studies show that a large percentage of customers who purchase a car will do so from the first place they visit. term investor since you can Appraisal lane and wholesale market. KMX has built a brand consumers can trust. The long-term value of that brand association in the used car market is and will continue to be incredibly high. the stock market can still be overly concerned Footprint of superstores in single-store markets. Brand.

” years ago that attrition was inevitable in their client base. Mead Johnson [MJN] was the infant formula structure with high shares for spinoff from Bristol-Myers [BMY]. Netflix [NFLX] was even more convenient than Blockbuster. intangibles. it is trust. Value-oriented Equity Investment Ideas for Sophisticated Investors JOHN GILBERT. where infant nutrition and safety can be even bigger issues than in developed markets. a well- known and longstanding known and longstanding brand name in Enfamil. Selling for over $18 in 2002. like Coinstar [CSTR] and their Redbox vending machines. All rights reserved.. (Some firms enjoy multiple advantages. Blockbuster declared bankruptcy in 2010. network effect. We eliminated any holdings and have not regretted that decision. but in this product is secondary. AUTHOR. That was a competitive advantage. however. I have learned to consider non-traditional substitutes. GENERAL RE–NEW ENGLAND ASSET MANAGEMENT Sustainable competitive advantage has become more appreciated. Don’t just look at traditional substitutes (left-right). Another is Pitney Bowes [PBI]. think two-dimensionally. THE CHECKLIST INVESTOR In the book It’s Earnings That Count I describe a three-step test to find bargain growth companies: authentic earnings power. I thought. but not more “Mead Johnson has all the persistent. A good business—until email became the dominant written form of communication. MJN and its small cohort of issues than in developed competitors have pricing flexibility and the margins and ROIC that go with it. It was clear to us several customers. and because the stores have convenient locations. Companies with authentic earnings power. Price is safety can be even bigger never irrelevant. the more valuable the business. unusually large exposure to however. confirmed by steady increases in FCF and EVA. JOIN TODAY! www. and shares last traded for $0. and efficient scale. Lesson? When assessing the durability of a moat. Lots of other consumers realized the same. CIO. and low price to intrinsic value.. The more durable the moat. A baby is the most important thing in the world to where infant nutrition and young parents. With its mail-deliver distribution model.07. things we like—an oligopolistic industry Occasionally it comes our way. The investing challenge of finding it at a discount has gotten harder. What MJN is really marketing isn’t a liquid. HEWITT HEISERMAN JR. © 2008-2013 by BeyondProxy LLC.g. price-inelastic customers.manualofideas. Apple’s iOS platform). which offered a broader selection. businesses crave but do not Newspapers are an obvious example. durable competitive advantage. also consider alternate substitutes (up-down). as Morningstar points out. Beyond the industry structure issues. markets. I used to compare my target to other companies that offered a similar product—a “left-right” landscape analysis. switching costs. On lack of sustainable competitive advantage: Technological change has been MJN has an advantage most poison for many legacy businesses that at one time appeared bulletproof. which had possess—price-inelastic 80% share of the mailroom equipment market. Beyond the industry structure issues. and unusually large exposure brand name in Enfamil. I preferred Blockbuster. a well. and to emerging market economies. to Blockbuster’s detriment. which I define as rising levels of GAAP net income. It has all the things we like—an the participants.com July 2013 – Page 10 of 117 . tend to enjoy competitive advantage.) To estimate competitive advantage durability. Due to the rise of the Internet. oligopolistic industry structure with high shares for the participants. I add a sixth criterion: ecosystem (e. Morningstar says there are five types of durable competitive advantage: cost leadership. MJN has an advantage most businesses crave but do not possess— emerging market economies. I identified other companies that also distributed movies via physical locations. When I bought video retailer Blockbuster because “entertainment” is a perpetual want.

Unfortunately. I could only repeat what the great investors have put in writing. However. The main questions for me is how sticky the product or service is. They had a great reputation and brand names. equity. PRIVATE INVESTOR As to finding moats in general. This will quickly show up in If the return on capital is too high. Value-oriented Equity Investment Ideas for Sophisticated Investors ARKO KADAJANE. If those two qualities aren’t met there should be a scale advantage or some other low-cost operator advantage. once Asian markets decided to mass-market competitors. There is. PORTFOLIO MANAGER. Monopolies are either governmental partners. The problem is that in most sectors it’s impossible to predict which companies have sustainable competitive advantage and high return on capital in the future. Cemex [CX] is an example where the moat was challenged. Unfortunately. a few strong competitors will provide very does not assure a good good returns—while keeping new competitors at arm’s-length. an Having an oligopoly alone does not assure a good investment. They are certainly not an oligopoly—but capital. All rights reserved. one specific concept I found appealing and wanted to analyze/backtest further but have not gotten around to doing so yet. Either way. This will quickly show up in management can be fantastic. Fannie Mae and Freddie Mac both were oligopolies that turned out to be bad investments because of a change in credit policy and poor management. it’s quite likely there will be a low or zero © 2008-2013 by BeyondProxy LLC. I always like to think about the service or product as a customer. To quote Bakshi: “My argument in the presentation is that float comes in many forms. Obviously. being a low-cost producer is always good. However. the moat was still there since a geographical monopoly arises around a cement plant due to transportation costs. SATHER FINANCIAL GROUP We are happy to find oligopolies. the incurrence of too much debt—and the stacking of the debt in a few maturities—greatly hurt Cemex. investment. In the end. PRESIDENT. high free cash flow. Furniture Brands could not compete due to their high labor costs. As such. Return on equity or return on invested capital gives you some sort of a preliminary understanding that the company should enjoy some edge over competitors. AMBIENT SOUND INVESTMENTS We don’t have any good quantitative metrics for finding companies with sustainable competitive advantage. it can show a vulnerability for new the numbers—high return on competitors to come in. These were also ones in which the negative influence of government or politics caused the management to do foolish things. high free cash flow. DAVE SATHER. In our assessment. high return on Wal-Mart [WMT] is a great example.” it is extremely difficult to compete against them. the numbers—high return on equity. FABIAN SCHILCHER. and does the company have the ability to raise prices. however. It’s rather easy to find companies which currently have a wide-moat business. Furniture Brands [FBN] appeared to have a moat. the wide moat collapsed. or the government will break up the monopoly.com July 2013 – Page 11 of 117 . JOIN TODAY! www.manualofideas. high return on capital. It is the concept Sanjay Bakshi describes in a presentation about floats and moats. an oligopoly with wise oligopoly with wise management can be fantastic. although sometimes this approach has a bias risk. this presents a risk “Having an oligopoly alone to an investment thesis. and if there is a solid moat.

But “Does the business show a while the concept is simple. Another place to look is the 13Fs of focused value investors who specialize in wide-moat businesses. See’s (brand). To do this. looking for insights into the nature and durability of the moat. While it won’t necessarily result in an investable moat. Once you know what you are looking for—an ongoing.manualofideas. I try to keep things as simple as or brand presence or the possible. BNSF (lack of substitutes. PRIVATE INVESTOR Finding wide-moat businesses begins with developing a clear idea of what you are looking for. Value-oriented Equity Investment Ideas for Sophisticated Investors cost float as well. Does the business have pricing power or free cash flow generation?” brand presence or the lowest-cost production? Does it have high margins and a track record of consistent free cash flow generation? These are all pretty basic things and are easy to assess. misjudged the sustainability time? Does it have a pristine of the moat around newspapers when the Internet emerged as a disrupting force. because there is no substitute for seeing these competitive forces from an operating perspective. but some great ones are hiding in plain sight and simply require the patience to wait for the right opportunity and the courage to invest when the time arrives. you need. Greenwald. cumulative process— there is no subsitute for broad. high returns on capital.com July 2013 – Page 12 of 117 . FOUNDING PARTNER. An added plus is experience running a business. Porter’s five forces. insisting on the basics will lead you to high-quality companies. Judging whether a moat exists high return on shareholders’ and the sustainability of that moat is difficult. à la Munger. JEFFREY STACEY. stable market share. There is no way to automate this process. This can be further complemented by reading the best books on industries. This needs to be complemented by a growing mental library of wide-moat companies to use as reference points when evaluating possible investments. insurmountable barriers to entry). All rights reserved. Even Warren Buffett. and classic microeconomics works such as Shapiro and Varian’s Information Rules. then there is a quantitative way to spot a moat— just measure the size of float and its trend over time…” GREG SPEICHER. you must research it like a journalist. companies. scale. cost advantages). JOIN TODAY! www. it probably track record of consistent doesn’t possess an enduring moat. there are many others. who is equity over a long period of clearly the greatest wide-moat investor of all time. which should result in an ample margin of safety if you don’t pay too much. GEICO (low- cost provider). Pat Dorsey. balance sheet? Does the As I search and sift and study companies in an attempt to assess the size and business have pricing power durability of the moat a business may possess. and business leaders. Once you find a wide-moat candidate. If I am right. Good places to look are industries with superior economics: high barriers to entry. it is not easy to do. sustained reading and thinking to find wide-moat business. STACEY MUIRHEAD CAPITAL MGMT Most investors intuitively understand the concept of investing in companies with enduring competitive advantages or what is referred to as a wide moat. Obvious examples include Coke (brand. © 2008-2013 by BeyondProxy LLC. Many such businesses are hard to find. a latticework of mental models drawn from the master teachers on competition and competitive strategy: Buffett’s complete corpus. Does the business show a high return on shareholders’ equity over a lowest-cost production? Does long period of time? Does it have a pristine balance sheet? If a business it have high margins and a generates high returns through leverage and financial engineering.

our experience with Indigo all too convincingly demonstrates that it isn’t easy to do. The basics were all present. JOIN TODAY! www. You need both because many high-ROIC companies have the illusion of strength simply because there’s an absence of competitors. and the emergence of e-reading was a game changer. One that routinely holds is that capital chases high returns and withdraws from low returns. The search continues… GLENN SUROWIEC. The views expressed above do not necessarily reflect the views of the firms with which the authors are affiliated. The authors may have positions in the companies mentioned and may transact in the securities of those companies at any time without further notice. Coca-Cola [KO] or Disney [DIS].com July 2013 – Page 13 of 117 . Industry pricing honest about how durable the and returns come down. While management is very talented and continues to do all the right things. then back up the truck because there are few easier ways to make money. All rights reserved. The majority “My advice is to be really of high-return companies can’t withstand a flood of new supply. e. Cable/phone companies are other examples—we deal with them because we have to. A current example would be Apple [AAPL]. © 2008-2013 by BeyondProxy LLC. track a list of wide-moat companies and do buy them when they occasionally A current example would be fall out of favor. and even more so to find one that’s materially undervalued. Why? There are certain “laws” of capitalism and economics. then back up the as such. the moat wasn’t enduring.” exceptional brand strength. with ambivalent customers just waiting for a new entrant. GDS INVESTMENTS I probably have a non-traditional perspective on “wide-moat” investing. That said. and high returns on equity. companies get re-priced from extraordinary to ordinary. Value-oriented Equity Investment Ideas for Sophisticated Investors The search is never easy and there are many potholes on the investment road. It’s rare to find a truly wide- truck because there are few moat company. it had best-in-class margins.manualofideas. I do easier ways to make money.. However. Several years ago we invested in Indigo Books and Music [Toronto: IDG]. It seems so easy to conduct this public post mortem and reach the conclusion that Indigo didn’t have an enduring moat. in this pursuit one will likely find more “moat imposters” than not. this is a temporary condition. If you find a It’s easier for me to invest in this high-probability scenario than the low company that truly has a probability that a high-moat company retains its position over the long term. moat is. Indigo is the largest book retailer in Canada with the largest market share by far. I look for consistently high returns on capital and Apple. Microsoft [MSFT] stands out in this regard—high returns. PORTFOLIO MANAGER. It was a destination stop with a great brand image with Canadian book lovers. My advice is to be really honest about how durable the moat is. if executed correctly. If you find a company that truly has a wide moat that’s materially discounted. Specifically. the simple fact remains that book retailing must reinvent itself to be successful.g. wide-moat investing is a relatively low-risk way to achieve market-beating returns. wide moat that’s materially The other issue with wide-moat investing is that most obvious moats are priced discounted. net cash on the balance sheet. I largely accept that. But while the concept of investing in wide-moat companies is a simple one. At the time we invested.

000 or $180. Ken academic reading. By investing in growing. from 1992 through March 2013. of outside reading. (The following is a lightly edited interview transcript and may contain errors. The first day the professor dismissed the chapter at hand. Value-oriented Equity Investment Ideas for Sophisticated Investors Exclusive Interview with David Rolfe We recently had the pleasure of speaking with David Rolfe. I didn’t have any expectations when I my first exposure to the likes signed up for the class. All rights reserved. St. That was Locke. I was very fortunate to become passionately interested in “…he put me in the direction the investment business back in 1984. Louis. Louis-based Wedgewood Partners.com July 2013 – Page 14 of 117 . influential—if you really are In fact—myself and another student and the professor—we actually started the interested in this topic. net. founded in 1988. After almost four years of being a portfolio manager at Boatmen’s Trust. and all he did was talk about the stock market. Wedgewood has managed to compound capital at 12% per year. Rowe Price… He was also influential—if you really are interested in this topic. still running. I’ll never forget Investments 334. Out of that rich environment. What was key in my career development at that firm—all the portfolio managers had a discretionary book of business. St. It’s $175. I was hooked. read them and reread them. Before we discuss your investment approach and some of your favorite ideas. but how he really helped me was he put me in the direction of outside reading. They were doing the focus thing. Missouri and that’s where Wedgewood is located. and they compete against other schools for monetary prizes. wide-moat companies. [Jim] Craig and [Tom] Bailey. and T. Buy the classic books.) The Manual of Ideas: You’ve been in the business for decades as an investor. We couldn’t get enough of it. Louis. Louis. Then when I finished school in late 1985. David joined the firm in 1992 in his current role and has been instrumental in shaping Wedgewood’s investment philosophy and approach. Dr. tell us a bit about your background and what got you interested in investing.000 and well-organized. and it was quickly bought out by Boatmen’s Trust. the combined entity had a huge custody business.manualofideas. buy these books. In addition.” a paper portfolio. St. Templeton. has approximately $3 billion of assets under management. Rowe junkie. David Rolfe: I was born and raised in St. I joined on the sell side of the Street. I had become enamored with focus investing. Louis is a big trust company town. versus 9% for the S&P 500. Louis Union Trust Company. That was my first exposure to the likes of Buffett and Graham. I was a stockbroker. non- I had an investments professor at the University of Missouri. He made it very interesting. JOIN TODAY! www. luck would befall me again in that the founding chief investment officer of © 2008-2013 by BeyondProxy LLC. It started out as these books. so that was my first exposure to the likes of Mason Hawkins at Southeastern Asset Management and the early “growth gang” at Janus: [Tom] Marsico. They could do whatever they wanted in terms of philosophy and process. after the crash of 1987— and I like to joke that after the crash of 1987 I couldn’t sell a brokered CD to my parents—but I was fortunate that I was able to go to the buy side of the Street as a portfolio manager at the old St. I imagine most of the class was rather bored but there were a few of us Price… He was also that were fascinated. and T. That was my easiest way to get into the business. buy student investment club at the University of Missouri. It turned out he was a market Templeton. non-academic reading. The second planet that aligned for me in early 1988. That was the initial bug. St. of Buffett and Graham. It’s still there. chief investment officer at Wedgewood Partners. a long time ago.

we have to wait patiently for the value side of the equation. company level. The © 2008-2013 by BeyondProxy LLC. Let’s pick focus. He gave me a shot. JOIN TODAY! www. If you want to build a portfolio of fifty or sixty. At Wedgewood. we hope to own these terrific growth companies for many years.com July 2013 – Page 15 of 117 . Value-oriented Equity Investment Ideas for Sophisticated Investors Wedgewood Partners—the firm was founded in 1988 so this is in the spring of 1992—the founding chief investment officer retired. about twenty stocks. the president and founder of Wedgewood Partners. and that’s where we stop.” years. At the ripe old age of thirty—and I knew all the mysteries in the investment world—with little track record at hand. market share dominating leaders that don’t have to use financial leverage. they shouldn’t be changing that much. I’m curious to delve a little bit deeper into that investment philosophy of yours. we’re going to be picky. even a hundred terrific growth companies—I don’t know if there are a hundred terrific growth companies—but to populate a portfolio that large. we want to buy them at a discount to intrinsic value. and if they compound at 15% over the next five years. We’re looking for these terrific businesses. Michael Quigley in 2006. MOI: You talked about Warren Buffett as an influence. and so the four of us have been doing this single strategy beginning in 1992—21+ years. Market. or trim or sell them. year. By being focused at the and that’s where we stop. I then met my partner Anthony Guerrerio. The companies that you identify and would like to invest in at the right price are companies that exhibit strong growth. and discipline. month. even two years. and he gave me a chance. I believe the big Achilles heel for far too many growth managers is the fact that they overpay or have to overpay for these companies. MOI: You’ve had a great track record since then. we Wedgewood. It’s not growth for growth’s sake—hypergrowth. Dana Webb in 2002. And along the way. risky balance sheet leverage growth. Given that we have very little turnover at turnover at Wedgewood. What do you mean by it? Rolfe: One of the phrases we like to chat about when we describe our philosophy at Wedgewood Partners is this idea that focused investing has “We’re putting our twenty structural advantages over other strategies. However. that we believe at a minimum can double over the next three to five years. You have three key tenets— focus. uniquely competitively growth companies for many advantaged. valuation changes constantly and it can get extreme. Once we identify that small subset. It’s great owning an industry darling when the stock price is rising and revenues and earnings are terrific. In May 1992. And we’re picky on the valuation in which we invest in them. I joined as chief investment officer with a blank slate to bring this developing philosophy with me to Wedgewood. you have to suspend a lot of your valuation criteria just to get them in the portfolio. We’re picky on the types of companies we want to own. We’re putting our twenty best ideas in Given that we have very little the portfolio. hope to own these terrific Our focus is on businesses we think are best in class. that it’s the value side of the equation that’s going to be the biggest driver of your potential return on that company over the next week. First. But as we know with Mr. the underlying growth is going to drive the out-years of the stock appreciation. we vetted a couple folks on the investment team. Rolfe: It is a big challenge. It’s really difficult. and it makes intuitive sense. It’s just as important. And we know from experience. Every investment style has its Achilles heel. If we’re right on these business models. We know if we’re buying companies at fair value.manualofideas. patience. quarter. Tell us about the challenges of being a value investor and investing in these types of companies that some would say are growth stocks. imprudent growth. we typically own best ideas in the portfolio. critically so. All rights reserved. that’s how focused we get.

and there’s this great business franchise that’s generating unlevered returns on invested capital of 20%. JOIN TODAY! www. we have to be patient on the valuation to come to levels where we believe the risk-reward is attractive enough that we swing the bat. the market will deliver it up at a price that makes sense. Value-oriented Equity Investment Ideas for Sophisticated Investors company is doing what you expect it to do. they’re going to have to ward off all you get the opportunity. We’ve come to learn over our careers that if a company is truly a terrific company that has a great growth pass for the next ten. You look back at the great investments over time—Wal-Mart [WMT]. You have to be patient. Said another way. That’s how And for a company to consistently do that. The trick is to discern if it’s a short-term phenomenon that’s fixable or not.com July 2013 – Page 16 of 117 . that’s the biggest thing. The biggest challenge is having the patience to wait for the company to get valued attractively. And if so. You look at the list of all the holdings in our portfolio and it’s very easy to identify—great company. the list is not that large. You’ve got to be patient. but there’s an issue on invested capital. with it right now. There aren’t that many out there. Help us understand how you identify these great businesses. on and on it goes. That’s where our focus is at Wedgewood. If a easy to identify—great company has significant competitive advantages—the key metric is cash. It’s getting the business wrong. there’s the mistake. but there’s an issue with it right now. We want to own companies that generate buckets of cash. “…there’s got to be some Depending on where you are in the business cycle—if you just go back over any hair on the story. Then again. our portfolio and it’s very What we’re looking for to discern great from good is ultimately profitability. When you find these businesses that have a long enough history of demonstrating that they can ward off the multitude of competitive pressures. day in and day out—at the company level. Rolfe: You do even a little cursory screening of companies of reasonable size. Certainly. fifteen years. MOI: Let’s stay with the business side of things. not the valuation wrong. we’re getting the best of two worlds: a great franchise at a discount. What really differentiates a truly great business from a merely good one? Perhaps that’s where some investors make the mistake—how do you separate those truly outstanding businesses? We already heard from you that they are quite rare. and you look for companies that have compounded the list of all the holdings in their earnings consistently at 15% plus a year. customers want more from a company and pay less. So many growth investors I would almost characterize as maybe closet momentum investors. 30%. paying 35x. say $5 billion and above. We’re not chasing momentum stocks. No company clicks along without bumps in the road forever. You look at period [of] five to six years. 40% or © 2008-2013 by BeyondProxy LLC. Our biggest mistakes have been getting the company wrong. 40x earnings for a 20% grower—if the stock turns out to be an 18% or 19% grower and the valuation comes down. there’s got to be some hair on the story.” those competitive threats. industry level. All rights reserved. large mid-cap to large-cap. You see the darlings of the day and you see them populate many portfolios. But far too many growth managers pay too high a price for these companies. return company. The biggest challenge is to have this value orientation to growth. Same as suppliers. Coca-Cola [KO].manualofideas. There have been plenty of times when those companies were out of favor—there’s something going on at the company level [so that] the valuation comes in. maybe even GEICO as an example here talking about Buffett. that’s our universe. Our work is to determine if it’s a short-term problem that’s fixable—company level. Customers are a threat. That’s how you get the opportunity.

through the course of a business cycle or successive business cycles. That’s the mosaic that we put together in our heads. while we currently own about twenty or so stocks in our portfolio. our watchlist is only about thirty- five or forty companies. too many cyclical companies are boom-bust. going back to this idea of the structural advantage of focus investing. Including the companies we have in our portfolio—right now it’s about twenty-two—and on our shortlist at any given time it’s maybe another ten to twenty companies. nothing is steady-state at any business. so now the firms. classic Buffett.com July 2013 – Page 17 of 117 . over the last twenty to twenty-five years we’ve only owned a little more than seventy-five or eighty others. The economy was much more cyclical. it’s not that many. Back in his day. MOI: What are your favorite sources of mispricing? Rolfe: Most of them come at the company level. a company will [have] higher lows and higher highs in terms of revenues and earnings. We swung the bat about a hundred times in twenty-five years.” stock’s crutching quite a bit. Then we have to try to get our heads around the valuation. Also. MOI: One often hears this term “secular growth. our prospective list of companies isn’t that large. That’s really the root of our culture and how we think and act at Wedgewood. We think can’t become complacent. That’s it. best-of-breed businesses.manualofideas. Many times there “We swung the bat about a may be some competitive inroads. Again. Related to that. All rights reserved. if we are truly dedicated to finding these top-rate. These companies have a terrific product or service. JOIN TODAY! www. If we can understand these business models well enough. the economy had bigger booms and bigger busts. There are times when competition begins to take its that’s a market distinction toll. how they have dealt with problems in the past. The way we view secular growth is. day-out discussions I have with my three partners. They have to adapt. and it can be a multitude of things. There are only four of us at Wedgewood. and they aren’t necessarily forging a long-term growth path that we would find attractive. Rowe Price’s definition of growth. That list doesn’t change that often. That’s when we sharpen our pencils. hundred times in twenty-five maybe they start to lose some market share. Companies years… That’s it. Those are the day-in. Value-oriented Equity Investment Ideas for Sophisticated Investors even higher. That’s it. Then the four of us reach a conclusion if we think there are better days ahead for these great businesses and the near-term problem can be addressed. understand the history of the management team. we wait for a fat pitch. maybe their market share starts to level off. and that’s when you might see an earnings miss or two.” I never really understood what that means. that growth chugs along… Simplistically. If it has been a and difference to so many previous growth darling. We think that’s a market distinction and difference to so many firms. As a company goes through the cycle in a secular way or over a longer period. I’m linking my previous firm since over the course of Wedgewood we’ve owned most of those stocks that were in the portfolios at my predecessor firm. While we only have four people doing this. His definition was. How do you go about identifying growth that’s sustainable? It seems growth in a way is cyclical… Rolfe: How we try to differentiate between this idea of secular growth and cyclical growth—we’re reminded of T. all companies are cyclical and it’s just that over © 2008-2013 by BeyondProxy LLC. that’s when our antenna perks up and we just have to wait for the valuation to come in to pull the trigger. chances are it had a pretty healthy multiple.

and not chase.” On the flipside. We’re seeing it significantly in the stock market. 21x. If we don’t think a company can double. Revenues were running at a nice rate so you had operational leverage. 21x. it’s probably not a good enough growth opportunity. the levered credit market. 6%. we have to have the courage of our conviction. how does the level of interest rates affect your thinking about value? Rolfe: This is a unique period. Market. MOI: We are in a low interest rate environment… When you invest in companies that are growing rapidly. 22x. We’re only looking for twenty companies. The markets can change on a dime. Low interest rates change behavior on a number of fronts. Combined with financial leverage. We see excesses in the fixed income market. many of them are priced at a P/E of 20x. we saw in 2006 and 2007 so many cyclical companies had cheap and easy credit. In the chase for yield. It changes a lot of behavior. you can’t chase that so-called leadership just because you’re behind. which we applaud. your opportunity set. look at what the chase for yield has wrought. All rights reserved. and those were the market leaders back then.manualofideas. these companies have been bid up to what we believe are excessive levels. Leadership can change on a dime. We actually like this environment. JOIN TODAY! www. what we want is compounding of retained earnings. opportunity set. and rising material prices. You have changes in “This is a unique period. The company has all this cash on rates have been for such a its balance sheet… But now the stock has gotten so cheap that they’re going to long period of time. a credit bubble. stay with our philosophy and process. As an example. It creates opportunities. As an investment manager. 22x. and it’s very accretive. Value-oriented Equity Investment Ideas for Sophisticated Investors a three. The chase for dividend yield. © 2008-2013 by BeyondProxy LLC. What we’re looking for at a minimum is a company that can double over three to five years. We see excesses in the credit market. just like in 2006 and 2007 when we were lagging. Consider how low interest rates have been for such a long period of time. the classic blue chip companies that pay a big dividend. you have these companies with underlying growth of 4%. is Apple [AAPL]. As an Companies that maybe would not borrow money before [now] have that example. When companies don’t have those opportunities and they’re paying out a third to a half of their retained earnings in the form of a dividend. What are your favorite valuation methods for these types of companies? Some people may be enticed to take the low interest rates and feed them into their discount rates. Return on asset was high because prices were high. need $150 billion to stay relevant. It start returning buckets of it back to shareholders. We would rather a company not pay a large dividend. MOI: Help us understand how the low interest rate environment can feed into valuation models. trust our research. What we have now in terms of a change of behavior is.com July 2013 – Page 18 of 117 . a lot of these cyclical companies were booming. By our definition of the growth. We get to extremes. the underlying growth rate of the company. 5%. Interest rates are so low that they can take You have changes in your advantage and borrow money. the industry leaders over the last year certainly. that have prospects for sustained growth. the underlying size of the company will grow through business cycles.to five-year period. this is classic Mr. They don’t changes a lot of behavior. our largest holding opportunity. We’re seeing extremes across the board here. 7% are now priced at a P/E of 20x. Over the last six months or so. Consider how low interest We’ve owned it in size since the end of 2005. our largest holding is Apple [AAPL].

In rates went up 200 basis points? 1948. in a low interest rate environment. We don’t have to lower our hurdle on either score to get something into the portfolio.manualofideas. Fate would have it that the SEC ultimately ruled to allow that purchase—he was an advisor buying an insurance company. MOI: You’ve studied the example of GEICO to illustrate this misnomer of growth versus value investing. A key aspect when we model businesses or model intrinsic value. Give us some sense of how you fit in. 1999 and early 2000. How do you see the dilemma between value and growth? Rolfe: It’s the valuation that’s going to give us an opportunity. What would the numbers look like five years from now if $100. When we do our “…the history of GEICO is valuation work. We don’t model to the second or third decimal point.” [numbers] out unless you’re modeling another end of the world. Graham was quick to admit two things. what variable doesn’t ripe with examples for makes sense here? What variable isn’t sustainable? If interest rates are too low. if we’re only looking at a twenty-stock portfolio. They’re not that elegant. we think that we have more of an opportunity to execute on the classic tenants of both growth and value investing. growth investors and value everything else being equal. The company was earnings is worth more. and GEICO soared. it’s good that the industry is like this. a secularly growing business rather than a deep cyclical business. You 25% of his investment have to throw those numbers out because there was an extreme. It allowed for the first publicly traded shares of GEICO.000. We want to do both. Benjamin Graham broke his rules and he put 25% of his investment partnership in a privately held company. You put in a silly discount rate and you’re going to get some obscene prices.000 in seed capital. So many people have said it over the years—Buffett and Munger included—value and growth are two sides of the same investment coin. we always have to step back and say. and so you build started in 1937 with about in some scenarios. or an extreme valuation that’s going to turn a decent investment over the near term into a really good investment. Can you share with us some of the insights that you’ve got out of studying GEICO over the years? Rolfe: It’s a story we’ve liked to tell when we’ve met with clients and prospective clients because the history of GEICO is ripe with examples for growth investors and value investors. part discipline.000 in seed capital. and it soared. Ultimately. Benjamin Graham When it comes to valuation. JOIN TODAY! www. if you will. I’m glad that 98+% of money managers out there aren’t focused managers. a lot of common sense goes into those models. Same thing partnership in a privately when you had such a valuation compression in 2008 and early 2009. when we’re looking at a technology company that broke his rules and he put had a huge valuation in 1998. what really makes sense here? That’s part experience. He purchased half of GEICO in 1948 for about $712. On the one hand. They can appear to be. And again. In 1948. it rose in value to over $400 million at its peak in © 2008-2013 by BeyondProxy LLC. Everything else being equal. I would much rather own a better business than a turnaround business. throw those held company. You have to step back and say. The changes of valuation give us opportunity. It gives us opportunity.com July 2013 – Page 19 of 117 . Value-oriented Equity Investment Ideas for Sophisticated Investors Rolfe: That’s a classic problem with the so-called Fed model. It keeps us away from the traffic jam. imperative- driven reasons—they want to talk about growth or value and put managers in certain camps. There are too many people in the industry—for various institutional. but that can also be a trap for investors. MOI: The spectrum of value investing is quite wide. a dollar of investors. The company was started in 1937 with about $100. But common sense has to rule the day. averages are deceiving. All rights reserved.

they know that GEICO was a huge win for him. Graham was very upfront [about] admitting that the gain in GEICO was more than all of his other successes combined. it was a crowded trade. When you read the annual reports. clicking along. a huge success. What’s interesting is that a lot of the study of Benjamin Graham is classic deep value. but all satisfaction that he played a significant role in saving GEICO. His last investment was in 1980.” There are plenty of times when a great growth company stumbles. Buffett became involved when he was going to school at Columbia. GEICO.manualofideas. “There are plenty of times When Buffett arrived on the scene. and they fell to a couple of dollars [by 1976]. there were times that GEICO was eminently investable in terms of a good valuation. GEICO was spending about $33 million in when a great growth advertising per year. still had their GEICO investment. and there are many people who believe that Apple’s best growth days are well behind them. But the stock got almost cut in half. JOIN TODAY! www. was still intact. their low-cost advantage versus their competitors. He bought about a third of the company in those dark days. and then particularly in the annual reports starting in 1995- 1996. when he passed away in 1976. there were Graham still owned it. Buffett knew that the underlying advantage of GEICO. They’re up to a billion now per year. It’s the story I like to the while. of their three largest competitors combined. It’s been sixty years. but it had to give him stumble back then. a classic value opportunity. and all the while. and all sings the praises of this great growth company. and that was a significant part eminently investable in terms of that rebirth—the impact of Buffett. when the details were singing the praises of GEICO… He liked to joke that he wanted Tony Nicely to step on the accelerator to spend all this [money on] advertising. As fate would have it. His wife. and that would be the foundation for growth going forward.com July 2013 – Page 20 of 117 . were about $40 in 1974. but all along the way. [GEICO’s] was a significant I’ve never heard Buffett talk about it in these terms. just before their recent stumble. even when he first invested in GEICO. They have stumbled. the growth was tell to explain what we’re trying to do at Wedgewood. He bought the other half in late 1995 for $2. Their product introductions haven’t had the same regular sequence. And Benjamin along the way. If it wasn’t for GEICO. and then Buffett kept his foot on Nicely’s foot. For those who have followed Buffett’s career. it was Buffett who swooped in and started buying the shares when they had fallen. It was a company he hawked when he was a stockbroker after he left Columbia. roughly. studying under Graham. and we actually believe it was more dramatic than that. You talked a little about Apple—how do you see the investment case here? Rolfe: In the fall of last year when it was $705 a share. All along while Apple’s earnings have disappointed. Value-oriented Equity Investment Ideas for Sophisticated Investors 1972. some of the great businesses that you were able to acquire at a good price. Through share buybacks at GEICO. MOI: Let’s talk about some of the “GEICOs” in your portfolio. just in terms of the raw growth numbers they were able to put up over the last couple of years. We also fall into that camp. When GEICO stumbled in the early 1970s. advertising. his reputation as a great investor wouldn’t have been such.3 billion. the growth was clicking along. and Buffett still of a good valuation. All rights reserved. © 2008-2013 by BeyondProxy LLC. That was a significant stumble back then. they were still generating buckets of cash. he ultimately got to about 50% of GEICO. They reached a high of $61 in 1972. He found out about GEICO. Here was the opportunity. It’s three times the company stumbles. honed out of the scars of the great depression. He broke the rules and he bought this company. members of the times that GEICO was Graham family. and held it for all those years where his discipline would have said to sell it.

Every year the iPhone’s been out since 2007—and they just recently again won J. make no mistake about it: If Apple starts to deliver me-too. It’s assuming flat growth and a significant and permanent contraction in their margins. That’s a big driver of intrinsic value growth per share. We [have] added more to our position. Certainly. Is that in your view the key insight here—this ecosystem that Apple has versus let’s say Nokia? Rolfe: That’s a great question. The ecosystem growth is very healthy. you could about it: If Apple starts to see a reduction of shares outstanding from 10% to 15%. The reason why Nokia is where it is right now is they haven’t had an ecosystem. We’ll see how it turns out. and when we look out three to five years. The average revenue from a customer within that ecosystem is a lot higher than a one-off purchase. particularly iPads. to the growth of the ecosystem. hundreds of millions of active iTunes credit cards. if something comes along with a better mousetrap. Their products were one-off hits and misses if you will vis-à-vis the competition. ecosystem growth. Power’s for consumer satisfaction—we see developers developing apps for their ecosystem. one-off product growth rates clouds the judgment of this haven’t had an ecosystem.5 years. At [recent] prices. these various products and services are Their products were one-off peripheral. They still deliver high user satisfaction that is keeping those ecosystem members interested in future products. JOIN TODAY! www. If you subtract the cash out and you look at the decline in Apple from an enterprise value [standpoint]. it was almost cut by two- thirds. We think the market’s obsession with “The reason why Nokia is individual products at current margins. and that ecosystem can from 20%. eight months. Ultimately. and that balance sheet is deliver me-too. Value-oriented Equity Investment Ideas for Sophisticated Investors If you look at when the market value was $700 billion. this comparison with other technology companies where you just don’t know the rapid change and the risks. and we see the usage of iPhones. growth is going to grind to a there’s going to be this growing franchise that prospectively can have anywhere halt. All rights reserved. There’s no question about © 2008-2013 by BeyondProxy LLC. Apple is our largest holding. products. technological obsolescence is right there.com July 2013 – Page 21 of 117 . 400+ million iOS users. As much as I say that these gadgets are peripheral to the ecosystem. they are going to return about a hundred billion gadgets are peripheral to the dollars—largely sixty billion in stock buybacks over the next 2. That’s a significant distinction [versus] other technology companies. As company. they were generating a ton of cash. prospective margins. and that ecosystem can shrink.D. We live in a world of ecosystems. the ecosystem growth is going to grind to a halt. You buy an iPod. We don’t hits and misses if you will think ecosystem growth is over. and you might buy successive generations once you get locked into that ecosystem with software and services. maybe one-third—that’s probably a little bit on the high side over the shrink. MOI: Some investors would say—and perhaps that is the key factor that makes some investors uncomfortable with Apple—is this comparison with Nokia [Helsinki: NOK1V]. the market-implied growth rate is flat. Depending on when they buy back stock. the ecosystem The valuation is extremely low. low-quality products. We still think [Apple] is a true growth vis-à-vis the competition. you might buy an iPad. you might buy an iPhone. important but peripheral. You buy an iPhone. low-quality going to be loaded up again in two or three years.” next five years—of their shares bought back. We believe that the long-term growth case of Apple is made through the prism of analyzing their ecosystem.manualofideas. it doesn’t take much much as I say that these to move the needle. not at the rates it once was. but at current prices. In total. present and past. and they can do the same. and we don’t think that’s the case. make no mistake They’re still building cash. one-off product where it is right now is they introductions. ecosystem. and where it fell to a low of $380 [per share]—all along the way over those seven.

As long as they’re delivering high quality. I still can’t believe what Buffett was able to pull off when he bought the rest of Burlington Northern. have spent. now BlackBerry [RIM].” goes the cash. have spent. Management talked about that they were thinking about this. there from now. and Research in stock. lot of the management would like to have that cash back. We’ve owned Google [GOOG] for a number of years. and we wanted them to swing of billions that Cisco the proverbial big bat when they made an announcement. it was the big stock positions— Coca-Cola. I’m sure a billion a week for the next year. the growth has been outstanding. roughly speaking. It’s been an outstanding investment. the whole thing. are you comfortable with how the current leadership of Apple has approached this? Rolfe: Quite frankly. It’s not like. Gillette. I’m very pleased that the emphasis is going to be on buying back [HPQ]. MOI: What are some of the other positions in the portfolio that perhaps could give us insight into how you generate ideas? What are some of the reasons why these great companies become cheap and what the investment case is? Rolfe: We’ve owned Berkshire Hathaway [BRK. Apple has a number of avenues of growth that feeds that ecosystem.A] nearly continuously since 1998. is Berkshire really a growth company in the traditional sense? Obviously. Just from a growth company perspective. iTunes is growing so rapidly. there’s been debate. Value-oriented Equity Investment Ideas for Sophisticated Investors it. Again. But we look at the totality of hardware and software. throw in iTunes. it’s very accretive. That’s starting to approach the size of Windows or Microsoft Office—that’s significant. best-in-class consumer satisfaction with their products. iTunes and accessories are surprisingly at a runway of $16-17 billion per annum. We’ve owned Visa [V] for a number of years. We just got word of buying the rest of Iscar—terrific. at the “When I think about the tens board level they were having active discussions. Do it now and do it in size lot of the management would while the stock is down.manualofideas. What’s the investment case? © 2008-2013 by BeyondProxy LLC. That’s also part of the ecosystem. Motion. JOIN TODAY! www. these are just terrific businesses that the market served up at terrific prices and we swung. GEICO. They’re going to return $100 billion by the end of 2015. incredibly accretive. As the company has morphed into more of a conglomerate. MOI: On the return-of-capital front. And they did. It’s inherent in almost every company. not so much of late. Hewlett-Packard they get it. All rights reserved. poor stewardship. we were getting a little frustrated. I’m sure a generating a ton of cash. and Research in Motion. Apple is a difference When I think about the tens of billions that Cisco [CSCO]. It’s not out of the realm ten years from now that half the shares could be bought back. particularly technology companies. now what? Apple’s business model and cash generation speak to ongoing share buybacks that can be very significant. They’re at a run right now.com July 2013 – Page 22 of 117 . of management buying back a bunch of stock at high prices. ABC/CapCities. MOI: What about Qualcomm [QCOM]? It’s a big position of yours. and so [CSCO]. We’ve owned American Express [AXP] for a number of years. now BlackBerry We hope they exhaust that $60 billion now. they knew the stock was down. we’ll be happy to own the company. We worry about that a lot and we think about that a lot. Corporate America is littered with many examples of like to have that cash back. They could buy back the stock at a [RIM]. That buyback shotgun is Apple is a difference [because] they’re still generating a ton of cash. That going to be loaded and buyback shotgun is going to be loaded and recocked three or four years from recocked three or four years now. Hewlett-Packard [because] they’re still [HPQ]. pre the purchase of General Re.

it has helped their average selling price stabilize. got a pretty good debate. if they’re close to consensus or not. the same or higher. have these sophisticated networks. MOI: In the case of Qualcomm or any of the other businesses you mentioned. Now you’ve got a pretty good debate.” We ask ourselves. a smartphone. Ultimately. through same or higher. What they’re close to consensus or has surprised folks over the last couple of years is just how steady the average not. Buffett included. in size. Mr. That’s fine. we’re trying to ascertain their total addressable market. a significant discount from intrinsic value? Another way to look at it is the old Charlie Munger “invert. what’s the market-implied growth rate? That’s where you get that big difference of where your numbers are. But it’s like with any other investment. The scale and scope of what Qualcomm is doing are unmatched. and they are at the forefront of Moore’s law in terms of shrinking the size of semiconductors. they generated a bunch of cash. If you want to be competitive in today’s mobile world in terms of a handset. It could be below. But when you look at the totality of what Qualcomm has been able to build. At the company level. if selling price of their components is going to go down every year forever. Their multipurpose chipsets find their way into almost the least expensive phones all the way to the high end. It’s their patents.manualofideas. We think the shares are pretty attractive. it’s stunning.” Qualcomm as just another tech company where it’s difficult to gain comfort. even a non-smartphone. Their ability not only to recognize market opportunity and get there before competitors.com July 2013 – Page 23 of 117 . Qualcomm is on your speed dial. If you’re right. © 2008-2013 by BeyondProxy LLC. MOI: What was the reason that you were able to acquire it at the right price. there are a lot of folks. All rights reserved. But I understand. and in some cases you get that big difference of even go up. Also.’ We ask ourselves. actually. who’ll say it’s a technology company and I’m just not going to try to get my head around it. Their solutions and technology stand at the forefront of the mobile Internet. Qualcomm had a lot of initiatives that were kind of hard to get “Another way to look at it is your arms around. they’re the arms merchant. It could be below. different networks around the world. the selling price has been. their competitive position. there’s your MOI: Some investors may not look at it the way you do and perhaps dismiss upside. As the company generated more revenue. when you think at when you bought it? Rolfe: They had a period of stalled growth. That was the long term bear case on Qualcomm—that the average where your numbers are. it’s huge. They were the inventor of CDMA technology. what resuscitated Qualcomm was the smartphone. They have an incredible intellectual portfolio of patents. that franchise. Value-oriented Equity Investment Ideas for Sophisticated Investors Rolfe: In this mobile Internet world. Their intellectual footprint in terms of a moat is deep and wide. It would take a lot to knock them out of the top spot. Now you’ve operational leverage. and so a lot to like at Qualcomm. What is really the moat here with Qualcomm? Rolfe: It’s their intellectual capital. what’s the plan here? Are they ever going to the old Charlie Munger move the needle? Again. We’ve owned that company for quite a few years as well. They’ve been good stewards of shareholder capital. and that got Wall Street a little bit impatient. Do we have confidence in a certain level of earnings power three to five years from now? What do we think would be an appropriate valuation. When what’s the market-implied you look at the totality of the silicon in the smartphone that Qualcomm can growth rate? That’s where address. If you’re right. JOIN TODAY! www. We ‘invert. but also drive innovation. how do you think about valuation? How do you assess whether the market quotation of a business is attractive enough to remain in the portfolio? Rolfe: [Qualcomm] hasn’t done much of late. buybacks.

there’s that buffer on the downside so your mistakes aren’t fatal. prudent diversification from a business model perspective. JOIN TODAY! www. It’s been our long history and understanding as investors of this idea of investing through the lens of a business owner. but it’s rare. have minimal business model If you have conviction in the company and the valuation makes sense—with that overlap. MOI: Do you apply in these models a similar discount rate across the board and then adjust the numbers of each company? Or do you apply different rates? Rolfe: There’s a little bit of a variation depending on the companies. We just choose not to. we’re probably going to be wrong on the other one or two related businesses. What you see as the end result in our portfolio. if we can’t find twenty companies in the U. All rights reserved. these business models are not overlapping or competing with other companies in the portfolio—and that’s it. wait for the valuation. If we’re wrong on one. Have you looked at companies that are domiciled abroad? Is your approach global? Rolfe: No. At the portfolio level. We want these businesses to have minimal business model overlap. The maximum we’ll let a stock get to is 10%. we own Google. businesses largely competing let’s kind of massage the numbers of the model to make sense. the minimum we’ll do is 2.S.-based. We won’t own Facebook [FB] at the same time. When it makes sense. We think far too many people have to do it that way. No opinions on Facebook. We’re not going to own three railroads—that defeats the purpose. now you’ve lost for the same profit dollar. not just raw numbers. They all play a key role. we may own a company that is domiciled out of the United States. As an their competitive aspects to have confidence in an earning power three to five example. We actually think that’s maybe a different yet thoughtful way of diversifying. where it says we need fifty different stocks to be diversified. We years from now. we are going to select about twenty that have the best risk-reward in terms of prospective growth and valuation. That will eliminate a We hope we can understand the Qualcomm business model well enough and prospective candidate.. it’s just that those two businesses have too much of their business model as an overlap. It’s got to be that big margin of safety. and then portfolio. having the right temperament. same time. out of our thirty to forty favorite businesses. we own Google. At the portfolio level. we’re not doing something right. these are the ones that we believe are priced right today. having the right behavior set. There are other folks that would just stay away because it’s a won’t own Facebook at the technology company. Identify these businesses. swing hard enough to make a difference.manualofideas.S. valuation. but that’s okay.5%. We don’t think you need fifty companies to be prudently diversified. © 2008-2013 by BeyondProxy LLC. MOI: Help us understand how you go about constructing this portfolio and how you think about position sizing? Rolfe: The three pillars of what we do are growth.S. the forest for the trees. you’re not overpaying. thoughtful. Our head isn’t so much in those valuation models. it’s U.com July 2013 – Page 24 of 117 . We don’t want margin of safety that ought to hit you across the head… If it’s close and it’s. In a twenty-stock portfolio. Portfolio management plays a key role. Out of our list of thirty to forty companies we want to own. Value-oriented Equity Investment Ideas for Sophisticated Investors there’s your upside. The ones where you have higher conviction—different numbers for those that have a little “We want these businesses to more risk in their business. We don’t want businesses largely competing for the same profit dollar. From time to time. As an example. If you’re wrong and the company is still growing. That will eliminate a prospective candidate.” MOI: The companies you mentioned are all listed in the U.

Throw them all together and you’ve got something. patience. perhaps focusing specifically on investors who may be hesitant to invest in companies that are growing rapidly. Each of those elements is very powerful— growth. This isn’t a team of twenty or thirty where everybody is coming up with great ideas and they want to see their work in the portfolio.manualofideas. it’s largely a buy and hold endeavor. What do you think they are missing? Rolfe: A couple of things. A significant part of what we do at Wedgewood is a decision of what we choose not to do. look at mutual fund flows. we’ve never had discussions of why don’t we get thirty stocks or why don’t we do another strategy. the At the individual company level. Again. There is literature out there. just go to Amazon. It’s just that temperament. then the classic Phil Fisher. there’s power of simplicity. When we were in 2008 and 2009. people are because of temperament couldn’t get out of stocks fast enough. and discipline… Rolfe: That’s it. That’s what we try to do at Wedgewood. thank you for your time and insights. There are certain aspects of investing—in this case growth. Once you find that terrific business. The best investment books. maybe a thoughtful but different application of diversification. Their contribution has been very significant in that they add to that culture. But we’ve learned over time. Value-oriented Equity Investment Ideas for Sophisticated Investors MOI: What is the single biggest mistake investors make. Said another way.com July 2013 – Page 25 of 117 . Don’t overthink it. we’re not reinventing the wheel at all. classic tenets of valuation. non-academic. What we love about indexation. Most of the big [mistakes] are because of temperament and behavior. It’s huge to buy into that culture. As John Bogle of Vanguard has said over and over again. When you think about how low our turnover is. and the opposite is you get into a company where the business doesn’t turn. over the last two years or so we’ve only added five or six companies to the portfolio. All rights reserved.” to make a fundamental case that valuation is reasonable. concentrating on your best growth ideas. we hold on to it like a junkyard dog because they’re too hard to find. his chairman letters. people make the mistake of assuming a great psychological aspects of growth company can grow. That’s huge. there’s plenty of them starting with Buffett and the partnership letters. on and on. it’s huge. MOI: How do you keep improving as an investor in great businesses? What are some books or resources you could share? What’s your advice to investors? Rolfe: In this business. can compound at a large number for quite a few investing. That’s just how we think. it’s let your winners run. value and portfolio management—we decide to do in a very specific. Over the years. Depending on where we are at in the business cycle—we just entered the fifth year of a bull market—people start to chase “Most of the big [mistakes] things. or a cyclical company that just doesn’t turn. It’s a permanently impaired growth company and it deserves to sell at a cheap multiple. That’s the biggest thing the four of us do at Wedgewood—buy into this culture. I’d be the first to admit [that] at Wedgewood we slavishly copy from the greats. David. and behavior. © 2008-2013 by BeyondProxy LLC. There’s almost no way it. and that’s part of the culture I’ve tried to embed with my three partners. the psychological aspects of investing. we are all very fortunate that we can sit on the shoulders of the giants. differentiated way from most of our peers. stocks can stay really high really long. JOIN TODAY! www. not the IQ side of it. MOI: Back to focus. not the IQ side of years and they bid up the valuation to what are extremes. MOI: On that note. unless the valuation gets extreme. fewer ideas but more impactful ideas.

853 15.931 4.569 Cash from operations 5.492 1.991 3.9 million FYE 12/31/13 2.01 0.524 12.378 Gross profit 12.550 2.558. All rights reserved.726 2.311 11.575 1.com Trading Data Consensus EPS Estimates Valuation Price: $35.405 -1.518 7.874 8.015 1.089 1.284 3.056 4.314 7.476 25.3% 57.41 LTM pre-tax ROC 21% Operating Performance and Financial Position ($ millions.106 EBIT/capital employed 20% 40% 51% 62% 45% 45% 3% 21% 18% 28% Ten-Year Stock Price Performance and Trading Volume Dynamics $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.689 2.795 1.792 Intangible assets 15.971 7.821 5. GMO.721 7.5 billion This quarter $0.530 1.161 351 545 Adjusted diluted EPS 2.080 9.057 6.44 21 P/E FYE 12/31/14 16x Enterprise value: $54.391 3. JOIN TODAY! www.528 30.097 15.22 0.7% 6.4% 55.338 1.284 5.933 1.543 1.01 2.4% 17.6% 21.106 -242 7.772 186 … % of revenue: Gross profit 56.862 3.7% 9.467 Tangible equity -1.519 5. LTM EBIT yield 4% Institutional ownership: 67% 4/17/13 $0. Jennison.040 18.595 3.873 27.785 3.4% Cash.865 27. Member of S&P 500 ABBOTT PARK IL www.951 2.620 7.25 2.275 8.359 7.53 0.53 20 P/E FYE 12/31/15 14x Shares outstanding: 1.089 32. Southeastern Health Care: Biotechnology & Drugs.3% 60.546 1.225 460 Capex 1.918 Inventory 2.547 1.545 1.492 16.2% 55.488 8.7% 9.0 billion Next quarter 0.517 Receivables 4.375 2.925 2.827 6.635 4.14 Shares out (avg) 1.77 Latest Ago Ests P/E FYE 12/31/13 18x Market value: $55.9% 10.9% 57.com July 2013 – Page 26 of 117 . investments 1.995 5.395 3.457 6. net 6.946 7.139 19.167 38. MFS.452 8.684 7.30 0.492 34.466 6.23 3.506 2.542 7.946 R&D 2.46 16 P / tangible book 7.01 25 EV/ LTM revenue 2.51 0.609 6.59 2. LTME FQE FQE per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13 Revenue 22.3% 55.517 9.0% 13.661 14.60 1.00 2.588 5.3% 54.42 $0.4% Adjusted operating income 18.918 7. Value-oriented Equity Investment Ideas for Sophisticated Investors Profiling 20 Wide-Moat Investment Candidates Abbott Labs (ABT) – Geode.806 2.9% 6.25 24 EV/ LTM EBIT 24x Insider ownership: <1% FYE 12/31/15 2.656 1.44 2.696 15.7% 21.204 36.724 4.916 17.0% 55.574 1.329 5.710 PP&E.527 8.582 42.736 8.44 $0.459 1.362 15.44 1.8% R&D 10.574 1.792 2.555 20.265 3.174 8.58 (as of 6/21/13) Month # of P/E FYE 12/31/12 18x 52-week range: $29.1% 58.482 Tangible assets 20.1% 8.502 23.231 4.186 7.184 7.67 1.970 9.082 25.765 35.063 5.0% 17.48–$38.713 11.190 6.776 3.5x Ownership Data FYE 12/31/14 2.914 29.373 2.616 453 275 Free cash flow 3.619 2.401 2.492 28.085 3.914 11.613 3.92 1.6% 11.792 7.manualofideas. Primecap.0% 12.010 9.774 5.255 2.799 1.494 21.184 7.479 7.908 2.685 509 615 Adjusted net income 3.219 7.255 2.528 6.6% 10.947 5.606 4.341 3.732 5.482 25.5% 18.325 23.25 3.851 21.549 2.266 12.579 5.7% 19.710 3.35 Dividend 1.158 3.635 Long-term debt 7.6% 6.442 364 346 Adjusted operating income 4.288 1.281 33. except Fiscal Years Ended December 31.8x Insider buys (last six months): 26 LT growth 12.30 1.09 3.660 3.558 1.76 1.929 2.849 15.abbott.744 3.467 11.8% 6.189 3.695 24.18 1.34 3.035 4.1% 9 Greenblatt Criteria Insider sales (last six months): 15 EPS Surprise Actual Est.720 27.955 5.204 Short-term debt 5.0% 9.652 -5.932 5.731 3.129 1.46 2.344 7.

diagnostic screening Net income 17% 19% 13% 12% 15% 10% D&A 6% 7% 7% 8% 7% 8% and detection.000 employees and ~$22 billion in revenue EBIT 20% 24% 17% 15% 20% 11% in vascular health. . diversified healthcare firm.1 32. The pharmaceutical business. positioning it well for continued growth.3 6. China. #1 in immunoassay diagnostics.5 -7. ~30% of ∆ gross profit 17% 4% 17% 14% 6% 1% sales) provides adult and pediatric products (~50/50 split). We welcome the separation as it rationalizes the portfolio. All rights reserved. with Calculation of return on capital employed ($bn): strong positions in diagnostics ($27 billion market).0 6. Revenue ($bn) 29.4 Diagnostic Products (est.8 7. © 2008-2013 by BeyondProxy LLC.S. 40 years ago. JOIN TODAY! www. Russia.S. Tangible assets ($bn) 27.5 including #1 in adult nutrition globally.0 -7. LT debt 32% 34% 39% 35% 42% 13% • Well balanced geographically. and 40% in fast-growing economies.6 -11. THE BOTTOM LINE Abbott’s size was cut roughly in half with the January spinoff of AbbVie.8 35.6 42.8 population.S. and nutrition.39-$1.9 39.2 #1 in blood screening.9 8. investments 19% 30% 17% 23% 35% 31% ST debt 10% 16% 20% 10% 6% 13% and #1 in three separate generic pharma products. % of revenue by segment: Proprietary pharma (AbbVie)1 44% 44% 45% 0% Medical Devices (est. Japan Shares out (avg) (mn) 1.7 -6. In its current state.manualofideas. ~25%) sells Vascular products 8% 9% 9% 9% 8% 14% a broad line of branded generic pharmaceutical products.6 – Adjusted EBIT 5. 57% 53% Established pharma 13% 14% 13% 23% endovascular.7 4. with 30% of sales Tangible equity 9% 11% -17% -4% 6% 26% in the U. #1 in LASIK.4 0.575 1.9 • Leadership in multiple healthcare segments.45 in 2013.8 -11. AbbVie is Nutritional products 17% 17% 14% 13% 16% 20% Abbott’s former proprietary pharma business. nutritionals ($36 billion).8 and greater access to care in growing economies.3 11.6 12.1 5. Abbott and AbbVie have market caps of ~$54 Gross profit 57% 57% 58% 60% 62% 55% billion and ~$66 billion.3 -12.7 0. which Diagnostic products 10% 12% 15% 19% 19% 24% was 45% of sales and more than half of EBIT in Vascular products 9% 23% 28% 29% 29% 25% Selected items as % of revenue: 2012.3 33.545 1.0 -0.569 and Australia.5 20. Nutritional products 17% 18% 16% 15% 16% 32% Diagnostic products 12% 12% 11% 11% 11% 20% Established Pharma Products (est.9 27. Abbott now R&D 9% 9% 11% 11% 11% 6% has 70.4 7. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA Abbott provides a broad line of health care products. Capex 4% 4% 3% 4% 5% 5% • Science-based. structural heart. but this seems unlikely. Abbott has authorized a stock buyback EARNINGS MOMENTUM Fundamentals improving?  and dividend payments.0 + Net fixed assets 7.5 30. 20 years ago. Value could be created by culling the portfolio further over time. The units Current assets 15. FYE December 31 2008 2009 2010 2011 2012 1Q13 ∆ revenue 14% 4% 14% 10% 3% 2% Nutritional Products (established 50 years ago.0 27.8 6. diabetes.2 -16.8 4.9 2.546 1.6 6. FINANCIAL STRENGTH Solid balance sheet?  • Post-AbbVie capital allocation unclear as yet. However. and + non-recurring items 0.3 -15. + Short-term debt 2.Cash. Canada.6 devices ($30 billion).4 -14. although the latter remains quite far-flung. #1 in drug-eluting stents.9 3. 2013.8 8. ~25%) sells coronary. higher prevalence of chronic disease. even after AbbVie spinoff? VALUE Intrinsic value materially higher than market value?  Abbott’s four major segments do not appear to be DOWNSIDE PROTECTION Low risk of permanent loss?  highly synergistic. = Return on capital employed 51% 56% 48% 52% 86% 21% pediatric nutrition.5 34. Other 7% 9% 8% 8% 7% 11% INVESTMENT HIGHLIGHTS Operating margin by segment: Proprietary pharma (AbbVie)1 43% 42% 44% n/m • Retains strong business portfolio after AbbVie Established pharma 38% 38% 21% 23% 24% 23% (NYSE: ABBV) spinoff on January 1.5 6.9 2.7 12.547 1. ∆ shares out (avg) 0% 0% 0% 1% 1% 0% 1 Abbott Labs spun off AbbVie (NYSE: ABBV).0 5.1 0.4 7. #1 Selected items as % of tangible assets: in bare metal stents.4 -11. Abbott holds leading market share in several attractive healthcare segments.5 25.8 23. The shares are fairly valued at 17-18x 2013E adjusted EPS.Current liabilities -10. 1% | GMO 1% | Primecap 1% | Southeastern <1% INVESTMENT RISKS & CONCERNS RATINGS • Portfolio too far-flung.8 7. Reported operating income 5. its research-based proprietary including India. to what extent MACRO Poised to benefit from economic and secular trends?  the company pursues M&A remains to be seen. and Brazil. #1 in U. latter should grow to nearly 50% of sales by 2015. respectively.6 branded generic pharma ($630 billion).7 13. MOAT Able to sustain high returns on invested capital?  Positively.98-$2.04 and MAJOR HOLDERS GAAP EPS of $1. the proprietary pharma business.7 0. vision correction.2 22. effective January 1. and vessel closure devices. ST investments -4. #2 in cataract. with each perhaps requiring MANAGEMENT Capable and properly incentivized?  greater attention than top management can provide.4 11.2 are aligned with long-term health trends: an aging . 30% in Western Europe. Capital employed 11. 49% 46% 43% 41% 42% n/a diagnostic systems and tests for a variety of healthcare sites.558 1.6 10. Cash.2 38. ~20%) provides …from U.com July 2013 – Page 27 of 117 .. The latter Insiders <1% | FMR 1% | Wellington 1% | MFS 1% | Cap Re includes intangibles amortization and other items.9 5. 2 years ago. • Guiding for “ongoing” EPS of $1.

2008-2012 Adjusted earnings from continuing operations per share increased from $3.manualofideas. 2013 and average estimate for the fiscal year ending estimate for the fiscal year ending EBIT margin for past seven fiscal years December 31.25 has been revised down by 1% from $2.01 (‡) Consensus FY14E EPS: $2. The Manual of Ideas analysis.07 per share in 2012 Source: Company presentation dated April 26.6 billion shares out) stock price ($36 per share) 19% upside to the recent 42% upside to the recent (*) Represents Biotechnology & Drugs industry median. All rights reserved.9 billion equals equals multiplied by Revised FY13 EPS estimate: $2. ST investments: $8. assumptions and estimates. 2013 December 31.0x (*) equals equals equals Estimated fair enterprise value of Industry multiple-implied fair value: Industry multiple-implied fair value: Abbott Labs: $39 billion $60 billion ($39 per share) $65 billion ($42 per share) plus multiplied by multiplied by Cash.6 billion shares out) $66 billion ($42 per share) $79 billion ($50 per share) 27% downside from the recent (based on 1. JOIN TODAY! www. Value-oriented Equity Investment Ideas for Sophisticated Investors ABBOTT LABS – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Based on revenue for the twelve months Based on median consensus EPS Based on median consensus EPS ended March 31.26 three months ago.01 is unchanged from three months ago. Source: Company filings.25 Estimated EBIT: $3.4x fair value P/E multiple) Estimated fair value of the common equals equals equity of Abbott Labs: Estimated fair value of the common Estimated fair value of the common $40 billion. (§) The FY14 consensus EPS estimate of $2.47 Assumed fair value multiple of EBIT: multiplied by multiplied by 10.6 billion shares out) (based on 1. ABBOTT LABS – CALCULATION of ADJUSTED EARNINGS FROM CONTINUING OPERATIONS. or $26 per share equity of Abbott Labs: equity of Abbott Labs: (based on 1. stock price ($36 per share) stock price ($36 per share) (‡) The FY13 consensus EPS estimate of $2.25 (§) multiplied by minus minus Average 7-year EBIT margin: 18.01 FY14 EPS estimate: 10% * $2. 2013.7x fair value P/E multiple) (20.11 Revised FY14 EPS estimate: $2.0% Assumed upside/downside to Assumed upside/downside to equals FY13 EPS estimate: 5% * $2.0x Corresponding industry P/E: 18.32 per share in 2008 to $5.1 billion 110% 120% equals (18.com July 2013 – Page 28 of 117 . 2014 ▼ ▼ ▼ TTM net sales: $22 billion Consensus FY13E EPS: $2.3x (*) Corresponding industry P/E: 17. © 2008-2013 by BeyondProxy LLC.5 billion Assumed ABT multiple as a Assumed ABT multiple as a minus percentage of the industry multiple: percentage of the industry multiple: Total debt: $7.

88 in 2011. $1.manualofideas. 2013. and $1. 1972-2012 “Consistent” dividends increased to $2. ABBOTT LABS – POSITION in KEY MARKETS Source: Company presentation dated June 11. 2013.72 in 2010. up from $1. Value-oriented Equity Investment Ideas for Sophisticated Investors ABBOTT LABS – BUSINESS PORTFOLIO Source: Company presentation dated June 11. JOIN TODAY! www.01 per share in 2012.56 in 2009 Source for above table and chart on the right: Company presentation dated April 26. © 2008-2013 by BeyondProxy LLC. ABBOTT LABS – ALIGNMENT with HEALTHCARE TRENDS ABBOTT LABS – GROWTH in DIVIDENDS.com July 2013 – Page 29 of 117 . All rights reserved. 2013.

471 Tangible equity -1.134 3.679 2.895 1.03 0.098 3.75 1.8% 15.106 735 731 Adjusted pretax income 1.80 Latest Ago Ests P/E FYE 12/31/13 18x Market value: $43.722 1.305 5.508 Tangible assets 4.109 1.439 2.997 3.592 3.141 2.801 2.625 1.85 22 P/E FYE 12/31/15 15x Shares outstanding: 692.3% 6.151 Receivables 1.06 0.8% 16.410 -2.957 2.473 13.547 1.237 696 922 Adjusted net income 1.18 4.177 9. except Fiscal Years Ended December 31.236 2.75 $0.790 -1.8% 52.389 4.484 1.084 2.57 0.798 1.080 2.122 8.84 23 P/E FYE 12/31/14 16x Enterprise value: $45.448 9.741 1.7% 6.5x Ownership Data FYE 12/31/14 3.76 LTM pre-tax ROC 80% Operating Performance and Financial Position ($ millions.986 10.164 270 296 Adjusted operating income 1.411 1. JOIN TODAY! www.130 2.726 2.230 2. Winslow.110 Intangible assets 8.63 3.2% 51.105 2.316 4.043 2.09 0.3% 6. Cap Re. All rights reserved.806 11.500 1.026 12.14 1.40 3.118 2.435 21.619 2.142 993 1.08 3.49 3.827 TBV / tangible assets -35% -48% -33% -12% 0% -35% -25% -17% -26% -17% EBIT/capital employed 98% 90% 82% 69% 97% 85% 83% 80% >100% 95% Ten-Year Stock Price Performance and Trading Volume Dynamics $70 $60 $50 $40 $30 $20 $10 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.949 528 520 … % of revenue: Gross profit 44.8% 15.109 1.893 2.80 24 EV/ LTM EBIT 15x Insider ownership: <1% FYE 12/31/15 4.2% 6.7% Adjusted operating income 15.8% 48.646 1. investments 318 239 393 1.00 Shares out (avg) 616 622 639 642 653 676 693 693 692 692 Cash from operations 1.7 million FYE 12/31/13 3.434 3.143 1.288 3.80 1.429 1.730 12.11 0.7% 46.517 12.6% 5.138 1.921 -843 10 -3.422 2.267 3.343 4.3 billion Next quarter 0.04 0.110 2.666 5.118 Inventory 989 1.550 16.041 5.505 2.3% 45.466 11.813 1.940 5.508 20.326 R&D 440 601 725 600 774 1.135 10.6% 11.11 (as of 6/21/13) Month # of P/E FYE 12/31/12 19x 52-week range: $49.926 4.633 537 1.606 5.471 520 692 Adjusted diluted EPS 1.07 0.889 1.manualofideas.260 18.050 2.166 1. Member of S&P 500 WASHINGTON DC www.806 21. LTM EBIT yield 7% Institutional ownership: 79% 4/18/13 $0.091 18.13 0.08 0.0% 16.95 2.635 11.3% 6.0% 16.4% Cash.698 10.702 20.84 0.867 PP&E.7% 51.665 1.516 9.962 9.614 -2.415 3.0 billion This quarter $0.962 Debt 2.80 3.720 -1.917 2.109 1.3% 17.637 1.87 2.3% R&D 4. Neuberger Technology: Scientific & Technical Instruments.315 21.8% 51.867 1.1% 14. Viking.7% 51.0% 50.626 3.40 25 EV/ LTM revenue 2.197 5.00 Dividend 0.200 1.729 3.214 1.292 2.6% 4 Greenblatt Criteria Insider sales (last six months): 11 EPS Surprise Actual Est.9% 17.151 1.070 6.984 1.933 2.825 5.827 -2.366 1.com July 2013 – Page 30 of 117 . net 869 1.471 4.101 2.84 $0.655 1.2% 6.18–$64.danaher. Value-oriented Equity Investment Ideas for Sophisticated Investors Danaher (DHR) – T Rowe.781 1.259 11.718 2.859 1.918 1.050 3. LTME FQE FQE per share data) 2006 2007 2008 2009 2010 2011 2012 3/29/13 3/30/12 3/29/13 Revenue 9.5% 5.com Trading Data Consensus EPS Estimates Valuation Price: $62.0% 18.760 7. MFS.7% 5.405 8.553 2.612 -1.20 9 P / tangible book n/m Insider buys (last six months): 11 LT growth 11.406 645 637 Capex 136 162 194 175 191 335 458 457 118 116 Free cash flow 1.194 1.019 1.06 0.445 Gross profit 4.

Debt (mostly long term) 44% 41% 33% 54% 47% 40% Tangible equity -33% -12% 0% -35% -25% -17% INVESTMENT RISKS & CONCERNS Shares out (avg) (mn) 639 642 653 676 693 692 • Heavily reliant on acquisitions. invested capital grew from $12 billion to $23 billion while cash ROIC rose from 14.1%. supporting equity-friendly capital allocation. All rights reserved. respectively.553 2. JOIN TODAY! www. and commercial products and services.066 “organic path” to 20% long-term operating margin.023 3.729 3. The firm’s = Return on capital employed 84% 75% 97% 90% 86% 74% co-founders are still major shareholders and on the Tangible assets ($bn) 5.104 3. having ∆ shares out (avg) 3% 0% 2% 4% 3% 0% 1 Adjusted for unusual items of -$49 million in 2008. © 2008-2013 by BeyondProxy LLC.121 2. Selected items as % of revenue: treat and prevent diseases of the teeth and gums. ∆ revenue 15% -17% 19% 28% 13% 3% ∆ gross profit 18% -15% 26% 28% 16% 4% INVESTMENT HIGHLIGHTS Revenue ($bn) 12.615 2.137 1. Danaher. due in part to consumables focus.918 1. Test and measurement 17% 14% 20% 22% 21% 22% 21% EBIT margin) provides electronic tools for Environmental 20% 19% 21% 21% 21% 19% enterprise and communications networks. The firm Life sciences and diagnostics 12% 14% 18% 29% 36% 35% has executed well on M&A-driven growth strategy.6 11.manualofideas. FYE December 31 2008 2009 2010 2011 2012 1Q13 medical. From 2008-2012. $237 million in 2011.com July 2013 – Page 31 of 117 . Mechanics and related hand tools 7% 8% 5% 2% 2% n/a Product identification 7% 7% 7% 7% 8% n/a • Dental (11%. The D&A 3% 3% 3% 4% 5% 5% product identification and motion control businesses Capex 2% 2% 2% 2% 3% 3% were acquired in 2002 and 1998. up Cash.118 4. with each unit now reporting . the co-founders (still active on the Board) have cultivated a culture of M&A-driven growth while focusing on acceptable returns on capital.1 11.831 3.3 4.6 16. with % of revenue by major segment: Test and measurement 22% 21% 23% 21% 19% 19% strong brand names.189 -4.287 2. The “Danaher Business + Net fixed assets 1.057 -1.5 9. R&D 6% 6% 6% 6% 6% 7% • Industrial technologies (18%. Selected items as % of tangible assets: Recurring revenue has grown to 40% of revenue. 13%) offers China 6% 6% 6% 7% 8% n/a % of revenue by major product group: analytical instruments. and other products Analytical/physical instrumentation 39% 39% 41% 37% 33% n/a to help diagnose disease. and Environmental 19% 23% 22% 18% 17% 16% major market positions in several verticals.5 12.955 System” is designed to drive efficiencies.677 -1.704 5. reagents. + Short-term debt 198 55 43 70 77 61 • Well-managed business. Gross profit 47% 48% 51% 51% 52% 52% Danaher entered the market in 2004 through M&A.2 11% 11% 14% 13% 13% 16% components for a diverse set of applications. setting the stage for incremental intrinsic value creation.125 Capital employed 2. Unfortunately.Cash. and -$123 million in 2012.643 6.109 1. -$144 million in been organized as a Massachusetts REIT in 1969 2011. Management sees an . Rales 6% | T Rowe 9% | MFS EARNINGS MOMENTUM Fundamentals improving?  4% | Winslow 2% | Viking 2% | Cap Re 1% | Neuberger 1% MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE Danaher’s history reveals an opportunistic approach to capital allocation. -$113 million in 2009. 14%) provides products to diagnose. Dental 10% 13% 11% 12% 14% 13% Industrial technologies 16% 14% 20% 21% 21% 21% • Environmental business (17%.126 1.050 2. Rather than view the company as committed to any one market. Calculation of return on capital employed ($mn): • Expanded margins in virtually every segment Adjusted EBIT 1. Danaher Life sciences and diagnostics 13% 12% 10% 9% 13% 13% entered the business in 1998 through an acquisition. investments 7% 24% 19% 6% 15% 20% from 25% in ‘07.749 over the past decade. The company has created equity value by meeting the twin objectives of growing invested capital and improving ROIC.1 18. Dental 14% 16% 15% 12% 11% 11% It earns mid-teens ROIC on $23 billion of capital. Danaher entered Motion/industrial automation controls 14% 11% 12% 10% 9% n/a these businesses in the mid-2000s through M&A.041 -3. and $93 million in 2012. has evolved into its current state through a RATINGS large number of acquisitions. innovative technology. Management sees opportunity to deploy $8 billion of additional capital over the next two years. DOWNSIDE PROTECTION Low risk of permanent loss?  MANAGEMENT Capable and properly incentivized?  NOTABLE HOLDERS FINANCIAL STRENGTH Solid balance sheet?  CEO Culp <1% | Co-founder and director M. 52% 53% 45% 42% 43% n/a M&A in late 1990s) and air quality (since mid-80s). Germany 14% 13% 7% 7% 6% n/a • Life sciences and diagnostics (36%.753 -3.Current liabilities -2. industrial. 21%) makes EBIT (adjusted)1 15% 15% 16% 17% 18% 16% Net income (adjusted)1. 2 Adjusted for nonrecurring items of $65 million in 2009.1 8. and reorganized as Diversified Mortgage Investors in 1978.0 Board.169 6.S.746 -4. ST investments -316 -1. the 7% FCF yield is a bit too low to entice us to invest. $75 million in 2010. 21%) is a leader in % of revenue by major geography: products that protect the water supply (entered via U.8 7. The life science businesses Medical and dental products 26% 28% 33% 41% 47% n/a offer research and clinical tools.2% to 16.085 -1.915 gross margin of at least ~50%.075 2.823 -2. Industrial technologies 27% 20% 20% 19% 18% 18% Operating income by major segment: • Test and measurement business (19% of sales.4 • Large designer of diversified machinery. Rales 7% | MOAT Able to sustain high returns on invested capital?  Co-founder and chairman S.7 10.108 -1.930 7.288 731 Current assets 4. Danaher has closed VALUE Intrinsic value materially higher than market value?  more than 150 deals over the past decade alone. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA Danaher provides a range of specialized professional.

JOIN TODAY! www. Value-oriented Equity Investment Ideas for Sophisticated Investors DANAHER – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Based on revenue for the twelve months Based on median consensus EPS Based on free cash flow for the twelve ended March 29.8x (*) equals equals equals Industry FCF yield-implied fair value: Estimated fair enterprise value of Industry multiple-implied fair value: $66 billion ($96 per share) Danaher: $30 billion $46 billion ($67 per share) multiplied by plus multiplied by Assumed required FCF yield as a Cash.com July 2013 – Page 32 of 117 .5 billion 110% (4.0% required FCF yield) equals (18. or $39 per share equity of Danaher: $74 billion. Last Gross Adj. or $106 per share (based on 690 million shares out) $51 billion ($74 per share) (based on 690 million shares out) 37% downside from the recent (based on 690 million shares out) 71% upside to the recent stock price ($62 per share) 19% upside to the recent stock price ($62 per share) (*) Scientific & Technical Instruments industry median. stock price ($62 per share) (§) The FY14 consensus EPS estimate of $3. 2013. (Click to visit ∆ to Reach Tang.283 n/m 5% neg.365 42.105 16% 6% 6% 7% 8% 27% 483 2% 0% 42% 12% 7% Emerson Electric / EMR -55% 14% 39. The Manual of Ideas.80 has been revised down by 1% from $3.024 45. / SPW -64% 97% 3. All rights reserved.1% Assumed upside/downside to Capex: $460 million equals FY14 EPS estimate: 5% * $3./ ∆ Rev. 2013 EBIT margin for past seven fiscal years December 31. 2013 and average estimate for the fiscal year ending months ended March 29. © 2008-2013 by BeyondProxy LLC.9 billion multiplied by Revised FY14 EPS estimate: $3.manualofideas. LTM EPS Yield LTM Rev.4 billion multiplied by minus minus Average 7-year EBIT margin: 16.0 billion equals Free cash flow: $2. = employee | rev. = adjusted | ∆ = change Explanations: ∆ revenue represents year-over-year change in revenue | EPS yield for this and next FY is based on consensus EPS estimates | EBIT is adjusted for certain unusual items DANAHER – SEGMENT EVOLUTION.294 2% 7% 5% 6% 7% 58% 183 3% 1% 40% 20% 6% SPX Corp.5x fair value P/E multiple) equals Estimated fair value of the common equals Estimated fair value of the common equity of Danaher: Estimated fair value of the common equity of Danaher: $27 billion.347 4. = revenue | tang.0x Corresponding industry P/E: 16. Source: Company filings. 2014 ▼ ▼ ▼ TTM net sales: $18 billion Consensus FY14E EPS: $3./ Empl.80 equals Estimated EBIT: $3.80 (§) Operating cash flow: $3. DANAHER – ANALYSIS OF SELECTED COMPARABLE COMPANIES Trading Data Public Market Valuation Operating Performance Tang. Equity/ relevant websites) 7-Year MV EV Book/ FCF This Next Rev.2 billion Assumed DHR multiple as a percentage of the industry FCF yield: minus percentage of the industry multiple: 90% Total debt: $4.84 three months ago.545 549. 6% 8% 119% 339 8% -2% 27% 13% -9% Danaher / DHR -62% 4% 43. Tang. ST investments: $2.4% (*) 10.345 n/m 7% 6% 5% 6% 41% 292 7% 3% 52% 17% -17% Abbreviations: MV = market value | EV = enterprise value | LTM = last twelve months | FY = fiscal year | empl. Low High ($mn) ($mn) MV Yield LTM FY FY EV ($000) LTM Q Profit EBIT Assets General Electric / GE -75% 80% 241. = tangible | adj. 2001 to 2012 Major gross margin improvement has accompanied strong revenue growth Source: Company presentation dated June 12. % LTM Rev.99 divided by Assumed fair value multiple of EBIT: multiplied by Industry median FCF yield: 4.

2013. JOIN TODAY! www.com July 2013 – Page 33 of 117 . All rights reserved. up from 18% in 2012 ~200 bps core increase in ROIC DANAHER – MANAGEMENT’S “CORE” ROIC ANALYSIS since 2008 despite 2009 recession Source for the above charts: Company presentation dated June 12. © 2008-2013 by BeyondProxy LLC. and post-acquisition margin improvement initiatives have produced major gross margin expansion since 2001 Management sees “organic path” to 20% operating margin. portfolio evolution.manualofideas. Value-oriented Equity Investment Ideas for Sophisticated Investors DANAHER – RECURRING REVENUE Management aims to utilize M&A and leverage the installed base in order to increase recurring revenue DANAHER – MARGIN EXPANSION Profitable growth.

486 2.6 million FYE 12/31/13 4.886 Debt 3.740 30.461 18.directv.3% 49.3% 9.246 4.886 16.197 2.692 2.679 Receivables 1.645 3.600 1.763 1.912 EBIT/capital employed 73% 64% 56% 42% 81% 83% 78% 78% >100% 85% Ten-Year Stock Price Performance and Trading Volume Dynamics $70 $60 $50 $40 $30 $20 $10 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC. LTM EBIT yield 10% Institutional ownership: 87% 5/7/13 $1.81 Latest Ago Ests P/E FYE 12/31/13 12x Market value: $34.395 8.299 2.9% 18.679 7. except Fiscal Years Ended December 31.528 18.434 1.384 -5.005 2.614 12. Southeastern.438 6.20 1.73 (as of 6/21/13) Month # of P/E FYE 12/31/12 13x 52-week range: $46.479 3.2% 10.110 985 880 747 638 622 678 572 Cash from operations 3.925 5.6% 47.2% 8.711 1.625 2.246 19.9% Cash.482 2.35 23 P/E FYE 12/31/14 10x Enterprise value: $51.640 -10.695 2.3% 8.360 2.345 1.520 595 678 Adjusted operating income 2.72 5.0% 9.186 953 1.96 4.8% 12.756 17.6% 49.355 1.471 2.98 5.693 21.404 3.6% 18.2% 17.673 3.476 6.547 11.365 17.408 Adjusted pretax income 2.4% 23.229 2.629 5. Member of S&P 500 EL SEGUNDO CA www. All rights reserved.4% 13.755 1.660 15.512 2.587 7.6% 11.684 2.162 3.195 1.00–$65.158 8.649 Inventory 148 193 192 212 247 280 412 418 285 418 LT investments 806 838 923 1.817 11.44 3.431 5.001 2.407 1.0% 11.0% 17.718 8.185 5.046 7.006 4.679 4. Weitz Services: Broadcasting & Cable TV.634 3.98 24 EV/ LTM EBIT 10x Insider ownership: <1% FYE 12/31/15 6.749 1.36 1.997 13.88 15 P / tangible book n/m Insider buys (last six months): 0 LT growth 23.033 13.364 811 826 Free cash flow 1.4% 8.2 billion Next quarter 1.113 -10.274 7.3% 8.226 29.515 1.157 1. Berkshire.10 1.438 8.056 -294 -2.161 14.649 2.013 3.262 1. LTME FQE FQE per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13 Revenue 14.7% 12.365 Tangible equity 1.764 4.251 Adjusted net income 1.423 1.896 4.902 1.337 9.687 13.895 4.375 8.696 2.349 3.015 2.388 2.662 3.474 2.437 2.8% 11.5% 49.434 1.349 2.1% 11.6% D&A 7.976 2.415 1.20 $1.295 5.737 D&A 1.manualofideas.764 Tangible assets 9.683 1.4% 2 Greenblatt Criteria Insider sales (last six months): 0 EPS Surprise Actual Est.506 4.4% 16. Baupost. investments 2.034 1.7x Ownership Data FYE 12/31/14 5.009 4.965 12.416 -8.071 2.580 Gross profit 7.502 873 1. net 4.647 6.535 1.536 Capex 1.10 23 P/E FYE 12/31/15 9x Shares outstanding: 558.222 5.420 1.5% 10.53 4.815 9.998 4.3% 49.683 PP&E.464 17.910 4.587 Intangible assets 5.043 952 710 … % of revenue: Gross profit 48.9% Capex 13.08 1.357 2.05 1.6% 8.0% 14.271 14.416 3.102 27.320 2.8% 48.738 1.4% 15.3% 11.669 1.605 1.453 5.147 2.com Trading Data Consensus EPS Estimates Valuation Price: $61.419 3.5% 48.4% 49.326 -10.54 2.7% 47.138 731 856 Adjusted diluted EPS 1.285 2.912 -8. Value-oriented Equity Investment Ideas for Sophisticated Investors DirecTV (DTV) – Akre.170 3.1% 17.463 4.com July 2013 – Page 34 of 117 .88 6.6% 10.745 10.13 1.93 18 EV/ LTM revenue 1.50 Shares out (avg) 1.06 LTM pre-tax ROC 78% Operating Performance and Financial Position ($ millions.417 15.833 6.085 5. JOIN TODAY! www.640 2.093 2.6% 11.634 5. Lane Five.681 2.635 11.206 5.914 15.565 24.5 billion This quarter $1.3% Adjusted operating income 16.36 $1.790 2.308 1.526 1.326 5.

8 7. 2013 (up 1% y-y).9 White joined in 2010.4 15. VALUE Intrinsic value materially higher than market value?  • ~$17 billion of net debt (2. © 2008-2013 by BeyondProxy LLC. What makes it compelling is exemplary capital allocation and the ability to reinvest capital from the maturing U. and -$166 million in 1Q13.1 million (flat y-y).9 million subscribers and 41%-owned Change (y-y) 5% 5% 4% 3% 1% 1% Sky Mexico (accounted for under the equity ARPU2 $84 $85 $90 $93 $97 $96 Change (y-y) 6% 2% 5% 4% 4% 4% method) another 5. Net income (adjusted)1 8% 7% 9% 10% 10% 11% • Largest pay-TV provider in Latin America.6 18. as PP&E.5% consensus EPS of $5. based on Monthly churn 1. 4 5 Excludes Sky Mexico subscribers.110 985 880 747 638 572 While the buybacks have created value over the ∆ shares out (avg) -7% -11% -11% -15% -15% -16% 1 Adjusted for unusual items of -$570 million in 2009. 88% 87% 84% 80% 78% 76% DIRECT Latin America 12% 13% 15% 19% 21% 23% • 20% subscriber share of U.48 3. LT debt 54% 54% 87% 100% 110% 112% DirecTV continues to grow subscribers (up 1% y-y Tangible equity -3% -18% -43% -60% -66% -69% Trailing P/E (end) 17x 35x 16x 12x 11x 12x in 2012) and ARPU (+4%) in the U. DIRECTV Latin America 18% 12% 17% 18% 15% 7% • Strong ARPU growth in the U. while keeping Forward P/E (end) 24x 13x 12x 9x 10x 11x churn low and subscriber acquisition costs in check. investments 17% 20% 12% 7% 12% 11% LT investments 8% 11% 14% 13% 11% 11% • Competition from cable and telco companies.5% 1. SAC = subscriber acquisition cost. the market continues to treat DirecTV as if it had little to no growth prospects.S. ARPU $55 $57 $58 $63 $57 $54 • Exemplary capital allocation under CEO Mike Change (y-y) 14% 4% 1% 8% -9% -11%5 White (61).8% 1.9 10. including aggressive repurchases.2 29. Excluding the impact of foreign currency exchange rates.1 27. housing units total 130+ million.7 billion to help fund 3 ARPU = average revenue per user.S. EBIT margin by segment: which includes cable (57% share). 13% 13% 16% 17% 18% 19% and. ARPU is up 13% since 2009. 2 billion at yearend 2009 to $16. JOIN TODAY! www.95 2. DirecTV has increased net debt from $5.S.6% 1. SAC3 $715 $712 $796 $813 $859 $899 • Valuation implies little to no growth expectation Change (y-y) 3% 0% 12% 2% 6% 5% at a 10% forward earnings yield. -$25 million in years.5% 1..S. pay-TV industry. All rights reserved. the market Change (y-y) 18% 18% 27% 36% 31% 29% seems to be ignoring the growth in Latin America.9 4. Netflix. DIRECTV U.S.8% 1. as well as increasing leverage. the valuation is attractive.47 4.1 million ∆ gross profit 17% 9% 12% 11% 7% 7% subscribers as of March 31.6 24. market into Latin America and other markets for a long time to come. FYE December 31 2008 2009 2010 2011 2012 1Q13 ∆ revenue – U.6 19. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA DirecTV provides satellite television services. Operating metrics – DIRECTV Latin America: Subscribers (mn)4 3. Despite concerns about competition and capital intensity.1 Brazil have 10.0x run-rate EBITDA DOWNSIDE PROTECTION Low risk of permanent loss?  based on Q1 adjusted EBITDA of $2.5% 1. telephone companies (5%+). MANAGEMENT Capable and properly incentivized?  FINANCIAL STRENGTH Solid balance sheet?  NOTABLE HOLDERS MOAT Able to sustain high returns on invested capital?  Insiders <1% | Berkshire Hathaway 7% | Southeastern 5% EARNINGS MOMENTUM Fundamentals improving?  Akre <1% | Baupost <1% | Lane Five <1% | Weitz Funds <1% MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE At a 10% forward earnings yield. ARPU increased 1.9 20. Selected items as % of tangible assets: INVESTMENT RISKS & CONCERNS Cash.S. DIRECTV U.S. we like the risk-reward.20 • Debt-funded share buybacks are unsustainable.1 billion).S. despite revenue up by ~50% since 2008.4 million subscribers. increasingly. However. 11% 8% 9% 8% 6% 5% INVESTMENT HIGHLIGHTS ∆ revenue – Latin America 39% 21% 25% 42% 23% 16% ∆ revenue 14% 10% 12% 13% 9% 8% • Largest U.S.5% 1.5%. ∆ assets 10% 10% -2% 3% 12% -6% ahead of DISH Network’s 14.36 0. Capex continues to be at ~11% RATINGS of revenue.7 billion.. This belies growth in Latin America where DirecTV is the largest pay-TV provider. Free cash flow in the period totaled $7.8% 1.2 billion of buybacks from 2010 through 1Q13.8% 1.3 10. Operating metrics – DIRECTV U. share count is down by 40%+).S. net 57% 50% 53% 55% 54% 54% well as Internet video as Hulu.: Wholly-owned PanAmericana and 93%-owned Sky Subscribers (mn) 17.9% Tangible assets ($bn) 11. reflects the Selected items as % of revenue: Gross profit 51% 51% 51% 49% 48% 49% strength of the DirecTV brand and popularity of its EBIT (adjusted)1 14% 12% 16% 17% 17% 19% product and service offerings in a challenging U.7 21. YouTube ST debt 1% 12% 0% 0% 2% 3% and other online providers gain popularity. Revenue ($bn) 19. and DirecTV still growing in the U.1 20. of which % of revenue by major segment: ~100 million currently subscribe to a form of pay-TV. While the U.S.2 19. With Latin America contributing ~25% of EBITDA.S.6 13. Shares out (avg) (mn) 1.6 U. D&A 12% 12% 10% 9% 8% 9% Capex 11% 10% 10% 12% 11% 11% which contributes nearly 25% of total revenue.58 1.98 for 2014. $17.9 may indeed have muted growth prospects.4 2011.7 13. $51 million in 2010.manualofideas.6 5. Pretax income (adjusted)1 13% 11% 14% 15% 15% 17% operating environment. satellite TV provider with 20. satellite (34%).0 12.) ($) 1. Diluted EPS (cont.7 15. -$64 million in 2012.7 7.com July 2013 – Page 35 of 117 .8% 1. • Capital intensity.S. Since Monthly churn 1.

96 (‡) multiplied by minus minus Average 7-year EBIT margin: 15.1% required FCF yield) 110% discount of 25%: $1.2% Capex: $3. DIRECTV – COMPOSITION of FREE CASH FLOW ($ in millions) FCF has lagged modestly behind net income over the past two years It’s unclear what portion of capex might be regarded as expansion rather than maintenance capex Operating cash flow was $1.80 three months ago. down from $1.7x (*) equals Industry FCF yield-implied fair value: equals Estimated fair enterprise value of $43 billion ($76 per share) Industry multiple-implied fair value: DIRECTV: $46 billion multiplied by $54 billion ($97 per share) plus Assumed required FCF yield as a multiplied by Cash. stock price ($62 per share) (‡) The FY13 consensus EPS estimate of $4.com July 2013 – Page 36 of 117 . JOIN TODAY! www. © 2008-2013 by BeyondProxy LLC.21 Assumed fair value multiple of EBIT: Industry median FCF yield: 4. ST investments: $1. The Manual of Ideas analysis.6 billion Free cash flow: $2.0x equals Corresponding industry P/E: 18.96 Estimated EBIT: $4.0 billion equals multiplied by divided by Revised FY13 EPS estimate: $5.76 billion in 1Q12 Capex was $830 million in 1Q13 compared to $810 million in 1Q12 Source: Company earnings release dated February 2013.96 has been revised upward by 3% from $4. assumptions and estimates.4 billion Consensus FY13E EPS: $4.manualofideas. Source: Company filings.8% (*) multiplied by 10. All rights reserved. or $55 per share stock price ($62 per share) 74% upside to the recent (based on 560 million shares out) stock price ($62 per share) 11% downside from the recent (*) Represents Broadcasting & Cable TV industry median multiple.3 billion equals (15.7 billion percentage of the industry FCF yield: Assumed DTV multiple as a plus 85% percentage of the industry multiple: Long-term investments at fair value (4. 2013 ▼ ▼ ▼ TTM net sales: $30 billion Operating cash flow: $5. 2013 and average estimate for the fiscal year ending months ended March 31. 2013 EBIT margin for past seven fiscal years December 31.54 billion in 1Q13. or $90 per share equity of DIRECTV: Estimated fair value of the common (based on 560 million shares out) $60 billion ($107 per share) equity of DIRECTV: 46% upside to the recent (based on 560 million shares out) $31 billion. Value-oriented Equity Investment Ideas for Sophisticated Investors DIRECTV – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Valuation methodology: Valuation methodology: Valuation methodology: Based on revenue for the twelve months Based on median consensus EPS Based on free cash flow for the twelve ended March 31.0x fair value P/E multiple) minus Estimated fair value of the common equals Total debt: $18 billion equity of DIRECTV: Estimated fair value of the common equals $50 billion.4 billion Assumed upside/downside to equals equals FY13 EPS estimate: 5% * $4.

Strong subscriber growth is fueling financial performance in Latin America. All rights reserved. JOIN TODAY! www.manualofideas. even as ARPU erodes modestly © 2008-2013 by BeyondProxy LLC. U. Value-oriented Equity Investment Ideas for Sophisticated Investors DIRECTV – KEY OPERATING METRICS of U. financials have benefited from strong ARPU while the subscriber trend has been rather flat DIRECTV – KEY OPERATING METRICS of LATIN AMERICA SEGMENT Source: Company earnings release dated February 2013.S.S. SEGMENT Source: Company earnings release dated February 2013.com July 2013 – Page 37 of 117 .

498 2.com Trading Data Consensus EPS Estimates Valuation Price: $61.104 8.815 10.457 3.340 2.013 -21. except Fiscal Years Ended December 31.553 3.078 3.347 8.10 $1.772 2.500 12.493 2.877 Tangible assets 2.031 2.708 PP&E.8% 7. LTM EBIT yield 6% Institutional ownership: 86% 4/29/13 $0.com July 2013 – Page 38 of 117 . LOUIS MO www. Member of S&P 500 ST. LTME FQE FQE per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13 Revenue 21.789 12.378 7.008 4.833 31.680 Intangible assets 3.578 1.express-scripts.6% 5.manualofideas.171 532 964 Capex 67 75 84 148 120 144 160 250 19 109 Free cash flow 592 752 1.726 31.722 5.980 13.60 11 P / tangible book n/m Insider buys (last six months): 17 LT growth 16.3% 9.574 1.826 -3.55 0.429 2. GMO.634 1.379 6.057 11.968 2.293 1.916 5.330 8.7 billion This quarter $1.475 2.951 13.341 -2.185 1.037 3.048 4.9% 7.240 7.877 7.708 12.7% 3. net 198 216 222 347 373 416 1.15 1.308 1.921 513 855 … % of revenue: Gross profit 6.192 4.6% 7.60 5.967 Adjusted operating income 826 1.80 4.5% 4.580 4.56 1.046 3.941 8.306 2.96 (as of 6/21/13) Month # of P/E FYE 12/31/12 35x 52-week range: $49.133 26.30 24 EV/ LTM revenue 0.618 Tangible equity -1.61 2.398 44.071 2.968 16.5% Adjusted operating income 3.274 1.760 1.9% 5.156 2.260 Ten-Year Stock Price Performance and Trading Volume Dynamics $70 $60 $50 $40 $30 $20 $10 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.98 LTM pre-tax ROC n/m Operating Performance and Financial Position ($ millions.909 2.990 Receivables 1.074 44.469 1.2% 5 Greenblatt Criteria Insider sales (last six months): 9 EPS Surprise Actual Est.662 1.552 3. investments 131 435 531 1.019 1.294 Inventory 191 166 203 313 382 374 1.535 10.458 13.932 -2.620 2.118 2.8% 8.973 46.2% 16.8% 6.605 -4.057 2.917 5.537 13.063 Gross profit 1.1 billion Next quarter 1.107 45.722 44.560 4. T Rowe.574 Short-term debt 180 260 420 1.481 4.385 23.757 8.260 -4.667 11.6x Ownership Data FYE 12/31/14 4.740 5.941 24.211 7.657 385 1.128 93.889 567 842 Adjusted pretax income 742 945 1.207 1.10 22 P/E FYE 12/31/14 13x Enterprise value: $63.340 0 1.0% 7.24 2.465 832 1.5 million FYE 12/31/13 4.516 437 638 Adjusted net income 475 601 776 827 1.474 23.205 1.219 2.000 632 Total current liabilities 2.824 21.46 Shares out (avg) 559 521 498 527 539 501 731 753 485 819 Cash from operations 659 827 1.8% 4.214 7.633 -22.794 1. All rights reserved.125 696 1.92 25 EV/ LTM EBIT 17x Insider ownership: <1% FYE 12/31/15 5.657 Total current assets 1.061 1.070 524 5.57 2.896 3. Value-oriented Equity Investment Ideas for Sophisticated Investors Express Scripts (ESRX) – Cap World.298 -21.431 8. Weitz Services: Retail (Drugs).990 9.99 $0.708 12.133 34.624 1.815 Total liabilities 3.79–$66.256 268 374 Adjusted diluted EPS 0.424 2.958 3.490 4.8% 6.136 -3.721 1.30 4.06 Latest Ago Ests P/E FYE 12/31/13 14x Market value: $50.117 2.294 2.2% Cash.08 22 P/E FYE 12/31/15 11x Shares outstanding: 817.270 1.759 2. Wedgewood.772 1.563 21.524 Long-term debt 1.983 4.714 10.494 7.1% 4.296 4.776 23.344 3.516 1. JOIN TODAY! www.057 3.909 2.076 14.607 2.1% 9.058 10.7% 4.968 Common equity 1.000 935 632 1.044 4.708 Payables 576 517 496 706 657 928 2.103 1. Davis.051 2.85 1.858 107.680 406 1.08 1.618 2.1% 3.144 2.9% 6.998 2.524 5.32 0.93 4.

While Health Solutions in April 2012. and -$1. customers are generally well-informed and can relatively easily move among the various PBMs in what remains a competitive industry. Pretax income (adjusted)1 6% 5% 4% 4% 3% 2% • ~$25 billion acquisition of Medco Health Net income (adjusted)2. net 10% 8% 11% 5% 13% 16% Payables 22% 16% 20% 11% 23% 24% has been a repurchaser of shares in the past. investments 23% 24% 16% 66% 22% 19% • Capital-light model generates significant FCF.0 million in 2009.2 million in 2008.1 Express Scripts provides healthcare management and Selected items as % of revenue: administration services on behalf of payors (e. MANAGEMENT Capable and properly incentivized?  • $4+ billion FCF target may be too aggressive in FINANCIAL STRENGTH Solid balance sheet?  the near term due to risk related to customer churn.g.7 Selected items as % of tangible assets: and FCF targets appear achievable in the near term. Revenue ($bn) 21. Inventory 9% 7% 11% 4% 13% 15% While Express Scripts does not pay a dividend. 4 Retail (Drugs) industry median.manualofideas. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA1 Express Scripts provides pharmacy benefit management FYE December 31 2008 2009 2010 2011 2012 1Q13 (PBM*) services in North America.S. 5 Reflects adjusted prescriptions (home delivery prescriptions are multiplied by 3. MOAT Able to sustain high returns on invested capital?  merger integration and regulatory developments. Current liabilities 119% 120% 117% 64% 103% 108% More than 90% of new lives are in 40 states where LT debt 58% 55% 75% 83% 118% 129% the company has a key managed care relationship.21 2. Gross profit 9% 10% 7% 7% 8% 8% HMOs.g. © 2008-2013 by BeyondProxy LLC.2 million in 1Q13. JOIN TODAY! www.7 10. formulary management and home delivery pharmacy services to create an integrated product NOTABLE HOLDERS offering to manage the prescription drug benefit for payors. as they typically cover a time period 3 times longer than retail prescriptions). the implied yield of 8%+ looks attractive. the synergies Tangible assets ($bn) 2. WellPoint represented 14% and the Dept.5 12. Receivables 50% 55% 51% 23% 43% 40% enabling potentially increasing return of capital. Cash.S. enabling more return of capital. * PBMs combine retail pharmacy claims processing.7 45. OptumRx-UnitedHealth). Express Scripts has become the largest pharmacy benefit manager in the U. ∆ revenue 1% 13% 82% 3% 103% 115% ∆ gross profit 15% 19% 22% 10% 126% 136% INVESTMENT HIGHLIGHTS ∆ assets 5% 117% -12% 48% 272% 183% ∆ BV per share 62% 211% -1% -26% 547% 404% • Largest pharmacy benefit manager in the U.4 billion). healthcare reform provides volume tailwinds. can relatively easily move among the various PBMs. % of revenue from Top 57 18% 24% 55% 57% 39% 40% Based on FCF of $855 million in Q1.79 0. All rights reserved.169 1. • Competition includes other independent PBMs (e.679 350 3) promoting the use of generics and low-cost brands. it PP&E.45 value and efficacy to assist clients in selecting a cost. health insurers.9 26. healthcare reform should provide additional growth tailwinds.412 1. While the added scale should help.com July 2013 – Page 39 of 117 .3 4. and retail pharmacy-owned PBMs (e. employers) through networks EBIT 6% 6% 5% 5% 3% 3% EBIT (adjusted)2 6% 6% 5% 5% 4% 3% of contracted retail pharmacies and mail-order.639 1. MedImpact).g.55 2.1x annualized EBITDA MACRO Poised to benefit from economic and secular trends?  based on Q1 EBITDA of $1. the Dept. Scale leads to D&A 0% 0% 1% 1% 2% 2% Capex 0% 1% 0% 0% 0% 0% competitive advantage related to the ability to negotiate Industry EBIT margin4 -2% 5% 5% 5% 3% 3% higher discounts from drug manufacturers on behalf Px processed (mn)5 506 531 754 752 1. VALUE Intrinsic value materially higher than market value?  WellPoint. ∆ px processed 0% 5% 42% 0% 86% 102% • Guiding for $4+ billion of annual FCF (8%+ yield) Generic penetration6 67% 70% 73% 75% 79% 81% including $1 billion of Medco-related synergies. 2 Adjusted for unusual items of -$30 million in 2011 and -$705 million in 2012.0 46.3 8. ST debt 18% 29% 0% 12% 7% 6% • U. Dividends per share ($) – – – – – – effective formulary.396 390 of the company’s healthcare payor customers.S. care companies (e. Based on guidance of $4+ billion of post-deal free cash flow. 6 Catalyst RX.53 1. Shares out (avg) (mn) 498 527 539 501 731 819 ∆ shares out (avg) -4% 6% 2% -7% 46% 69% INVESTMENT RISKS & CONCERNS 1 Figures reflect the acquisition of WellPoint’s PBM business NextRx in 2010 and Medco • Low entry barriers and switching costs.g.9 24. Tangible equity -93% -84% -108% -55% -173% -199% Trailing P/E (end) 18x 28x 24x 18x 30x 34x • Helps customers manage the cost pressures of Forward P/E (end) 18x 20x 21x 25x 13x 13x rising drug prices by: 1) evaluating drugs for price.6 3. of Defense 11% of 2012 revenue. Diluted EPS (cont. 2) leveraging purchasing volume BV per share (end) ($) 2 7 7 5 32 29 Share price (end) ($) 28 43 54 45 54 58 to deliver discounts to health benefit providers. scale is important.431 1.1 93. EARNINGS MOMENTUM Fundamentals improving?  • ~$12 billion of net debt (2. RATINGS • Customer concentration and retention risk. Caremark-CVS). -$23 million in 2010. We do like the company’s capital-light model which generates ample free cash flow.3 4% 3% 3% 3% 2% 1% Solutions in mid-2012 adds scale.54 1. of Defense and UnitedHealth DOWNSIDE PROTECTION Low risk of permanent loss?  Group represented 34% of 2012 revenue. and Volume (mn shares) 1. PBMs owned by managed 7 Generic drugs processed as a percentage of network prescriptions.S. $1. Insiders <1% | GMO 2% | Wedgewood <1% | Weitz <1% THE BOTTOM LINE Following the acquisition of PBM rival Medco in April 2012. especially as U.) ($) 1. customers are well-informed and 3 Adjusted for nonrecurring items of $0. -$28 million in 2012.

292 11. © 2008-2013 by BeyondProxy LLC. ST investments: $2.112 n/m 10% 3% 7% 8% 171% 8.9% Assumed upside/downside to Capex: $250 million equals FY13 EPS estimate: 5% * $4.0x Corresponding industry P/E: 14.2 billion multiplied by minus minus Average 7-year EBIT margin: 4.manualofideas.8% required FCF yield) equals (14.055 n/m 2% 1% 4% 5% 104% 3.51 divided by Assumed fair value multiple of EBIT: multiplied by Industry median FCF yield: 7.2 billion equals Free cash flow: $4. EXPRESS SCRIPTS – ANALYSIS OF SELECTED COMPARABLE COMPANIES Trading Data Public Market Valuation Operating Performance (Click to visit ∆ to Reach Tang./ ∆ Rev. or $89 per share (based on 820 million shares out) $60 billion ($73 per share) (based on 820 million shares out) 21% downside from the recent (based on 820 million shares out) 44% upside to the recent stock price ($62 per share) 18% upside to the recent stock price ($62 per share) (*) Represents Retail (Drugs) industry median multiple.com July 2013 – Page 40 of 117 .435 13% 2% 3% 3% 3% 18% 227 15% 6% 79% 22% Express Scripts / ESRX -76% 7% 50. 2013 and average estimate for the fiscal year ending months ended March 31. Low High ($mn) ($mn) MV Yield LTM FY FY EV ($000) LTM Q Profit EBIT Allscripts / MDRX -68% 142% 2.30 equals Estimated EBIT: $5. stock price ($62 per share) (‡) The FY13 consensus EPS estimate of $4. Value-oriented Equity Investment Ideas for Sophisticated Investors EXPRESS SCRIPTS – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Based on revenue for the twelve months Based on median consensus EPS Based on free cash flow for the twelve ended March 31. 2013 ▼ ▼ ▼ TTM net sales: $108 billion Consensus FY13E EPS: $4.27 three months ago.296 2.258 15. relevant websites) 7-Year MV EV Book/ FCF This Next Rev. = adjusted | ∆ = change Explanations: ∆ revenue represents year-over-year change in revenue | EPS yield for this and next FY is based on consensus EPS estimates | EBIT is adjusted for certain unusual items The company generated adjusted EBITDA of nearly $4 per claim in 2012 EXPRESS SCRIPTS – CALCULATION of EBITDA. All rights reserved. The Manual of Ideas.3x fair value P/E multiple) equals Estimated fair value of the common equals Estimated fair value of the common equity of Express Scripts: Estimated fair value of the common equity of Express Scripts: $40 billion.9 billion multiplied by Revised FY13 EPS estimate: $4. = tangible | adj. = revenue | tang. Source: Company filings. JOIN TODAY! www.7x (*) equals equals equals Industry FCF yield-implied fair value: Estimated fair enterprise value of Industry multiple-implied fair value: $65 billion ($80 per share) Express Scripts: $52 billion $54 billion ($66 per share) multiplied by plus multiplied by Assumed required FCF yield as a Cash./ Empl.30 has been revised upward by 1% from $4. 2012 Source: Express Scripts recast worksheet.30 (‡) Operating cash flow: $5. or $49 per share equity of Express Scripts: $73 billion.655 63.748 n/m 3% neg. 4% 5% 52% 201 -21% -5% 41% 1% Catamaran / CTRX -95% 16% 10.0 billion Assumed ESRX multiple as a percentage of the industry FCF yield: minus percentage of the industry multiple: 90% Total debt: $14 billion 110% (6. LTM EPS Yield LTM Rev.467 71% 88% 8% 2% Cerner / CERN -84% 6% 16. 2013 EBIT margin for past seven fiscal years December 31. Last Gross Adj. = employee | rev.216 85% 115% 8% 5% Abbreviations: MV = market value | EV = enterprise value | LTM = last twelve months | FY = fiscal year | empl.5% (*) 10. % LTM Rev.

© 2008-2013 by BeyondProxy LLC. Value-oriented Equity Investment Ideas for Sophisticated Investors EXPRESS SCRIPTS – WHAT PLAN SPONSORS SEEK in a PHARMACY BENEFIT MANAGEMENT (PBM) PLATFORM Snapshot of Express Scripts PBM platform U.com July 2013 – Page 41 of 117 . All rights reserved.S. JOIN TODAY! www. 2010-2016E ($ in billions) Continued positive sales outlook for generics should benefit Express Scripts Source for the above charts: Company presentation dated June 2013. HEALTHCARE REFORM – EXCHANGE TYPES. by STATE > 90% of new lives in 40 states where ESRX has a key managed care relationship BRANDED PHARMACEUTICALS – SNAPSHOT of PATENT EXPIRATIONS.manualofideas.

705 1.46 3.5x Insider buys (last six months): 15 LT growth 9.004 1.229 1.749 1.8% 33.42 8 P / tangible book 61.03 1.9% 13.133 1.1% 18.3% 15.540 1.317 2.050 Short-term debt 844 856 502 39 286 140 376 353 245 353 Long-term debt 1.095 1.3% 43.133 5.79 2.674 1.540 1.749 1.101 1.644 6.459 1.04 4.745 3.168 344 379 Adjusted net income 574 491 406 519 608 675 779 799 232 253 Adjusted diluted EPS 2.007 736 685 845 1.745 Common equity 683 593 318 721 902 857 1.705 Intangible assets 642 741 665 697 647 634 808 796 821 796 Tangible assets 3.969 2.4% 21.99 Latest Ago Ests P/E FYE 12/31/13 24x Market value: $18.04 LTM pre-tax ROC 65% Operating Performance and Financial Position ($ millions.994 765 851 Adjusted operating income 1.hersheys.5% 9.71 $0.586 1.100 Tangible equity 41 -148 -347 23 255 224 229 305 40 305 TBV / tangible assets 1% -4% -12% 1% 7% 6% 6% 8% 1% 8% EBIT/capital employed 42% 21% 29% 42% 56% 62% 58% 65% 88% >100% Ten-Year Stock Price Performance and Trading Volume Dynamics $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.280 1.38 1.100 860 1.037 1.44 2.779 4.13 Dividend 1.515 3.56 1. Pioneer.827 Gross profit 1.00 16 P/E FYE 12/31/15 20x Shares outstanding: 216.2% 38.28 2.248 1. Cap World.43 4. LTME FQE FQE per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 4/1/12 3/31/13 Revenue 4.474 3.4% 14.947 5.299 5.5% 20.739 3. JOIN TODAY! www.671 6.542 1.7% 18.3 million FYE 12/31/13 3. except Fiscal Years Ended December 31.506 1.550 3.55 1.774 3.503 1.15 1.66 (as of 6/21/13) Month # of P/E FYE 12/31/12 30x 52-week range: $68.081 6.955 3.908 2.7% 42.066 901 588 1.60 0.732 1.758 2.5% 5 Greenblatt Criteria Insider sales (last six months): 7 EPS Surprise Actual Est.9% 17. RenTech Consumer Non-Cyclical: Food Processing.0% Cash.405 1. investments 97 129 37 254 885 694 728 730 567 730 Receivables 523 487 455 410 390 400 461 517 503 517 Inventory 649 600 593 520 534 649 633 627 650 627 PP&E.378 368 402 Adjusted pretax income 891 617 587 754 908 1.0x Ownership Data FYE 12/31/14 4.67 2.66 3. Member of S&P 500 HERSHEY PA www.66 18 EV/ LTM revenue 3.14 1.4% 44.370 3.00 1.manualofideas.38 0. FMR.09–$91.03 1.28 1.09 $1.651 1.868 1. LTM EBIT yield 6% Institutional ownership: n/a 4/25/13 $1.98 3.429 2.978 3.540 Total liabilities 3. Value-oriented Equity Investment Ideas for Sophisticated Investors Hershey (HSY) – Hershey Trust.2% 46.947 4.531 1.112 276 293 Capex 199 204 283 146 202 348 278 280 92 94 Free cash flow 525 575 237 920 700 240 817 832 184 200 … % of revenue: Gross profit 37.9 billion Next quarter 1.7 billion This quarter $0. net 1.944 4.71 16 P/E FYE 12/31/14 21x Enterprise value: $19.42 Shares out (avg) 236 229 227 228 228 227 225 225 225 224 Cash from operations 723 779 520 1.com Trading Data Consensus EPS Estimates Valuation Price: $86.438 1.0% 34. JPM.3% 22.009 1.03 18 EV/ LTM EBIT 16x Insider ownership: 8% FYE 12/31/15 4.8% 42.19 1.19 1.560 1.632 1.626 3.740 1.571 2.6% Adjusted operating income 20.8% 44.050 3.053 2.com July 2013 – Page 42 of 117 . All rights reserved.718 3.507 2.654 3.

up from 10% today. as calculated Capital employed 2.1% ~16.421 1.978 3. Net income (adjusted)1 8% 10% 11% 11% 12% 14% candy.com July 2013 – Page 43 of 117 .100 11. spending $4. both organically and through acquisitions.S.499 1. having captured D&A 5% 3% 3% 4% 3% 3% 46% of industry growth from 2009-12. ST debt 17% 1% 8% 4% 10% 9% Management expects China sales to grow strongly LT debt 51% 50% 43% 46% 39% 38% Tangible equity -12% 1% 7% 6% 6% 8% from a small base over the next five years. Hershey has focused on leveraging the strong North American base to expand into international markets. The company . + Short-term debt 679 270 162 213 258 365 + Net fixed assets 1. VALUE Intrinsic value materially higher than market value?  • 59% of sales from 25 supermarkets and 34 mass DOWNSIDE PROTECTION Low risk of permanent loss?  merchandisers.712 1.695 2.300 11.055 1.000 Revenue ($mn) 5. 14. -$46 million in 2011. Hershey has bought 2010.111 392 • Large confectionary category.445 -1.832 1. ∆ employees 3% -5% -7% 4% 3% n/a ∆ revenue 4% 3% 7% 7% 9% 6% INVESTMENT HIGHLIGHTS ∆ gross profit 8% 17% 18% 6% 13% 11% Employees 12. the primary distributor to Wal-Mart.080 2. Shares out (avg) (mn) 227 228 228 227 225 224 • Dividend payout ratio of at least 50%. we do not find the shares compelling.1 million common shares (NYSE: INVESTMENT RISKS & CONCERNS HSY. While Hershey possesses pricing power.800 12.Cash.690 and impulse buying. KitKat. Whoppers. Reese’s. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA Hershey produces and distributes a broad line of branded FYE December 31 2008 2009 2010 2011 2012 1Q13 chocolate.S.386 1. Shares outstanding: 163.S.617 1. Cash. the key question from an investment standpoint seems to be what purchase price will afford us an attractive long-term return.133 5. cocoa and other key commodities could 2% | Pioneer 1% | JPM 1% | RenTech 1% | Cap World 1% pressure margins in the short term. confectionery.299 5.482 high household penetration.3% 14. 2 Food Processing industry median.229 402 5% annually from 2007-2012 to $194 billion. EARNINGS MOMENTUM Fundamentals improving?  putting varying amounts of pressure on pricing.671 6. Brands include …to distributor McLane 25% 26% 23% 23% 23% ~23% Hershey’s. Reported operating income 590 762 905 1.S. mint and gum category. Ice Breakers.101 1. and related grocery products.6% 15.100 ~12.921 1.090 -1.365 1.2% Mars/Wrigley and 6% for Nestle). It has grown Capex 6% 3% 4% 6% 4% 5% U.969 2.026 2.S.605 1. has averaged in the high teens. Overall Trailing P/E (end) 26x 19x 21x 23x 25x 28x non-U.0% in 2013E. Ad expense has gone up Calculation of return on capital employed ($mn): from 3. Current assets 1.1% of sales in 2008 to 8. MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE Hershey is a wide-moat producer of branded chocolate and related products. respectively.990 by the company. When evaluating a great business like Hershey’s. with global sales up + non-recurring items 95 83 99 46 118 11 Adjusted EBIT 685 845 1. Inflation could RATINGS have a longer-term impact by affecting demand.947 4. York.6 million Class B common shares (wholly owned by Hershey Trust.56 per share. -$99 million in dividend of $1. in the long term. convenience store market share from 26. Hershey seeks to grow the overseas PP&E. checkout conversion. -$83 million in 2009. EPS Selected items as % of tangible assets: growth should exceed the target by 200 bps in 2013. and -$11 million in 1Q13.036 1. while the share NOTABLE HOLDERS count has declined from 361 million to 224 million. At a trailing FCF yield of 4-5%.827 employees and 43% share in the U.4% 14. with . with the goal of generating a quarter of sales overseas within the next five years. The FINANCIAL STRENGTH Solid balance sheet?  desire to retain shelf space at key retailers translates MOAT Able to sustain high returns on invested capital?  into a need to engage in promotional activities.432 1. Economic ROIC. having built up significant brand preference and consumer loyalty in the U. with 2012 ∆ shares out (avg) -1% 0% 0% -1% -1% 0% 1 Adjusted for unusual items of -$95 million in 2008.004 1. net 49% 47% 40% 41% 42% 42% footprint. including 22% of sales from MANAGEMENT Capable and properly incentivized?  McLane./Canada sales should increase 15-20% in Forward P/E (end) 18x 16x 17x 21x 20x 23x 2013 and grow to 25% of sales within five years.0 billion.S. More recently. and EBIT (adjusted)1 13% 16% 18% 18% 18% 22% Twizzlers. JOIN TODAY! www. = Return on capital employed 34% 46% 63% 64% 64% 81% • Aims to grow sales and EPS 5-7% and 8-10% Tangible assets ($mn) 2. Selected items as % of revenue: Gross profit 34% 39% 43% 42% 44% 47% Almond Joy.050 annually.626 3.105 -1. (31% for …from U.322 -1.081 6.236 -1. The company is in a position to engage in premium pricing and to increase prices at or above the rate of inflation.800 12.6% 16.499 1.2% in Industry gross margin2 27% 29% 28% 30% 26% 27% Industry EBIT margin2 5% 7% 7% 7% 6% 7% 2008 to 31.774 3. Jolly Rancher.4% in 2012. All rights reserved. consumer loyalty. Rolo. The company has 30% share of the U.S. ST investments -83 -145 -569 -789 -711 -729 benefits from strong U.644 1. © 2008-2013 by BeyondProxy LLC. investments 1% 9% 24% 18% 18% 18% Receivables 15% 14% 11% 11% 12% 13% • Leveraging North American strength to expand Inventory 20% 17% 15% 17% 16% 15% globally.manualofideas. ten votes per share) • Exposed to spikes in input costs. with 13. -$118 million in 2012. spikes in the price of Economics: Management <1% | Hershey Trust 33% | FMR sugar.100 • Among leading chocolate companies. back 141 million shares at ~$28 per share from 1993-2012. one vote per share) and 60.Current liabilities -1.147 • Fundamentally advantaged model.

Source: Company filings.5% required FCF yield) equals (20.9 billion 115% (2. ST investments: $730 million Assumed HSY multiple as a percentage of the industry FCF yield: minus percentage of the industry multiple: 90% Total debt: $1.0x fair value P/E multiple) equals Estimated fair value of the common equals Estimated fair value of the common equity of Hershey: Estimated fair value of the common equity of Hershey: $10 billion.1 billion multiplied by minus minus Average 7-year EBIT margin: 17.84 divided by Assumed fair value multiple of EBIT: multiplied by Industry median FCF yield: 2.66 equals Estimated EBIT: $1. JOIN TODAY! www. HERSHEY – CASH FLOW COMPOSITION ($ in millions) FCF has fluctuated from year to year while growing over multi-year periods Source: Company factbook.7 billion Consensus FY13E EPS: $3.2x (*) equals equals equals Industry FCF yield-implied fair value: Estimated fair enterprise value of Industry multiple-implied fair value: $29 billion ($136 per share) Hershey: $11 billion $16 billion ($74 per share) multiplied by plus multiplied by Assumed required FCF yield as a Cash. The Manual of Ideas.0x Corresponding industry P/E: 19.manualofideas. or $48 per share equity of Hershey: $33 billion. Value-oriented Equity Investment Ideas for Sophisticated Investors HERSHEY – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Based on revenue for the twelve months Based on median consensus EPS Based on free cash flow for the twelve ended March 31.63 three months ago. © 2008-2013 by BeyondProxy LLC.8% (*) 10. 2013 and average estimate for the fiscal year ending months ended March 31.66 (‡) Operating cash flow: $1. 2013 EBIT margin for past seven fiscal years December 31.0% Assumed upside/downside to Capex: $280 million equals FY13 EPS estimate: 5% * $3. 2013 ▼ ▼ ▼ TTM net sales: $6. stock price ($87 per share) (‡) The FY13 consensus EPS estimate of $3. or $151 per share (based on 216 million shares out) $18 billion ($85 per share) (based on 216 million shares out) 45% downside from the recent (based on 216 million shares out) 74% upside to the recent stock price ($87 per share) 2% downside from the recent stock price ($87 per share) (*) Represents Food Processing industry median.66 has been revised upward by 1% from $3. All rights reserved.com July 2013 – Page 44 of 117 .1 billion equals Free cash flow: $830 million multiplied by Revised FY13 EPS estimate: $3.

com July 2013 – Page 45 of 117 . 1998-2012 Economic ROIC. except per share data) Source for the above chart and table: Company factbook. is materially lower than return on capital employed. as calculated by management. All rights reserved. JOIN TODAY! www.manualofideas. as calculated on page 43 Economic ROIC is calculated by dividing net operating profit after taxes (NOPAT) by the average invested capital HERSHEY – FIVE-YEAR GROWTH of SELECTED FINANCIAL ITEMS (in thousands. Value-oriented Equity Investment Ideas for Sophisticated Investors HERSHEY – MANAGEMENT’S CALCULATION of ECONOMIC ROIC. © 2008-2013 by BeyondProxy LLC.

732 9.9% 35.285 Capex 5.09 2.623 53.122 1.1% 29.073 13.631 TBV / tangible assets 73% 75% 76% 76% 76% 55% 52% 53% 56% 53% EBIT/capital employed 32% 46% 43% 31% 87% 84% 57% 50% 75% 40% Ten-Year Stock Price Performance and Trading Volume Dynamics $40 $35 $30 $25 $20 $15 $10 $5 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.4x Insider buys (last six months): 11 LT growth 11.20 (as of 6/21/13) Month # of P/E FYE 12/31/12 11x 52-week range: $19. Geode.563 15.2% 16.329 8.860 5.0% Cash. Bleichroeder.258 35.066 R&D 5.2x Ownership Data FYE 12/31/14 2. Franklin.801 4.588 17.527 Adjusted operating income 6.842 11.231 7.971.133 7.999 4.314 3. JOIN TODAY! www.358 LT investments 4.687 7.406 67.755 5.363 11.5% 55.964 7.561 28.1% 15.197 4.96 Latest Ago Ests P/E FYE 12/31/13 13x Market value: $120.791 57.50 0.627 27.977 2.692 20.037 3.207 8.221 2.370 3.87 45 EV/ LTM revenue 2.162 17.452 15.843 13.625 5.358 4.39 $0.438 4.904 20.49 2.170 16.664 5.45 0.98 9 P / tangible book 3.3% 64.886 34.7% 16.1% 15.709 2.757 4.331 13.521 15.839 36.589 13. investments 10.999 53. Value-oriented Equity Investment Ideas for Sophisticated Investors Intel (INTC) – Wellington.801 PP&E.485 10.7% 32. LTME FQE FQE per share data) 2006 2007 2008 2009 2010 2011 2012 3/30/13 3/31/12 3/30/13 Revenue 35.655 11.21 0.50 39 P/E FYE 12/31/15 12x Shares outstanding: 4.712 2.904 37.765 47.225 17.com Trading Data Consensus EPS Estimates Valuation Price: $24.350 10.98 1.948 Cash from operations 10. LTM EBIT yield 11% Institutional ownership: 62% 4/16/13 $0.650 3.78 0.218 19.899 23.734 4.0% 56.519 Adjusted net income 5.265 7.972 4.7% 65.56 0.5% 51.06 0.450 13.0% 5 Greenblatt Criteria Insider sales (last six months): 12 EPS Surprise Actual Est.062 Adjusted diluted EPS 0.757 33.270 2.9% 55.418 25.816 5.096 4.753 17.308 35.810 2.729 6.772 7. except Fiscal Years Ended December 29.797 5.520 56.885 14.45 Shares out (avg) 5.391 15.40 0.5% 20.42 Dividend 0.837 18.580 Gross profit 18.536 Inventory 4.602 16.390 35.722 5.3% 62.663 5.945 15.744 2.000 5.6% 15. net 17.304 5.005 10.63 0.418 Intangible assets 4.341 53.576 1.563 Tangible assets 43.795 55.3 billion This quarter $0.151 31. Walter Scott Technology: Semiconductors.078 … % of revenue: Gross profit 51.520 50.02 1.421 5.122 -5 2.334 37.996 4.625 10.256 4.127 43.0 million FYE 12/31/13 1.935 3.56 0.273 2.631 31.400 44.382 38.197 2.557 5.612 7.042 9.638 13.983 28.365 67. Member of S&P 500 SANTA CLARA CA www. All rights reserved.039 30.148 10.952 8.782 8.906 12.0% 19.515 5.4 billion Next quarter 0.33 0.002 15.41 LTM pre-tax ROC 50% Operating Performance and Financial Position ($ millions.4% 27.87 2.02 2.707 5.598 68.32 1.984 4.115 7.401 2.intel.207 10.821 11.867 3.534 4.2% R&D 16. Harris.833 3.555 5.942 15.02 45 EV/ LTM EBIT 9x Insider ownership: <1% FYE 12/31/15 2.574 17.20 2.5% 22.477 14.manualofideas.074 11.926 11.com July 2013 – Page 46 of 117 .876 4.1% 60.586 35.23–$26.0% 11.0% 15.844 19.848 4.55 0.536 4.39 40 P/E FYE 12/31/14 12x Enterprise value: $116.5% 62.207 Free cash flow 4.830 11.6% 20.491 33.305 3.11 0.87 1.632 12.797 2.671 7.653 6.1% Adjusted operating income 17.963 18.920 21.231 Tangible equity 31.755 8.884 20.4% 18.40 $0.027 28.775 45.385 7.4% 25.015 12.489 4.448 13.073 Receivables 2.520 Debt 2.873 5.287 2.075 2.028 2.274 2.87 1.5% 19.576 8.8% 25.918 17.

5 billion to just under 5.4 17. net 38% 36% 31% 42% 41% 42% • Capex-intensive business.9 15. including Wind River (~$1 Gross profit 55% 56% 65% 63% 62% 56% billion in 2009) and McAfee (~$8 billion in 2011).6 35.4 5. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA Intel designs.8 55. = Return on capital employed 55% 34% 88% 85% 57% 35% INVESTMENT RISKS & CONCERNS Tangible assets ($bn) 45.1 0. One of the toughest competitors is NVIDIA.1 0.4 17. ST investments -13. -$125 million in platforms. Intel had only 0.5 0.1 0.8 47. but it has also Calculation of return on capital employed ($bn): created low-hanging opportunities for incremental Reported operating income 7. loss-making All Other segment): cycle—introducing a new microarchitecture every PC client 34% 30% 43% 42% 38% 31% two years and ramping the next generation of silicon Data center 32% 35% 50% 50% 47% 42% Other Intel architecture -4% -2% 9% -12% -31% -62% process technology in the intervening years.5 -12. and Cisco at FCF yields in the high single digits or higher (Intel is at ~8%). the share count has + Net fixed assets 17. etc. accounted for a combined 32% of sales in 2012.7 28.0 billion.9 -17.5 14.663 5.6 54.256 4. Intel’s largest customers. workstations.9 -18. and -$17 million in 1Q13.2 billion in 2008. Adjusted EBIT 9. dominant in Windows OS Software and services 2% 0% 1% 3% 4% 5% markets.5 17.5 15. Over the past decade. JOIN TODAY! www. R&D 15% 16% 15% 15% 19% 20% EBIT (adjusted)1 26% 17% 36% 32% 27% 20% The McAfee acquisition allows Intel to bundle Pretax income (adjusted)1 26% 18% 37% 33% 28% 20% hardware and software security in one solution. Intel’s total revenue is LT investments 16% 18% 13% 9% 11% 13% expected to grow in the low single digits in 2013. -$132 million in 2011.948 Internet-connected mobile devices and integrated ∆ shares out (avg) -3% -2% 0% -5% -5% -1% 1 Adjusted for unusual items of -$2.2 0.1 43.2 Capital employed 17.5 26. Oracle. Net income (adjusted)1 20% 14% 27% 24% 21% 16% • Weakness creates opportunity? Intel’s lacking D&A 12% 14% 11% 11% 14% 16% presence in fast-proliferating non-PC devices has Capex 14% 13% 12% 20% 22% 18% Industry gross margin3 38% 36% 43% 43% 40% 39% affected the company’s preeminence.3 12.9 20.7 20.6 2.7 -8.5 Current assets 21.5 revenue growth. We favor long-time leaders like Intel.2 17. and VALUE Intrinsic value materially higher than market value?  Oracle.Current liabilities -8. respectively.5 • HP and Dell accounted for 18% and 14% of Selected items as % of tangible assets: Cash. Intel does not derive Inventory 8% 6% 7% 7% 7% 6% material revenue from Apple.6 Intel bought back 191 million shares for $4.7 28. Forward P/E (end) 19x 10x 9x 11x 11x 11x • Industry transitioning from PCs and servers to Shares out (avg) (mn) 5.6 30. There is a constant need to replace Trailing P/E (end) 16x 26x 10x 10x 10x 11x physical assets in light of technology advancement. Intel competes against AMD. a growth focus going forward.7 5. DOWNSIDE PROTECTION Low risk of permanent loss?  which has shifted some of the workload performed MANAGEMENT Capable and properly incentivized?  by the microprocessor to the graphics processor.5 17. 2 Increase in employees in 2011 • Competitive industry.555 5.5 -17. Market share gains in tablets and mobile phones off a very low base remain a wildcard that could re-accelerate growth.3 0. -$452 million in 2009. Microsoft.6 netbook market. and wireless products ∆ assets -9% 5% 19% 13% 19% 16% Data Center (20%): semis for servers.1 0.1 – 0.3 in 2012 and 25 million shares for $530 million in + Short-term debt 0. Intel should remain an industry leader. challenging Intel’s dominance.1 0. AMD has been Intel’s due to McAfee and the WLS business of Infineon. primary competitor in chips for PCs.6 2. but growth has been impacted by Apple’s increasing dominance in all things computing.4 67.2 -7. HP and Dell. with D&A above 10% Debt (all long term) 3% 4% 4% 13% 19% 19% Tangible equity 76% 76% 76% 55% 52% 53% of revenue.0 53.6 25. In the server RATINGS market.manualofideas.6 20. PC client 74% 71% 70% 66% 64% 64% INVESTMENT HIGHLIGHTS Data center 18% 18% 20% 19% 20% 21% Other Intel architecture 5% 8% 7% 9% 8% 8% • Largest chip maker. mobile phone components % of revenue by major segment: Software and services (4%): McAfee.557 5.2 1Q13. Intel drives a regular two-year upgrade Operating margin by segment (excl. 3 Semiconductors industry median.0 chip market in 2012.6 17. Despite Intel’s exclusion from the Apple camp and the transition away from PCs. investments 26% 29% 38% 27% 27% 25% revenue in 2012.6 68.996 4.5 declined from 6. FYE December 29 2008 2009 2010 2011 2012 1Q13 ∆ revenue -2% -7% 24% 24% -1% -3% PC Client Group (65% of revenue): platforms designed for ∆ gross profit 5% -6% 46% 18% -2% -15% notebook and desktop markets. FINANCIAL STRENGTH Solid balance sheet?  NOTABLE HOLDERS MOAT Able to sustain high returns on invested capital?  Insiders <1% | Wellington 2% | Harris 1% | Franklin 1% | EARNINGS MOMENTUM Fundamentals improving?  Geode 1% | Bleichroeder 1% | Walter Scott 1% | Cap Re 1% MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE Intel remains the juggernaut in the semiconductor industry. .4 -16. 2010. tablets.8 billion . makes and markets semiconductors. PP&E.8 28.3 14.7 -12.8 25.5 -10.0 • Repurchased ~$90 billion of stock since 1990. All rights reserved.2% of the phone + non-recurring items 2.8 57. storage ∆ BV per share -5% 7% 19% -2% 17% 11% Other Intel architecture (8%): platforms for embedded apps. IBM. Wind River.6 -12.Cash. © 2008-2013 by BeyondProxy LLC. Employees (end) (‘000) 2 84 80 83 100 105 n/a Revenue ($bn) 37.com July 2013 – Page 47 of 117 . Software and services -180% -87% -66% -2% 0% -4% • Added high-quality software businesses through Selected items as % of revenue: M&A over the years.4 28.

331 4. = adjusted | ∆ = change Explanations: ∆ revenue represents year-over-year change in revenue | EPS yield for this and next FY is based on consensus EPS estimates | EBIT is adjusted for certain unusual items INTEL – OPERATING CASH FLOW. = employee | rev. or $22 per share 59% upside to the recent stock price ($24 per share) (based on 5. = tangible | adj.1% required FCF yield) discount of 50%: $4. 0% 8% 117% 175 -28% 0% 33% 27% 11% Texas Instruments / TXN -62% 13% 38. 9% downside from the recent (‡) The FY13 consensus EPS estimate of $1.87 has been revised down by 3% from $1. 2013 EBIT margin for past seven fiscal years December 29. 2013 and average estimate for the fiscal year ending months ended March 30. The Manual of Ideas analysis.636 46% 9% 6% 5% 6% 93% 541 9% 3% 53% 27% 16% Qualcomm / QCOM -54% 14% 104. Value-oriented Equity Investment Ideas for Sophisticated Investors INTEL – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Based on revenue for the twelve months Based on median consensus EPS Based on free cash flow for the twelve ended March 30. LTM EPS Yield LTM Rev.431 30% 8% 8% 8% 8% 46% 503 -2% -3% 60% 19% 25% Abbreviations: MV = market value | EV = enterprise value | LTM = last twelve months | FY = fiscal year | empl.6% (*) 7.130 n/m 7% 7% 9% 9% 43% 238 -3% -5% 48% 6% 23% NVIDIA / NVDA -60% 175% 8. Low High ($mn) ($mn) MV Yield LTM FY FY EV ($000) LTM Q Profit R&D EBIT Advanced Micro / AMD -60% 968% 2.273 116.5% Assumed upside/downside to Capex: $11 billion equals FY13 EPS estimate: 5% * $1. = revenue | tang. 2013 ▼ ▼ ▼ TTM net sales: $53 billion Consensus FY13E EPS: $1.5x Corresponding industry P/E: 18.0 billion shares out) equity of Intel: (based on 5. ST investments: $17 billion Assumed INTC multiple as a percentage of the industry FCF yield: plus percentage of the industry multiple: 90% Long-term investments at fair value 105% (4.93 three months ago./ ∆ Rev.com July 2013 – Page 48 of 117 .4x fair value P/E multiple) equals minus equals Estimated fair value of the common Total debt: $13 billion Estimated fair value of the common equity of Intel: equals equity of Intel: $222 billion.7x (*) equals equals equals Industry FCF yield-implied fair value: Estimated fair enterprise value of Industry multiple-implied fair value: $200 billion ($40 per share) Intel: $101 billion $183 billion ($37 per share) multiplied by plus multiplied by Assumed required FCF yield as a Cash.87 (‡) Operating cash flow: $20 billion multiplied by minus minus Average 7-year EBIT margin: 25. or $45 per share Estimated fair value of the common $192 billion ($39 per share) (based on 5.1 billion multiplied by Revised FY13 EPS estimate: $1.586 10% 7% 5% 5% 6% 31% 369 -7% -8% 49% 14% 25% Intel / INTC -50% 21% 120. 2008-2012 ($ in billions) Capex has increased faster than operating cash flow in the past two years Source for the above charts: Company website. 2008-2012 ($ in billions) INTEL – CAPEX./ Empl.239 7.manualofideas. Last Gross Adj. % LTM Rev. stock price ($24 per share) Source: Company filings.0 billion shares out) 85% upside to the recent $110 billion. JOIN TODAY! www. INTEL – ANALYSIS OF SELECTED COMPARABLE COMPANIES Trading Data Public Market Valuation Operating Performance (Click to visit ∆ to Reach Tang.899 n/m -25% neg.828 91. © 2008-2013 by BeyondProxy LLC.725 238.0 billion shares out) stock price ($24 per share) (*) Represents Semiconductors industry median.96 divided by Assumed fair value multiple of EBIT: multiplied by Industry median FCF yield: 4.4 billion (15.335 29% 5% 6% 7% 8% 24% 813 25% 24% 63% 20% 31% STMicroelectronics / STM -59% 129% 8.765 40.87 equals Estimated EBIT: $14 billion equals Free cash flow: $9. relevant websites) 7-Year MV EV Book/ FCF This Next Rev. All rights reserved. assumptions and estimates. 1% 126% 476 -25% -31% 34% 26% -7% IBM / IBM -64% 10% 216.858 3. neg.230 68% 0% neg.

JOIN TODAY! www. and the cost advantage continues to increase as the technology evolves toward the production of larger and larger circuit functions on a single semiconductor substrate. Volume 38. It is becoming progressively more difficult to keep Moore’s Law going.” Electronics.manualofideas. © 2008-2013 by BeyondProxy LLC. Number 8. All rights reserved. Value-oriented Equity Investment Ideas for Sophisticated Investors INTEL – COMPONENTS of FREE CASH FLOW. 1965 Source: Company presentation dated May 2013. April 19. but Intel has an advantage over smaller semiconductor companies MOORE’S LAW “Reduced cost [emphasis added by Intel] is one of the big attractions of integrated electronics.com July 2013 – Page 49 of 117 . 2010-2012 Source: Company annual financial statements.

39 1.7% 11.6% 6. Kayne Anderson.20 0.56 6 P/E FYE 6/30/15 19x Shares outstanding: 86.40 0. LTM EBIT yield 6% Institutional ownership: 92% 4/30/13 $0.0% 22. Royce.27 2.4% 5.4% 40.44 0.098 256 282 Gross profit 257 287 307 299 345 399 424 461 103 115 R&D 32 36 43 43 51 63 61 62 16 16 Adjusted operating income 141 160 164 158 182 216 236 254 57 66 Adjusted pretax income 142 162 164 157 181 208 232 250 55 65 Adjusted net income 91 106 105 103 118 138 155 172 37 46 Adjusted diluted EPS 0.10 2.0% 40. LTME FQE FQE per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13 Revenue 591 667 743 746 837 967 1.1 billion This quarter $0.3% Cash. Value-oriented Equity Investment Ideas for Sophisticated Investors Jack Henry (JKHY) – Findlay Park.6% 5. except Fiscal Years Ended June 30. net 252 250 239 238 275 270 277 291 273 291 Intangible assets 324 373 432 435 856 834 822 822 824 822 Tangible assets 583 626 589 616 704 672 797 741 621 741 Short-term debt 50 71 70 64 106 26 26 38 29 38 Long-term debt 0 0 0 0 273 128 106 95 113 95 Tangible equity 252 225 169 192 -106 46 161 257 155 257 TBV / tangible assets 43% 36% 29% 31% -15% 7% 20% 35% 25% 35% EBIT/capital employed 52% 62% 68% 74% 91% >100% >100% 90% >100% >100% Ten-Year Stock Price Performance and Trading Volume Dynamics $60 $50 $40 $30 $20 $10 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.3% 41.48 0.32 (as of 6/21/13) Month # of P/E FYE 6/30/12 27x 52-week range: $32.23 1.53 Dividend 0.4% 23.8% 5.jackhenry.53 3 P / tangible book 15.51 8 P/E FYE 6/30/14 21x Enterprise value: $4.13 Shares out (avg) 91 90 88 84 85 86 87 86 87 86 Cash from operations 169 174 181 207 219 240 265 299 22 33 Capex 62 55 55 56 80 59 79 93 18 24 Free cash flow 108 119 126 150 139 181 185 206 4 10 … % of revenue: Gross profit 43.10 6 EV/ LTM revenue 3.99 1.36 0.3% 42.8x Insider buys (last six months): 1 LT growth 11.0% 23. All rights reserved.2% 21.1% 22.65–$48. JOIN TODAY! www.8% 22.com Trading Data Consensus EPS Estimates Valuation Price: $47. Member of S&P MidCap 400 MONETT MO www.8% 6.42 0.com July 2013 – Page 50 of 117 .5% 43. JPM.99 0. investments 76 90 67 119 127 64 157 182 90 182 Receivables 180 209 214 195 215 225 227 130 126 130 PP&E.3% 41.32 0.12 0.51 $0.1% 6.53 $0.0% 41.19 1.7x Ownership Data FYE 6/30/14 2.60 1.0% 23.56 0. TimesSquare Technology: Computer Networks.51 LTM pre-tax ROC 90% Operating Performance and Financial Position ($ millions.9% 5.0 billion Next quarter 0.7% 3 Greenblatt Criteria Insider sales (last six months): 3 EPS Surprise Actual Est.027 1.24 0.2% 41.3% 40.28 0.manualofideas.1 million FYE 6/30/13 2.7% R&D 5.8% 24.79 1.1% 21.24 Latest Ago Ests P/E FYE 6/30/13 23x Market value: $4.17 1.27 10 EV/ LTM EBIT 16x Insider ownership: <1% FYE 6/30/15 2.7% Adjusted operating income 23.0% 5.53 2.4% 5.

and changes in ∆ shares out (avg) -2% -5% 1% 2% 1% -1% the competitive landscape may affect long-term NOTABLE HOLDERS demand. Jack Henry bought back $34 million ST debt 12% 10% 15% 4% 3% 5% of stock in 2012. ST investments -78 -93 -123 -95 -111 -170 revenue from acquired companies accounting for . Open VALUE Intrinsic value materially higher than market value?  Solutions. with 11. driven by adoption of iPay (2. Credit union 41% 40% 38% 38% 41% 44% Banking industry consolidation continues while Selected items as % of revenue: bank closures have declined from the peak in 2010.4% revenue CAGR from 1991-2012. Competitors RATINGS include Fidelity National Information.com July 2013 – Page 51 of 117 .S. investments 11% 19% 18% 10% 20% 25% share in May. Current assets 340 345 376 374 411 431 • M&A has grown the ProfitStars platform. making increased per-customer value capture a priority. Fiserv. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA Jack Henry provides computer systems and electronic YTD payment solutions primarily to financial services firms. The number of financial institutions is not Insiders 1% | JPM 6% | Kayne Anderson 4% | TimesSquare growing. but the U.600 customers in the U. banks and credit unions. financial technology industry is not exactly a growth industry. % of revenue by segment: Revenue comes mostly from recurring outsourcing Bank 83% 83% 80% 77% 76% 75% fees and processing fees. Investors may want to assume conservatively that Jack Henry will grow per-share FCF at a mid to high single-digit rate. © 2008-2013 by BeyondProxy LLC.Current liabilities -336 -343 -394 -412 -391 -332 + Short-term debt 70 67 85 66 26 32 29% of ProfitStars revenue in 2012. The number of banks and credit unions has been declining at a modest rate. D&A 8% 9% 9% 9% 9% 9% • Attractive operating model.20 per Selected items as % of tangible assets: Cash. with “solid Bank 42% 40% 42% 42% 41% 42% new core sales” and sales to existing customers. as the MANAGEMENT Capable and properly incentivized?  addition of new products and technologies requires FINANCIAL STRENGTH Solid balance sheet?  complex platform integration to ensure both high MOAT Able to sustain high returns on invested capital?  performance and high data and transaction security. LT debt 0% 0% 39% 19% 13% 13% Tangible equity 29% 31% -15% 7% 20% 35% INVESTMENT RISKS & CONCERNS Forward P/E (end) 16x 17x 18x 19x 19x 21x • Dependent on U. All rights reserved.Cash. The vast majority of the company’s revenue comes from high-margin services. Symitar is the leading info processing Hardware 12% 10% 8% 6% 6% 5% Gross margin by type: provider to credit unions. with roughly 80% considered recurring. MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE Jack Henry has carved out a strong niche providing financial technology-related services to banks and credit unions. making the trailing FCF yield of 5% only modestly attractive. Jack Henry has Hardware 27% 27% 26% 26% 27% 27% reported a 20. and many smaller companies.1 = Return on capital employed 68% 74% 91% 106% 113% 105% million active subs) and other niche solutions. with operating margin Capex 7% 8% 10% 6% 8% 8% in the 22-23% range and 80% of revenue recurring. Gross profit 41% 40% 41% 41% 41% 42% As institutions continue moving from in-house to R&D 6% 6% 6% 7% 6% 6% EBIT 22% 21% 22% 22% 23% 23% outsourced solutions.S. FYE June 30 2008 2009 2010 2011 2012 3/31/13 ∆ revenue – banks 11% 0% 9% 11% 4% 8% INVESTMENT HIGHLIGHTS ∆ revenue – credit unions 14% 1% 28% 34% 13% 14% ∆ total revenue 11% 0% 12% 16% 6% 9% • Large provider of financial tech and payment Revenue ($mn) 743 746 837 967 1. JOIN TODAY! www. EARNINGS MOMENTUM Fundamentals improving?  Jack Henry has completed 19 deals since 2004. consolidation. Harland. • Competition could pressure pricing. The company has grown value for shareholders through accretive acquisitions and organic market share gains. ProfitStars solutions such License 91% 88% 89% 88% 89% 91% as bill pay and online invoicing serve institutions Support and service 37% 37% 39% 39% 39% 41% using any core processing system. Shares out (avg) (mn) 88 84 85 86 87 86 Industry weakness.S. Credit union 17% 17% 20% 23% 24% 25% Gross margin by segment: • Improving operating environment. Calculation of return on capital employed ($mn): GAAP = adjusted EBIT 164 158 182 216 236 193 Deferred revenue roughly matches receivables. making growth dependent on share gains 4% | Royce 2% | T Rowe 2% | FMR 2% | Findlay Park 1% and higher value capture on a per-institution basis. with . The % of revenue by type: firm has three core brands: Jack Henry Banking License 10% 8% 6% 5% 5% 5% helps community to mid-tier banks with information Support and service 78% 82% 86% 88% 89% 90% processing. up from 12% in + Net fixed assets 244 238 256 272 273 284 2007. Tangible assets ($mn) 589 616 704 672 797 741 • Increased quarterly dividend by 54% to $0.manualofideas. Jack Henry has an opportunity Net income 14% 14% 14% 14% 15% 16% to grow recurring revenue under multi-year deals. Trailing FCF is $206 million. with 5+ year deal terms.027 831 processing. ProfitStars has grown to almost 30% of Capital employed 241 214 200 204 209 245 company revenue. DOWNSIDE PROTECTION Low risk of permanent loss?  • M&A strategy carries integration risks.

025 6% 5% 4% 4% 5% 27% 225 9% 10% 42% 23% 35% Abbreviations: MV = market value | EV = enterprise value | LTM = last twelve months | FY = fiscal year | empl. Jack Henry enjoys a premium valuation JACK HENRY – ANALYSIS OF SELECTED COMPARABLE COMPANIES Trading Data Public Market Valuation Operating Performance Tang. JOIN TODAY! www. Source: Company filings. The Manual of Ideas. 2013 EBIT margin for past seven fiscal years 30.6% required FCF yield) equals (17.212 n/m 6% 5% 7% 8% 30% 226 3% 5% 41% 23% -137% Jack Henry / JKHY -70% 2% 4. Equity/ relevant websites) 7-Year MV EV Book/ FCF This Next Rev. 2013 and average estimate for the fiscal year ending June months ended March 31.0 billion ($35 per share) multiplied by plus multiplied by Assumed required FCF yield as a Cash.5 billion. % LTM Rev. = revenue | tang. LTM EPS Yield LTM Rev. 2013 ▼ ▼ ▼ TTM net sales: $1.e.20 divided by Assumed fair value multiple of EBIT: multiplied by Industry median FCF yield: 4. = tangible | adj. (Click to visit ∆ to Reach Tang. stock price ($47 per share) (‡) The FY13 consensus EPS estimate of $2. or $29 per share equity of Jack Henry: $5. = adjusted | ∆ = change Explanations: ∆ revenue represents year-over-year change in revenue | EPS yield for this and next FY is based on consensus EPS estimates | EBIT is adjusted for certain unusual items JACK HENRY – MANAGEMENT’S BREAKDOWN of FREE CASH FLOW ($ in millions) Note that management subtracts dividends from FCF.5x fair value P/E multiple) equals Estimated fair value of the common equals Estimated fair value of the common equity of Jack Henry: Estimated fair value of the common equity of Jack Henry: $2.0x Corresponding industry P/E: 15. ST investments: $182 million Assumed JKHY multiple as a percentage of the industry FCF yield: minus percentage of the industry multiple: 90% Total debt: $133 million 125% (3. Low High ($mn) ($mn) MV Yield LTM FY FY EV ($000) LTM Q Profit EBIT Assets DST Systems / DST -60% 37% 2.6% Assumed upside/downside to Capex: $93 million equals FY13 EPS estimate: 5% * $2.432 20% 4% 12% 7% 8% 76% 145 6% 4% 15% 7% 20% Fidelity National / FIS -74% 8% 12. including dividends.10 (‡) Operating cash flow: $299 million multiplied by minus minus Average 7-year EBIT margin: 22. All rights reserved.498 n/m n/m 6% 5% 7% 7% n/m 168 3% 5% 32% 19% -151% Fiserv / FISV -68% 5% 11. i.1 billion ($60 per share) Jack Henry: $2./ Empl.8 billion ($44 per share) (based on 86 million shares out) 38% downside from the recent (based on 86 million shares out) 40% upside to the recent stock price ($47 per share) 8% downside from the recent stock price ($47 per share) (*) Represents Computer Networks industry median.com July 2013 – Page 52 of 117 .08 three months ago.075 4.9x (*) equals equals equals Industry FCF yield-implied fair value: Estimated fair enterprise value of Industry multiple-implied fair value: $5. © 2008-2013 by BeyondProxy LLC.519 15../ ∆ Rev. Tang.7 billion.10 equals Estimated EBIT: $248 million equals Free cash flow: $206 million multiplied by Revised FY13 EPS estimate: $2.5 billion $3.1 billion Consensus FY13E EPS: $2. Value-oriented Equity Investment Ideas for Sophisticated Investors JACK HENRY – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Valuation methodology: Valuation methodology: Valuation methodology: Based on revenue for the twelve months Based on median consensus EPS Based on free cash flow for the twelve ended March 31.848 3. Last Gross Adj.manualofideas.10 has been revised upward by 1% from $2.0% (*) 10. = employee | rev. FCF was $185 million in 2012 Source: Company presentation dated May 2013. or $66 per share (based on 86 million shares out) $3. Using a more appropriate definition of FCF.

2012 CREDIT UNIONS – INDUSTRY CONSOLIDATION. JOIN TODAY! www. © 2008-2013 by BeyondProxy LLC.com July 2013 – Page 53 of 117 . All rights reserved.manualofideas. $ in millions) Expanding EBITDA margin reflects operating leverage Source for the above tables and charts: Company presentation dated May 2013. 2012 vs. 2012 BANKS and CREDIT UNIONS – ASSETS. Value-oriented Equity Investment Ideas for Sophisticated Investors BANKS – INDUSTRY CONSOLIDATION. 2011 JACK HENRY – GROWTH in CONSOLIDATING INDUSTRY JACK HENRY – GROSS and OPERATING MARGIN TREND (fiscal years ended June 30) How long can margin improvement continue? JACK HENRY – EBITDA MARGIN TREND (fiscal years ended June 30.

688 28.061 Adjusted diluted EPS 3.719 9.755 13.658 32.396 14.318 7.668 Receivables 8.339 13.803 2.3% 27.180 5.9% 71.236 43.20 (as of 6/21/13) Month # of P/E FYE 12/31/12 22x 52-week range: $66.224 11.759 14.505 Gross profit 38.097 15. investments 4.571 16.074 8.737 2.7% 67.658 4.825 Adjusted net income 11. except Fiscal Years Ended December 30.577 6.868 52.285 7.698 71.870 16.712 9.4% 10.3% 11.753 2.080 11.217 10.617 6.9% 11.8% 27.79 24 EV/ LTM EBIT 12x Insider ownership: <1% FYE 12/31/15 6.3% 26.39 19 P/E FYE 12/31/14 14x Enterprise value: $227.74 5.276 51.4% 11.860 2.972 16.795 2.15 6.385 14.014 7.1% 11.645 1. LTM EBIT yield 8% Institutional ownership: 69% 4/16/13 $1.40 LTM pre-tax ROC 81% Operating Performance and Financial Position ($ millions. Franklin.425 27.358 34.176 50.747 61.835 17.497 70.582 12.022 14.224 68.33 1.052 5.566 46.497 26.883 2.44 0.358 Tangible assets 41. Member of S&P 500 NEW BRUNSWICK NJ www.556 14.15 16 P / tangible book 14.185 14.3% 6.248 15.139 17.378 6.804 1.930 16.93 2.018 502 586 Free cash flow 11.515 Inventory 4. West Coast Health Care: Biotechnology & Drugs.463 3. net 13.2% 69.00 4.368 70.982 11.jnj. Wellington. Value-oriented Equity Investment Ideas for Sophisticated Investors Johnson & Johnson (JNJ) – Fairfax.110 16.5% 68.4% 12. LTME FQE FQE per share data) 2006 2007 2008 2010 2011 2012 2012 3/31/13 4/1/12 3/31/13 Revenue 53.9 billion Next quarter 1.795 44.650 16.986 6.39 $1.548 7.878 2.com Trading Data Consensus EPS Estimates Valuation Price: $83.010 11.2% 10.691 PP&E.553 14.897 61.80 1.43 1.951 R&D 7.385 3.223 9.612 12.120 8.146 14.9% 24.444 9.808.942 3.721 Intangible assets 28.61 Shares out (avg) 2.5% 68.7 billion This quarter $1.496 50.763 27.847 21.529 Long-term debt 2.9 million FYE 12/31/13 5.804 13. JOIN TODAY! www.030 67.751 2.128 13.495 7.2% Adjusted operating income 28.298 15.782 5.41 25 EV/ LTM revenue 3.590 16.6% Cash.889 5.8% 70.80 3.898 79.581 11.3% 10 Greenblatt Criteria Insider sales (last six months): 8 EPS Surprise Actual Est.830 12.405 12.241 13.130 13.691 … % of revenue: Gross profit 71.646 9.450 42.57 0.084 9.277 Capex 2.844 7.665 7.261 21.41 5.816 19.044 14.365 2.439 4.5% 69.677 21.293 1.83 4.365 14.69 4.800 7.045 4.79 5.668 33.0% 70.8% 31.893 2.62 1.191 57.936 2.185 32.680 7.569 22.217 63.910 4.666 2.489 11.969 11.178 Short-term debt 4.14–$89.763 2.99 Latest Ago Ests P/E FYE 12/31/13 15x Market value: $233.11 2.462 11.95 4.110 5.40 2.44 $1.790 Cash from operations 14.85 1.6% 11.529 6.579 2.6% 11.001 11.095 63.515 10.315 12.293 11.125 7.906 14.com July 2013 – Page 54 of 117 .010 34.8% 31.497 TBV / tangible assets 25% 28% 26% 31% 35% 29% 19% 23% 33% 23% EBIT/capital employed 84% 76% 93% 82% 89% 63% 65% 81% >100% 96% Ten-Year Stock Price Performance and Trading Volume Dynamics $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.587 65.manualofideas.2% 27.309 11.670 45.171 71.066 2.630 14.384 2.3x Ownership Data FYE 12/31/14 5.774 10.736 2.267 43.363 13.695 31.739 16.4% 24.324 61.3% 19.46 Dividend 1.934 3.760 2.33 19 P/E FYE 12/31/15 14x Shares outstanding: 2.403 24.824 15.809 19.8% 67.089 21.784 Adjusted operating income 15.721 14. All rights reserved. MFS.178 81.21 4.2x Insider buys (last six months): 7 LT growth 6.46 1.344 45.206 14.363 Tangible equity 10.25 2.3% R&D 13.732 6.676 4.691 6.828 16.156 12.

rising incidence Selected items as % of tangible assets: of chronic disease.9 79. MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE J&J has world-leading franchises in branded medical devices.manualofideas.751 2. emerging markets.79 for 2014. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA1 J&J develops and markets branded healthcare products. Trailing P/E (end) 13x 15x 13x 19x 18x 22x Forward P/E (end) 14x 13x 18x 17x 13x 15x INVESTMENT RISKS & CONCERNS Diluted EPS (cont.9 61. implying ~7% y-y EPS growth.803 2.) ($) 4.86 1. J&J projects Int’l at constant forex 5% 4% 2% 7% 8% 9% an industry CAGR of 3-6% in 2011-16 (developed Selected items as % of revenue: markets: 2-4%.5 provide diversified and high-margin income streams. the recent valuation at a 7% forward earnings yield (including a 3% dividend yield) may not fully appreciate J&J’s growth prospects and the net cash balance sheet.61 • Capital allocation. Largest product EBIT margin by segment:2 Remicade (9% of 2012 revenue) is protected until Pharmaceutical 31% 28% 32% 26% 24% 36% 2018 in the U. which has not gone away following the appointment of Alex Gorsky as CEO in mid-2012.g.2 71. We would like to see J&J be more aggressive with share repurchases instead of using its fortress balance sheet on further acquisitions.4 70. consumer: 14%). D&A 4% 4% 5% 5% 5% 6% Capex 5% 4% 4% 4% 4% 3% IMS expects a 2012-17 market CAGR of ~4. The Gross profit 71% 70% 69% 69% 68% 68% R&D3 12% 11% 11% 12% 11% 10% recent $19 billion purchase of Synthes further EBIT 27% 26% 28% 20% 21% 24% strengthens global orthopedics leadership of DePuy.2 driven by aging. Net income 20% 20% 22% 15% 16% 20% • Pharma business (~40% of revenue) is one of the Net cash from ops 23% 27% 27% 22% 23% 13% largest players in ~$960 billion global market.0 67. Capital allocation is also a concern. FYE December 30 2008 2009 2010 2011 2012 1Q13 ∆ revenue 4% -3% -1% 6% 3% 8% INVESTMENT HIGHLIGHTS ∆ due to volume 1% 0% -1% 3% 6% ∆ due to price 1% 0% -1% 0% 0% } 10% • ~70% of revenue is attributable to products or ∆ due to currency 2% -3% 1% 3% -3% -1% businesses with #1 or #2 global market share. Insiders <1% | Fairfax <1% | West Coast <1% The appointment of Alex Gorsky (52) as CEO in RATINGS 2012 may not have changed this preference. regulatory and competitive pressures. as % of revenue 51% 50% 48% 44% 44% 46% U.40 4. % of revenue by segment: • Valuation may not fully appreciate J&J’s growth Pharmaceutical 39% 36% 36% 37% 38% 39% Medical devices 36% 38% 40% 40% 41% 40% prospects and the net cash balance sheet ($6 billion Consumer 25% 26% 24% 23% 21% 21% of net cash and marketable securities.80 1. MANAGEMENT Capable and properly incentivized?  and the already high adjusted EBIT margins in 2012 FINANCIAL STRENGTH Solid balance sheet?  (pharma: 33%. revenue growth 0% -4% -5% -2% 3% 11% • Medical device business (~40% of revenue) is #1 International growth 10% -1% 4% 12% 4% 6% player in ~$360 billion global market. Tangible assets ($bn) 57. All rights reserved. © 2008-2013 by BeyondProxy LLC. Cash. While J&J 3 Excludes in-process R&D.5%.S.40 0. devices: 32%.11 2. Given the strong balance sheet.com July 2013 – Page 55 of 117 .753 2. Medical devices 6% 2% 4% 5% 6% 10% Consumer 11% -2% -8% 2% -3% 2% • No major patent expirations.22 Dividends per share ($) 1. it has not been a net repurchaser of shares over the last three years. While organic earnings growth is a challenge for a business of J&J’s size and efficiency. Acuvue and Neutrogena.57 4.93 2. The forward Revenue growth by segment: earnings yield is 7% based on consensus EPS of Pharmaceutical -1% -8% -1% 9% 4% 10% $5. On balance.760 2.790 defensible and highly cash generative businesses. JOIN TODAY! www. OTC Tangible equity 26% 31% 35% 29% 19% 23% drugs/skin care items are ~55% of segment revenue. net 25% 23% 21% 19% 23% 22% ST debt 7% 10% 11% 8% 7% 6% some of the world’s most recognizable brands LT debt 14% 13% 13% 16% 16% 16% including Tylenol.5 70.2 63. Shares out (avg) (mn) 2. ∆ shares out (avg) -3% -2% 0% -1% 1% 2% and a modest valuation. MOAT Able to sustain high returns on invested capital?  Management may succumb to a growth imperative EARNINGS MOMENTUM Fundamentals improving?  to “buy” earnings growth in a value-destructive way.25 2.2 17. pays a dividend (3% yield).49 3.6 65. we would like to see J&J be 1 2 J&J acquired orthopedic devices manufacturer Synthes for ~$20 billion in June 2012. ∆ employees 0% -3% -1% 3% 8% n/a J&J’s world-leading health care product franchises Revenue ($bn) 63.S. emerging markets: 10-13%). more aggressive with share repurchases.736 2. pharmaceuticals and consumer healthcare products. Synthes in 2012). U. investments 22% 31% 39% 41% 30% 30% • Consumer business (~20% of revenue) owns PP&E. VALUE Intrinsic value materially higher than market value?  • Earnings growth is a challenge given the size of DOWNSIDE PROTECTION Low risk of permanent loss?  the business. Excludes corporate expenses (-1% of revenue in 2012).78 3. and unmet medical needs. The steady and abundant FCF of Medical devices 31% 33% 34% 20% 26% 21% most of J&J’s businesses enables reinvestment as Consumer 17% 16% 16% 14% 12% 15% well as more aggressive return of capital.S.7 61. NOTABLE HOLDERS seemingly preferring M&A (e. we would like to see the shares trade closer to a 10% earnings yield before getting interested.

2013 EBIT margin for past seven fiscal years December 30. Low High ($mn) ($mn) MV Yield LTM FY FY EV ($000) LTM Q Profit R&D EBIT Becton Dickinson / BDX -40% 7% 18. assumptions and estimates.390 1% 6% 5% 6% 7% 32% 243 1% 1% 62% 7% 29% Merck / MRK -57% 31% 141. or $58 per share $268 billion.9% (*) multiplied by 9.7x fair value P/E multiple) Estimated fair value of the common Estimated fair value of the common equals equity of Johnson & Johnson: equity of Johnson & Johnson: Estimated fair value of the common $163 billion.41 three months ago.922 146.41 is unchanged from $5. stock price ($83 per share) (‡) The FY13 consensus EPS estimate of $5./ ∆ Rev. Source: Company filings. JOHNSON & JOHNSON – ANALYSIS OF SELECTED COMPARABLE COMPANIES Trading Data Public Market Valuation Operating Performance (Click to visit ∆ to Reach Tang.654 20.41 Estimated EBIT: $18 billion Free cash flow: $12 billion equals multiplied by divided by Revised FY13 EPS estimate: $5.493 n/m 6% 6% 6% 7% 37% 280 3% 5% 57% 5% 24% C.5% Capex: $3. relevant websites) 7-Year MV EV Book/ FCF This Next Rev. 2010-2012 Source: Company annual report for the year ended December 31.8 billion shares out) (based on 2.8 billion shares out) $321 billion ($114 per share) 30% downside from the recent 14% upside to the recent (based on 2.com July 2013 – Page 56 of 117 . 2012.887 147.100 3% 6% 6% 7% 8% 28% 453 -2% 2% 67% 16% 21% Pfizer / PFE -59% 9% 201.0 billion Assumed upside/downside to equals equals FY13 EPS estimate: 5% * $5.923 7% 5% 4% 7% 7% 30% 538 6% 8% 67% 11% 32% Abbreviations: MV = market value | EV = enterprise value | LTM = last twelve months | FY = fiscal year | empl. Value-oriented Equity Investment Ideas for Sophisticated Investors JOHNSON & JOHNSON – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Valuation methodology: Valuation methodology: Valuation methodology: Based on revenue for the twelve months Based on median consensus EPS Based on free cash flow for the twelve ended March 31.725 9% 6% 4% 7% 8% 31% 564 -4% -9% 76% 17% 44% Novartis / NVS -52% 9% 189. LTM EPS Yield LTM Rev. = employee | rev.8 billion shares out) stock price ($83 per share) stock price ($83 per share) 38% upside to the recent (*) Represents Biotechnology & Drugs industry median multiple.873 206. The Manual of Ideas analysis.099 32. 2013 ▼ ▼ ▼ TTM net sales: $69 billion Operating cash flow: $15 billion Consensus FY13E EPS: $5.759 n/m 0% 4% 7% 8% 31% 412 -3% -9% 70% 14% 24% Johnson & Johnson / JNJ -44% 8% 233./ Empl.942 n/m 8% 5% 8% 8% 28% 630 -28% -9% n/m 16% 47% Sanofi / SNY -53% 9% 136.403 12% 6% 6% 6% 7% 38% 265 2% 4% 52% 6% 21% Covidien / COV -56% 11% 29.861 9. % LTM Rev. Bard / BCR -46% 3% 8. = revenue | tang.R. = tangible | adj.4% required FCF yield) 110% equals equals (18. even after M&A JOHNSON & JOHNSON – COMPONENTS of REVENUE GROWTH.68 Assumed fair value multiple of EBIT: Industry median FCF yield: 4.3x (*) equals Industry FCF yield-implied fair value: equals Estimated fair enterprise value of $241 billion ($86 per share) Industry multiple-implied fair value: Johnson & Johnson: $158 billion multiplied by $292 billion ($104 per share) plus Assumed required FCF yield as a multiplied by Cash. JOIN TODAY! www.manualofideas.0x equals Corresponding industry P/E: 18. All rights reserved. Last Gross Adj.41 (‡) multiplied by minus minus Average 7-year EBIT margin: 25. = adjusted | ∆ = change Explanations: ∆ revenue represents year-over-year change in revenue | EPS yield for this and next FY is based on consensus EPS estimates | EBIT is adjusted for certain unusual items Growth has been a challenge. or $95 per share equity of Johnson & Johnson: (based on 2. ST investments: $22 billion percentage of the industry FCF yield: Assumed JNJ multiple as a minus 90% percentage of the industry multiple: Total debt: $16 billion (4. © 2008-2013 by BeyondProxy LLC. 2013 and average estimate for the fiscal year ending months ended March 31.699 227.191 204.

1 Excluding the net impact of the Synthes acquisition. overall growth. 2012 * Operational excludes the impact of currency. 2012. JOHNSON & JOHNSON – PERFORMANCE SUMMARY. All rights reserved. JOIN TODAY! www.5% per year over ten years. has been a challenge over the last five years Total shareholder return has been modest. with roughly half of the return coming from dividends 1 Attributable to Johnson & Johnson. Value-oriented Equity Investment Ideas for Sophisticated Investors J&J has one of the most diversified product portfolios among peers. making J&J defensible. 2002-2012 While J&J grew international sales from 38% of total sales in 2002 to 56% in 2012.5%) and Orthopedics total change = (0. © 2008-2013 by BeyondProxy LLC.manualofideas.com July 2013 – Page 57 of 117 . 2012.4%). ** Rounded for visual accuracy. but also leading to only GDP-like growth JOHNSON & JOHNSON – BREAKDOWN of SEGMENT SALES. Source: Company annual report for the year ended December 31. MD&D total change = (1. averaging 5. Source: Company annual report for the year ended December 31.

4x Ownership Data FYE 11/30/14 3.09 0.618 1.770 2.418 1.04 1.52 17 EV/ LTM EBIT 17x Insider ownership: <1% FYE 11/30/15 3.192 1.9% 40.014 2.0% Cash.707 Tangible equity -64 -2 -550 -382 -196 -443 -336 -307 -378 -307 EBIT/capital employed 43% 53% 53% 65% 71% 66% 62% 58% 54% 52% Ten-Year Stock Price Performance and Trading Volume Dynamics $80 $70 $60 $50 $40 $30 $20 $10 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.6% 42.7% Adjusted operating income 12.20 3.24 1.014 Tangible assets 1. Franklin.044 2.3% 12.34 Shares out (avg) 132 129 129 131 133 133 133 133 133 133 Cash from operations 311 225 315 416 388 340 455 464 23 32 Capex 85 79 86 82 89 97 110 108 15 12 Free cash flow 226 146 229 333 299 243 345 357 7 19 … % of revenue: Gross profit 41. Neuberger.5 million FYE 11/30/13 3.716 2.014 4.61 14 P/E FYE 11/30/14 20x Enterprise value: $9.027 2.83 7 P / tangible book n/m Insider buys (last six months): 6 LT growth 8.055 1.12 1. investments 49 46 39 40 51 54 79 69 54 69 Receivables 379 457 381 365 387 427 466 404 381 404 Inventory 406 430 439 458 478 614 615 607 640 607 Total current assets 899 983 968 971 1. Parnassus.manualofideas.192 3.327 1. Value-oriented Equity Investment Ideas for Sophisticated Investors McCormick (MKC) – T Rowe.602 1.9% 14. MS.57 Dividend 0.09 3.61 $0.08 2.3% 14.650 2.698 4. except Fiscal Years Ended November 30.147 2.4% 14.707 1.5 billion This quarter $0.83 3.20 17 EV/ LTM revenue 2.087 1.1% 8.193 1. Member of S&P 500 SPARKS MD www.26 Latest Ago Ests P/E FYE 11/30/13 22x Market value: $8.5% 41.223 1.79 2.605 1.454 1. LTM EBIT yield 6% Institutional ownership: 82% 4/2/13 $0.571 1.3% 3 Greenblatt Criteria Insider sales (last six months): 6 EPS Surprise Actual Est.019 2.042 907 934 Gross profit 1.044 2.674 1.717 1.072 2.615 1.683 1.1% 15.085 1.88 0. JOIN TODAY! www.27 0.90 3.83 14 P/E FYE 11/30/15 19x Shares outstanding: 119.96 1.2% 40.016 1.052 2.2% 13.4% 12.212 LT investments 96 108 99 123 187 202 314 328 311 328 PP&E.44 (as of 6/21/13) Month # of P/E FYE 11/30/12 24x 52-week range: $57.916 3.30 2.335 1. net 470 488 461 490 488 523 547 533 523 533 Intangible assets 997 1.115 1.40 2.56 0.53 3.285 1. LTME FQE FQE per share data) 2006 2007 2008 2009 2010 2011 2012 2/28/13 2/29/12 2/28/13 Revenue 2.177 3.029 776 Common equity 933 1.523 1.030 779 776 1.212 1. Geode Consumer Non-Cyclical: Food Processing.mccormickcorporation.6% 13.624 355 362 Adjusted operating income 342 385 418 481 510 551 580 578 113 112 Adjusted pretax income 295 333 379 430 463 502 528 525 100 99 Adjusted net income 275 261 297 314 370 385 410 409 75 76 Adjusted diluted EPS 2.7 billion Next quarter 0.701 1.com Trading Data Consensus EPS Estimates Valuation Price: $71.3% 40. All rights reserved.31 0.072 Short-term debt 81 150 354 116 100 222 393 454 283 454 Long-term debt 570 574 885 875 780 1.0% 40.671 1.56 LTM pre-tax ROC 58% Operating Performance and Financial Position ($ millions.6% 41.2% 38.80 0.01–$75.1% 15.82 0.2% 39.02 2.288 1.com July 2013 – Page 58 of 117 .337 3.72 0.57 $0.

founded in 1889. JOIN TODAY! www. Sysco.615 1. Lawry’s. The firm EMEA 24% 21% 20% 21% 21% n/a may gain share in China.014 934 none of whom has more than 5% share. and -$1. with global sales of $9 billion expected U. All rights reserved. lessening consumers’ price consciousness. less than 2x EBIT. century.671 1. while MOAT Able to sustain high returns on invested capital?  three industrial customers comprised 50-53% of EARNINGS MOMENTUM Fundamentals improving?  industrial revenue (Pepsico was 11% of total sales).072 slightly above $1 billion. Capital employed 712 715 719 820 940 986 = Return on capital employed 59% 67% 71% 67% 62% 45% • Conservative balance sheet.1 million in business that has been in existence for more than a 2010. and weaker demand from quick-service restaurants in RATINGS the U.147 2. we wonder why management believes it can keep growing EBIT 300 bps faster than sales. PP&E. Consumer 58% 60% 60% 59% 60% 61% 40% of McCormick’s sales come from “industrial” Industrial 42% 40% 40% 41% 40% 39% customers. and Pepsico. Revenue from emerging markets EBIT (adjusted)1 13% 15% 15% 15% 14% 12% should rise from 14% of sales in ‘12 to 20% by ‘15. ST investments -42 -39 -45 -52 -66 -74 • Attractive economics.com July 2013 – Page 59 of 117 . provides herbs and spices.Cash. Yum. long-term growth.090 -1.192 3. Key brands % of revenue by segment: include McCormick.254 1. it’s unclear to what extent it also enjoys brand preference. Inventory 27% 27% 27% 30% 29% 29% LT investments 6% 7% 11% 10% 15% 16% constituting the majority of $345 million in FCF. -$14 million in 2009.Current liabilities -948 -926 -827 -914 -1. The business earns solid returns on capital. Net income (adjusted)1 9% 10% 11% 10% 10% 8% • Modest but predictable grower. Management’s long-term shareholder return target of 11-13% appears aggressive given an expectation of 4-6% sales growth. FYE November 30 2008 2009 2010 2011 2012 1Q13 ∆ revenue – consumer 11% 3% 5% 10% 10% 7% INVESTMENT HIGHLIGHTS ∆ revenue – industrial 6% -3% 4% 12% 7% -2% • Largest herbs and spices company globally. with net debt of Tangible assets ($mn) 1. 58% 62% 61% 60% 59% n/a to grow $1 billion by 2017 (Euromonitor). private label represents Selected items as % of revenue: Gross profit 41% 42% 42% 41% 40% 39% tough competition. with ∆ total revenue 9% 0% 5% 11% 9% 3% ∆ gross profit 8% 3% 7% 7% 6% 2% 18% market share.177 3.152 consumer segment. DOWNSIDE PROTECTION Low risk of permanent loss?  • Customer concentration makes price increases a MANAGEMENT Capable and properly incentivized?  matter of negotiation rather than unilateral action. a market with attractive economics and positive. We find the shares fully valued at the 4% trailing FCF yield. For a ∆ shares out (avg) 0% 1% 2% 0% 0% 0% 1 Adjusted for unusual items of -$41 million in 2008.S. Operating margin by segment: General Mills. solidly ahead of competitors.manualofideas.248 . -$0. investments 2% 2% 3% 3% 4% 3% • Returned ~$300 million to shareholders in FY12. especially in the industrial segment. © 2008-2013 by BeyondProxy LLC. Current assets 976 969 993 1.119 1.7 million in 2012. Management expects VALUE Intrinsic value materially higher than market value?  industrial sales and income to growth in 2H13. EBIT Capex 3% 3% 3% 3% 3% 1% Industry gross margin2 27% 29% 28% 30% 26% 27% growth of 7-9%. EBIT. The Selected items as % of tangible assets: company owns most of its manufacturing facilities. and EPS growth has met those targets. -$11 million in 2011.698 4. FINANCIAL STRENGTH Solid balance sheet?  Wal-Mart accounted for 11% of sales in 2012. While McCormick has brand awareness. makes price increases a matter of negotiation. Herbs and spices comprise a + Short-term debt 252 235 108 161 308 423 fairly small portion of the overall cost of a typical + Net fixed assets 474 475 489 506 535 540 meal. 2 Food Processing industry median. where it ranks second.770 2. LT debt 55% 52% 44% 50% 36% 37% Tangible equity -34% -23% -11% -22% -16% -15% INVESTMENT RISKS & CONCERNS Forward P/E (end) 14x 13x 17x 17x 20x 21x • Margin expansion realistic? Sales growth of 4-6% Shares out (avg) (mn) 129 131 133 133 133 133 cannot support EBIT growth of 7-9% forever. NOTABLE HOLDERS CEO % | T Rowe 3% | Enhanced 2% | Franklin 2% | • Near-term challenges include sporadic share losses Parnassus 2% | MS 1% | Neuberger 1% | Geode 1% to private label products in consumer markets. especially in higher-margin . In Other countries 18% 17% 18% 19% 20% n/a Europe and the Americas. and total shareholder Calculation of return on capital employed ($mn): return of 11-13% (via dividends). albeit unspectacular. but investors may overestimate pricing power.S. Revenue ($mn) 3. net 29% 29% 28% 26% 25% 26% This is higher than management’s long-term return ST debt 22% 7% 6% 11% 18% 22% of capital percentage of modestly less than 50%. Trailing five-year Adjusted EBIT 418 481 510 551 580 112 sales. MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE McCormick is the leader in herbs and spices. Management D&A 3% 3% 3% 3% 3% 3% expects long-term growth in sales of 4-6%. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA McCormick. and (less) in China.337 3.044 2. including industry leaders Kraft. and EPS growth of 9-11% (by Industry EBIT margin2 5% 7% 7% 7% 6% 7% leveraging cash allocation). Consumer 19% 21% 20% 19% 19% 15% Industrial 6% 7% 8% 7% 8% 7% • Herbs/spices is one of the faster-growing flavor % of revenue by geography: categories. Customer concentration. Cash. McDonald’s. and Club House.

0 billion Consensus FY13E EPS: $3.20 equals Estimated EBIT: $570 million equals Free cash flow: $360 million multiplied by Revised FY13 EPS estimate: $3. JOIN TODAY! www. The Manual of Ideas. 2013. 2013 EBIT margin for past seven fiscal years November 30. Value-oriented Equity Investment Ideas for Sophisticated Investors MCCORMICK – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Based on revenue for the twelve months Based on median consensus EPS Based on free cash flow for the twelve ended February 28.0x Corresponding industry P/E: 19.5 billion.2x (*) equals equals equals Industry FCF yield-implied fair value: Estimated fair enterprise value of Industry multiple-implied fair value: $13 billion ($105 per share) McCormick: $5. 2002-2012 Source: Company presentation dated May 31.8% (*) 10.20 has been revised down by 0% from $3. © 2008-2013 by BeyondProxy LLC. Source: Company filings. 2013 and average estimate for the fiscal year ending months ended February 28.0 billion ($58 per share) multiplied by plus multiplied by Assumed required FCF yield as a Cash. 2013 ▼ ▼ ▼ TTM net sales: $4.7 billion $7.2 billion 90% (3. All rights reserved.04 divided by Assumed fair value multiple of EBIT: multiplied by Industry median FCF yield: 2.20 (‡) Operating cash flow: $460 million multiplied by minus minus Average 7-year EBIT margin: 14.manualofideas. ST investments: $69 million Assumed MKC multiple as a percentage of the industry FCF yield: minus percentage of the industry multiple: 110% Total debt: $1.1% required FCF yield) equals (15.3 billion ($53 per share) (based on 120 million shares out) 47% downside from the recent (based on 120 million shares out) 34% upside to the recent stock price ($71 per share) 26% downside from the recent stock price ($71 per share) (*) Represents Food Processing industry median.21 three months ago.1% Assumed upside/downside to Capex: $108 million equals FY13 EPS estimate: -5% * $3. stock price ($71 per share) (‡) The FY13 consensus EPS estimate of $3.com July 2013 – Page 60 of 117 .6x fair value P/E multiple) equals Estimated fair value of the common equals Estimated fair value of the common equity of McCormick: Estimated fair value of the common equity of McCormick: $4. or $96 per share (based on 120 million shares out) $6. or $38 per share equity of McCormick: $11 billion. MCCORMICK – SELECTED FINANCIAL DATA.

All rights reserved. 2013. Value-oriented Equity Investment Ideas for Sophisticated Investors MCCORMICK – CASH from OPERATIONS. Source for the above charts: Company presentation dated May 31. JOIN TODAY! www. © 2008-2013 by BeyondProxy LLC. 2002-2012 MCCORMICK – DIVIDEND HISTORY.manualofideas. we are less sure about the path to a shareholder return of 11-13% per year * On comparable basis. 1986-2012 McCormick is by far the market leader MCCORMICK’S CONSUMER BUSINESS – LEADING GLOBAL MARKET SHARE MCCORMICK – MANAGEMENT’S GROWTH TARGETS The top-line outlook seems realistic.com July 2013 – Page 61 of 117 .

064 786 Common equity 200 286 507 1.80 0.mscibarra.9% D&A 7.1% 5.5% 34.4% 73.9% 3.52 6 P/E FYE 12/31/15 13x Shares outstanding: 120.431 2. investments 171 268 471 301 342 393 254 263 460 263 Receivables 80 88 77 148 138 181 154 167 172 167 Total current assets 281 392 603 536 575 678 515 523 713 523 PP&E.6% 10.0% 71.354 2.4% 68.0% 1 Greenblatt Criteria Insider sales (last six months): 7 EPS Surprise Actual Est.0% 69.305 1.4% 8.2% Adjusted operating income 35.3% 71.54 LTM pre-tax ROC n/m Operating Performance and Financial Position ($ millions. T Rowe.66 0.2% 70.5% 8.9% 7.7 million FYE 12/31/13 2.4% 35.7% 36.417 2.com July 2013 – Page 62 of 117 . ValueAct Financial: Investment Services.431 Tangible assets 289 428 639 600 640 740 595 601 776 601 Payables 17 36 2 2 0 0 3 1 0 1 Short-term debt 22 22 42 55 55 10 43 43 10 43 Long-term debt 403 380 338 1.98 0.067 812 786 1.89 Latest Ago Ests P/E FYE 12/31/13 15x Market value: $4.1% 35.96 0. net 4 28 29 34 36 38 67 65 40 65 Intangible assets 616 588 562 2.6 billion Next quarter 0.0% 2.1% 31.102 1.8% Capex 0.0% 2.0% 15.2% 69. All rights reserved.5% 7.343 -1.208 1.30 2.com Trading Data Consensus EPS Estimates Valuation Price: $33.6% 4. LTME FQE FQE per share data) 2007 2008 2009 2010 2010 2011 2012 3/31/13 3/31/12 3/31/13 Revenue 370 431 443 663 73 901 950 973 229 252 Gross profit 249 308 324 464 52 624 662 677 157 172 D&A 28 34 38 59 7 85 82 102 20 20 Adjusted operating income 130 136 151 215 27 326 347 361 81 91 Adjusted pretax income 133 110 132 162 21 267 289 305 68 84 Adjusted net income 81 67 81 100 14 177 183 241 44 59 Adjusted diluted EPS 0.30 7 EV/ LTM EBIT 13x Insider ownership: 2% FYE 12/31/15 2.7% 4.315 -1.338 2. except Fiscal Years Ended December 31.11 1.46 2. IFP.080 1.365 1. JOIN TODAY! www. Member of S&P MidCap 400 NEW YORK NY www.57 $0.50 1. GSAM.6% 68.1% 32.15 7 EV/ LTM revenue 4.75–$36. Value-oriented Equity Investment Ideas for Sophisticated Investors MSCI (MSCI) – BAMCO. Delaware.5% 37.manualofideas.53 $0.07 (as of 6/21/13) Month # of P/E FYE 12/31/12 22x 52-week range: $24.52 0.5% 8.15 2.53 6 P/E FYE 12/31/14 14x Enterprise value: $4.9% Cash.49 Shares out (avg) 85 100 101 112 120 121 122 122 122 121 Cash from operations 110 155 131 183 43 255 347 349 70 71 Capex 1 26 13 13 2 23 45 46 4 5 Free cash flow 110 130 118 170 41 232 302 303 65 66 … % of revenue: Gross profit 67.048 -999 -942 -973 -942 Ten-Year Stock Price Performance and Trading Volume Dynamics $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.36 0.9% 1.489 1.46 1.423 2.1% 36.425 1.7% 1.208 1. MSIM.2% 9.7x Ownership Data FYE 12/31/14 2.489 Tangible equity -416 -301 -55 -1.0 billion This quarter $0.5% 2.90 0.425 2.7% 69.46 4 P / tangible book n/m Insider buys (last six months): 14 LT growth 15.4% 36.8% 8. LTM EBIT yield 8% Institutional ownership: n/a 5/1/13 $0.9% 10.

Aggregate retention rates by product category: ISS is the largest of a handful of respected proxy Index and related 94% 91% 92% 93% 93% 95% Risk management analytics 87% 81% 88% 90% 89% 94% advisory firms. We find the quotation moderately compelling at a trailing FCF yield of 7%. which have become industry standards.6 billion in mid-2010. and ISS proxy services. Russell. 1Q13 data represents breakdown of actual revenue. The company had Tangible assets ($mn) 428 639 600 740 595 601 Selected items as % of tangible assets: deferred revenue of $350 million as of March 31. Barra Risk management analytics 28% 27% 28% 28% 27% 27% multi-asset class factor models. portfolio risk and Portfolio management analytics 19% 16% 14% 13% 11% 11% performance analytics.manualofideas. investments 63% 74% 50% 53% 43% 44% from $308 million at yearend 2012. and FEA valuation and risk management Selected items as % of revenue: software for the energy and commodities markets. NOTABLE HOLDERS INVESTMENT RISKS & CONCERNS CEO 1% | MSIM 11% | T Rowe 11% | IFP 6% | Delaware • Dependent on fortunes of investment industry. A recession may drain DOWNSIDE PROTECTION Low risk of permanent loss?  cash due to the large deferred revenue liability. up Cash. JOIN TODAY! www. credit analytics and other products. repurchases. Current liabilities 68% 46% 78% 61% 86% 80% LT debt 89% 53% 201% 144% 136% 131% • Clear capital allocation priorities: (1) organic Trailing P/E (end) 58x 22x 39x 23x 21x 21x investment. and FactSet in MOAT Able to sustain high returns on invested capital?  portfolio analytics. 5% | ValueAct 5% | Bamco 4% | GSAM 4% | Burgundy 1% making MSCI a pro-cyclical equity. Barra is the standard Capex 6% 3% 2% 3% 5% 2% in risk management software for investment firms.com July 2013 – Page 63 of 117 . MSCI extracts rents while helping capital providers evaluate investment alternatives (even if not in the most appropriate way). The vast Receivables 20% 12% 25% 24% 26% 28% majority of revenue is recurring. ISS Subscriptions 92% 87% 86% 86% 87% 85% governance research and outsourced proxy voting Asset-based fees 8% 13% 14% 14% 13% 15% services. the growth of which depends heavily on industry AUM growth and product diversity. (2) bolt-on acquisitions with mid-teens Shares out (avg) (mn) 100 101 112 121 122 121 ROIC in 3-5 years. Capital IQ. © 2008-2013 by BeyondProxy LLC. The MSCI indices generate Net income 15% 18% 14% 19% 19% 23% high-margin recurring revenue from customers who D&A 8% 8% 9% 9% 9% 8% use the data for benchmarking. All rights reserved. with renewal rates in the 80-90% range. with revenue Governance 87% 80% 84% 86% 89% 90% recognition trailing cash receipts. MSCI reported net CFO of $347 2 Revenue “run rate” represents contractual revenue for the next twelve months. MANAGEMENT Capable and properly incentivized?  • Competitors include FTSE. and S&P in FINANCIAL STRENGTH Solid balance sheet?  indices. but alternative tools may gain share over time. with $7 trillion benchmarked to them. real estate indices. RiskMetrics market and Energy and commodity analytics 2% 2% 2% 2% 1% 1% Governance 17% 15% 13% 12% 12% 13% credit risk analytics. MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE MSCI serves the investment management industry with tools such as the MSCI indices. % of revenue by geography: Americas 51% 51% 53% 54% 54% 53% INVESTMENT HIGHLIGHTS EMEA 33% 32% 32% 32% 32% 35% • Leading global provider of investment decision Asia and Australia 16% 17% 14% 14% 13% 12% % of revenue “run rate” by product: 2 support tools. as it derives from Other current assets 9% 8% 15% 14% 18% 16% product subscriptions and/or asset-based fees. social and governance research. Bloomberg. and (3) return of capital via ∆ shares out (avg) 18% 1% 11% 1% 1% -1% 1 Fiscal years ended November 30 for fiscal years through 2009. Algorithmics and SunGard in EARNINGS MOMENTUM Fundamentals improving?  risk. Broadridge and Glass Lewis in proxy services. 2012. MSCI should be able to retain a strong competitive position. equaling the million and allocated $100 million to buybacks in vast majority of projected revenue. IPD real estate data. While MSCI RATINGS tools may be mostly non-discretionary. Barra risk metrics. Governance n/m n/m 10% 10% 10% 12% and acquired RiskMetrics/ISS for $1. Debt reduction has also been a priority. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA MSCI provides investment management-related tools. Flagship products are the MSCI Index and related products 34% 40% 43% 44% 48% 48% indices. MSCI operates a capital-light business. MSCI % of revenue “run rate” by type: 2 environmental. portfolio risk and % of revenue by segment: performance analytics. completed an IPO in 2007. The businesses generate high Portfolio management analytics 86% 79% 80% 88% 85% 82% margins. FYE December 311 2008 2009 2010 2011 2012 1Q13 ∆ revenue 16% 3% 50% 36% 5% 10% The Performance and Risk business (87% of revenue) Revenue ($mn) 431 443 663 901 950 252 provides equity indices. Performance and risk 32% 34% 33% 40% 40% 40% MSCI acquired Barra in 2004. revenue VALUE Intrinsic value materially higher than market value?  depends on industry AUM. Gross profit 71% 73% 70% 69% 70% 68% EBIT 32% 34% 31% 36% 37% 36% • Wide-moat business. Energy and commodity analytics 92% 89% 85% 83% 78% 90% • Cash-generative business model. Performance and risk 100% 100% 91% 87% 87% 87% Governance (13%) facilitates the voting of proxies by Governance 0% 0% 9% 13% 13% 13% Operating margin by segment: investors and helps inform their voting decisions.

3 billion ($36 per share) plus Assumed required FCF yield as a multiplied by Cash. Value-oriented Equity Investment Ideas for Sophisticated Investors MSCI – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Based on revenue for the twelve months Based on median consensus EPS Based on free cash flow for the twelve ended March 31.6% Capex: $46 million Assumed upside/downside to equals equals FY13 EPS estimate: 5% * $2. MSCI – CALCULATION of ADJUSTED NET INCOME and EPS Source: Company presentation dated May 2013. ST investments: $263 million percentage of the industry FCF yield: Assumed MSCI multiple as a minus 95% percentage of the industry multiple: Total debt: $830 million (6.8% required FCF yield) 110% equals equals (15. or $23 per share $4.5 billion.com July 2013 – Page 64 of 117 .15 Estimated EBIT: $340 million Free cash flow: $300 million equals multiplied by divided by Revised FY13 EPS estimate: $2.18 three months ago. JOIN TODAY! www. 2013 ▼ ▼ ▼ TTM net sales: $970 million Operating cash flow: $350 million Consensus FY13E EPS: $2. 2013 and average estimate for the fiscal year ending months ended March 31.: Estimated fair value of the common $2.8x (*) equals Industry FCF yield-implied fair value: equals Estimated fair enterprise value of $4. or $37 per share equity of MSCI Inc. © 2008-2013 by BeyondProxy LLC. Source: Company filings.manualofideas. stock price ($33 per share) (‡) The FY13 consensus EPS estimate of $2.1% (*) multiplied by 10. The Manual of Ideas.: $3.2 billion ($35 per share) Industry multiple-implied fair value: MSCI Inc.15 (‡) multiplied by minus minus Average 7-year EBIT margin: 34.15 has been revised down by 2% from $2. 2013 EBIT margin for past seven fiscal years December 31.7 billion ($39 per share) 30% downside from the recent 12% upside to the recent (based on 121 million shares out) stock price ($33 per share) stock price ($33 per share) 19% upside to the recent (*) Represents Investment Services industry median multiple. All rights reserved.4x fair value P/E multiple) Estimated fair value of the common Estimated fair value of the common equals equity of MSCI Inc.8 billion.: (based on 121 million shares out) (based on 121 million shares out) $4.26 Assumed fair value multiple of EBIT: Industry median FCF yield: 7.4 billion multiplied by $4.0x equals Corresponding industry P/E: 15.: equity of MSCI Inc.

Source: Company presentation dated May 2013. © 2008-2013 by BeyondProxy LLC.manualofideas. Assumes shift of Vanguard ETFs. MSCI – EQUITY ETF MARKET SHARE by INDEX PROVIDER* MSCI – INDEX and RELATED “RUN RATE” by CLIENT TYPE Source: Company presentation dated March 2013. Asset managers represent by far MSCI’s Source: Company presentation dated March 2013. JOIN TODAY! www. * At yearend 2012. largest category of customers MSCI – REVENUE BREAKDOWN* Virtually all revenue consists of recurring asset-based fees and subscriptions * 2008 revenue is shown on a combined basis and FY2009 and FY2010 are shown as pro forma for the acquisition of RiskMetrics. Source: Company presentation dated March 2013.com July 2013 – Page 65 of 117 . Value-oriented Equity Investment Ideas for Sophisticated Investors MSCI – AUM LINKED to MSCI INDICES MSCI – MSCI-LINKED ETF AUM by MARKET EXPOSURE Source: Company presentation dated May 2013. All rights reserved.

2% 14.086 1.153 7.028 26.90 32.73 4.172 11.36 1.96 1.538 30.41 32.669 9.144 26.870 24. Member of S&P 500 NORFOLK VA www.234 2.035 723 Capex 1.368 6.94 1.199 28.42 5.341 2.599 Debt 6.4% 8.028 992 1.40 1. Value-oriented Equity Investment Ideas for Sophisticated Investors Norfolk Southern (NSC) – Cap Re.760 10.615 9.888 2.22 1.1% 36.974 1.7% 28.297 27.00 Latest Ago Ests P/E FYE 12/31/13 13x Market value: $23.2% D&A 8.17 7.15 EBIT/capital employed 12% 12% 14% 9% 12% 14% 13% 12% 13% 11% Ten-Year Stock Price Performance and Trading Volume Dynamics $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.8% 8.583 22.69 30.5% Adjusted operating income 27.969 9.5% 28.469 25.065 2.369 28.040 3.3% 19.110 9. LTME FQE FQE per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13 Revenue 9.1% 27.3% 28. All rights reserved.nscorp.com Trading Data Consensus EPS Estimates Valuation Price: $72.5% 35.753 1.025 7.5% 36.755 1.485 8.118 3.17 LTM pre-tax ROC 12% Operating Performance and Financial Position ($ millions.9% 26.954 2.040 10.056 1.6% 36.50 $1.24 1.714 3.799 3. except Fiscal Years Ended December 31.5% 13.3% Capex 12.870 Tangible assets 26.488 1.600 6.432 10.61 29 EV/ LTM revenue 2.227 3.68 24.495 4.66 1.516 11.3% 20.241 2.667 7. T Rowe Transportation: Railroads.407 9.455 1.206 2.026 1.6% 10.44 1.manualofideas.781 407 448 Adjusted diluted EPS 3.231 24.022 1.740 1.470 2.300 2.22 $1.58 1.6% 16.669 3.44 23 P/E FYE 12/31/15 10x Shares outstanding: 315.3x Insider buys (last six months): 10 LT growth 10.97 0.341 1.263 2.7% 33.375 30.682 8.736 25. Geode.63 3.353 10.7% 25.3% 34.599 29.47 0.16 12 P / tangible book 2. investments 918 206 618 1.540 8.341 PP&E.342 30.558 1.05–$81.15 29.109 1.911 9.0 billion This quarter $1.815 10.52 5.40 6.244 1.4% 10.643 23.160 2.779 2. net 21.8x Ownership Data FYE 12/31/14 6.0% 8.017 8.073 1.738 Gross profit 3.4% 8.607 10.075 4.90 (as of 6/21/13) Month # of P/E FYE 12/31/12 14x 52-week range: $56.789 2.707 1.4% 19.62 5.4% 8 Greenblatt Criteria Insider sales (last six months): 9 EPS Surprise Actual Est.8 billion Next quarter 1. DFA.97 25.2% 27.3% 15.989 2.247 22.703 25.360 3.159 461 379 Free cash flow 1.164 2.715 1.907 1.178 1.6% 16.1 million FYE 12/31/13 5.0% 8.110 301 668 687 831 687 Receivables 992 942 870 766 807 1.7% 36.989 969 918 Adjusted operating income 2.206 3.68 0.8% 24.545 2. MS.com July 2013 – Page 66 of 117 .860 2.574 3.0% 28.06 5. Cap World. LTM EBIT yield 10% Institutional ownership: 66% 4/23/13 $1. JOIN TODAY! www.661 7.42 Dividend 0.7% 7.193 2.157 561 1.79 4.5% 14.40 30 EV/ LTM EBIT 10x Insider ownership: <1% FYE 12/31/15 7.59 2.6% 36.110 TBV / tangible assets 37% 37% 37% 38% 38% 35% 32% 33% 33% 33% TBV per share 23.158 1.475 1.678 3.20 29.8% Cash.1% 35.50 Shares out (avg) 406 390 372 367 367 346 321 319 328 315 Cash from operations 2.098 21.067 824 594 574 344 … % of revenue: Gross profit 39.3% 7.6% 8.727 9.333 2. Citadel.50 25 P/E FYE 12/31/14 11x Enterprise value: $30.11 28.070 745 691 Adjusted net income 1.158 Inventory 151 176 194 164 169 209 216 246 228 246 LT investments 1.299 1.485 Tangible equity 9.80 28.

531 2. with $11 billion spent EBIT 29% 25% 28% 29% 28% 25% on capital expenditures and $11 billion spent on Net income 16% 13% 16% 17% 16% 16% buybacks and dividends over the past seven years. Coal 29% 28% 29% 31% 26% 23% 80. VALUE Intrinsic value materially higher than market value?  • Regulated by the U.000 locomotives.7 24. It owns 4.358 856 continued highway conversion. Surface Transportation DOWNSIDE PROTECTION Low risk of permanent loss?  Board.and long-term outlook for coal (20.23 5. and a weaker Asian Tangible equity 37% 38% 38% 35% 32% 33% market.95 n/a NSC has opened three Crescent Corridor facilities RTN per employee-hour worked 3.6 and higher stockpiles. © 2008-2013 by BeyondProxy LLC.070 1. conditions of service.7 25% of revenue).764 7.207 3.5 11. making DFA 1% | Citadel 1% | Geode 1% | MS 1% major savings unlikely.S. NSC Wage cost / employee ($) 66.943 n/a every major container port in the eastern U.5%. it earns Intermodal 19% 19% 19% 19% 20% 21% respectable returns on capital due to growth in trade.S.3 30. Equipment 488 171 317 938 776 n/a Selected items as % of revenue: • Balanced capital allocation. serving Employees (avg) 30.2 11.029 2.153 n/a since mid-2012 to handle higher intermodal volume.com July 2013 – Page 67 of 117 .957 6.000 71.7 76. auto. as higher gas prices and traffic congestion have made the highway system less competitive.557 1. Operating income 3.82 5.000 32.6 by electricity demand. NSC’s workforce of 31.419 1.784 service lanes ahead as new corridor terminals open.manualofideas.000 n/a Revenue ($bn) 10.350 5. and FINANCIAL STRENGTH Solid balance sheet?  the extension or abandonment of rail lines. In 2013. Automotive 412 289 290 332 375 99 Paper/clay/forest 394 306 328 314 306 77 • Positive outlook for intermodal services. Revenue ton miles (RTN) (bn) 195 159 182 192 186 n/a and growth with international shipping partners.620 1. Freight train miles traveled (mn) 80.3 n/a Revenue per ton mile (¢) 5.000 38. While another recession would likely offer a better entry point into the shares.000 37.000 69. 1 Railroads industry median.000 n/a operates the most extensive intermodal network in Benefit cost / employee ($) 31. If inflation Road and all other property 1. Unfortunately. Longer term.000 route miles in the U.000 per NOTABLE HOLDERS year and an benefit cost per employee of $38.128 1. utility coal is impacted / Capital employed 21. FYE December 31 2008 2009 2010 2011 2012 1Q13 ∆ revenue 13% -25% 19% 17% -1% -2% INVESTMENT HIGHLIGHTS ∆ assets 1% 4% 3% 1% 6% 4% • Operates 20.2 28. the debt service burden would diminish.0 9. MANAGEMENT Capable and properly incentivized?  routes. coal appears likely to lose Shares out (avg) (mn) 372 367 367 346 321 315 ∆ shares out (avg) -4% -1% 0% -6% -7% -4% share of the energy mix to affordable natural gas. which has jurisdiction over some rates. Paper/clay/forest 8% 8% 7% 7% 7% 7% While the business is capital-intensive.107 1. weak demand in Debt (mostly long term) 26% 26% 25% 27% 29% 28% Europe for met and steam coal.115 7. and railroads no longer trade at bargain prices. 80+% of employees are unionized. While railroads are a capital-intensive business.153 1.000 cars.927 3. MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE Norfolk Southern’s model has improved. soft domestic metallurgical Cash.5 30. Units by market group (‘000): Coal 1.46 5. • High-cost labor.766 1.1 2. investments 2% 4% 4% 1% 2% 2% market to support steel production. though it is hard to imagine RATINGS per-employee costs increasing faster than CPI.2 22.0 2. Automotive 8% 7% 7% 7% 8% 9% • Economics of railroad business have improved.2 3.3 27.7 3. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA Norfolk Southern is a North American railroad.7% n/a • $8+ billion of fixed-rate debt has average maturity Property additions (including capital leases) ($mn): of 24 years and interest rate of 5. competition from natural gas = Return on capital employed 14% 9% 12% 14% 13% 11% Tangible assets ($bn) 26. it could have an impact in the future.559 30.075 2. with Intermodal 3.593 28.9 25.03 5.000 other pieces of equipment.2% 71. new intermodal Total units 7.222 1.000 has an average wage cost per employee of $69. D&A 8% 11% 9% 8% 8% 8% Capex 15% 16% 15% 19% 20% 14% INVESTMENT RISKS & CONCERNS Calculation of return on capital employed ($bn): • Weak short.7 22.000 69.9% 71.5 72.000 39.900 3. fuel surcharges.0 67.4% 71.0 2.7 8.709 28. Agriculture/consumer 12% 15% 14% 13% 13% 13% Metals and construction 12% 9% 11% 11% 12% 12% with 58% of the economics (CSX owns remainder).7 the East and is a major transporter of coal. JOIN TODAY! www. and % of revenue by market group: industrial products.000 Insiders 1% | T Rowe 2% | Cap World 2% | Cap Re 1% | per year.465 n/a accelerates.414 343 fuel cost advantages over trucking (plus no traffic Chemicals 394 345 406 374 389 106 congestion on railways). Chemicals 12% 13% 14% 12% 13% 14% NSC also has a $1 billion investment in Conrail.S.1% 75.329 30.4 28. While MOAT Able to sustain high returns on invested capital?  regulation has not been a major factor in industry EARNINGS MOMENTUM Fundamentals improving?  economics. Barriers to Metals and construction 742 504 628 665 670 155 entry are prohibitively large in the railroad business.000 63. modest long-term returns should accrue even from here.211 3. barriers to entry are so high that existing players can enjoy improving economics for a long time as railroads become more appealing to shippers.6 75.1 0. and 35. the fact that the business has gone from bad to good has not remained a secret. and improved train Agriculture/consumer 612 563 628 599 596 148 operating efficiency on a unit basis.218 3. Railway opex to railway revenue 71. All rights reserved..7 23.

2013 EBIT margin for past seven fiscal years December 31.8 billion (13. Equity/ relevant websites) 7-Year MV EV Book/ FCF This Next Rev.216 28% 3% 6% 6% 7% 27% 454 5% 3% 73% 33% 41% Norfolk Southern / NSC -63% 11% 22. The Manual of Ideas analysis.40 has been revised upward by 2% from $6.31 three months ago.8 billion multiplied by minus minus Average 7-year EBIT margin: 27.227 26% 4% 6% n/a n/a 20% 406 7% 5% 53% 37% 41% Can. Low High ($mn) ($mn) MV Yield LTM FY FY EV ($000) LTM Q Profit EBIT Assets Can. / CSX -71% 15% 23. All rights reserved.40 equals Estimated EBIT: $3. 28% downside from the recent (§) The FY14 consensus EPS estimate of $6. Railway / CNI -69% 10% 40.5 billion Estimated fair value of the common equity of Norfolk Southern: equals equity of Norfolk Southern: $36 billion. 2008-2012 ($ in millions) Attractive and growing earnings yield Positive FCF generation. or $53 per share 25% upside to the recent stock price ($73 per share) (based on 320 million shares out) stock price ($73 per share) (*) Represents Railroads industry median multiple.72 divided by Assumed fair value multiple of EBIT: multiplied by Industry median FCF yield: 1. = revenue | tang. Value-oriented Equity Investment Ideas for Sophisticated Investors NORFOLK SOUTHERN – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Base Case Aggressive Base Case Based on revenue for the twelve months Based on median consensus EPS Based on free cash flow for the twelve ended March 31.9x (*) equals equals equals Industry FCF yield-implied fair value: Estimated fair enterprise value of Industry multiple-implied fair value: $34 billion ($109 per share) Norfolk Southern: $23 billion $27 billion ($87 per share) multiplied by plus multiplied by Assumed required FCF yield as a Cash. NORFOLK SOUTHERN – ANALYSIS OF SELECTED COMPARABLE COMPANIES Trading Data Public Market Valuation Operating Performance Tang. Last Gross Adj.6% required FCF yield) discount of 25%: $1.com July 2013 – Page 68 of 117 .970 30. ST investments: $690 million Assumed NSC multiple as a percentage of the industry FCF yield: plus percentage of the industry multiple: 95% Long-term investments at fair value 105% (1.40 (§) Operating cash flow: $2./ ∆ Rev.manualofideas.7% (*) 7.5x Corresponding industry P/E: 12. (Click to visit ∆ to Reach Tang.2 billion equals FY14 EPS estimate: 5% * $6. LTM EPS Yield LTM Rev.169 47. even as capex remains significantly higher than D&A Source: Company presentation dated June 2013.777 25. JOIN TODAY! www. assumptions and estimates.272 79. 2014 ▼ ▼ ▼ TTM net sales: $11 billion Consensus FY14E EPS: $6. = employee | rev.985 32.095 25% 1% 3% n/a n/a 22% 368 5% 9% 50% 30% 36% CSX Corp. = adjusted | ∆ = change Explanations: ∆ revenue represents year-over-year change in revenue | EPS yield for this and next FY is based on consensus EPS estimates | EBIT is adjusted for certain unusual items NORFOLK SOUTHERN – CASH FROM OPERATIONS and CAPEX. 2013 and average estimate for the fiscal year ending months ended March 31. Tang. Nat. % LTM Rev./ Empl. Pacific Railway / CP -79% 18% 20. or $115 per share Estimated fair value of the common $29 billion ($91 per share) (based on 320 million shares out) equity of Norfolk Southern: (based on 320 million shares out) 57% upside to the recent $17 billion.331 39% 4% 8% 8% 9% 36% 367 -1% 0% 68% 30% 31% Union Pacific / UNP -78% 5% 71.0 billion equals Free cash flow: $590 million multiplied by Revised FY14 EPS estimate: $6.768 44% 3% 8% 8% 9% 36% 355 -3% -2% 36% 28% 33% Abbreviations: MV = market value | EV = enterprise value | LTM = last twelve months | FY = fiscal year | empl.5% Assumed upside/downside to Capex: $2. stock price ($73 per share) Source: Company filings. © 2008-2013 by BeyondProxy LLC.5x fair value P/E multiple) equals minus equals Estimated fair value of the common Total debt: $8. = tangible | adj.

com July 2013 – Page 69 of 117 . JOIN TODAY! www.manualofideas. © 2008-2013 by BeyondProxy LLC. All rights reserved. Value-oriented Equity Investment Ideas for Sophisticated Investors NORFOLK SOUTHERN – INTEREST RATE (weighted avg) NORFOLK SOUTHERN – MATURITY (weighted avg) (yrs) Well-positioned for rising interest rate environment NORFOLK SOUTHERN – TRAIN SPEED NORFOLK SOUTHERN – TERMINAL DWELL The outlook for coal is a key concern NORFOLK SOUTHERN – MANAGEMENT’S NEAR-TERM BUSINESS OUTLOOK Source for the above charts: Company presentation dated June 2013.

764 31.746 29.799 4.com Trading Data Consensus EPS Estimates Valuation Price: $30.18 Shares out (avg) 5.214 13.305 5.458 21.868 3.69 35 P/E FYE 5/30/16 n/a Shares outstanding: 4.950 1.743 5.1% 36.407 29.169 4.159 7.676 33.986 13. LTM EBIT yield 11% Institutional ownership: 61% 6/20/13 $0.735 Cash from operations 4.18 0.078 … % of revenue: Gross profit 77.7% 35.4% 78.100 Adjusted operating income 4.15 1.018 32.767 3.5% 76.201 7.8% 79.402 8.133 8.872 2.032 6.20 0.391 3.413 33.145 13.033 2.69 0.358 1.945 5.084 1. LTME FQE FQE per share data) 2006 2007 2008 2009 2010 2011 2012 2/28/13 2/29/12 2/28/13 Revenue 14.224 29.36 0.7% 77.021 3.578 Adjusted diluted EPS 0.7 million FYE 5/31/14 2.205 8.688 1.250 Long-term debt 5.611 6.087 46.361 -1.622 37. Cap World.068 9.363 10. JOIN TODAY! www.111 29.4% 37.5x Ownership Data FYE 5/31/15 3.92 2.710.502 14.541 5.87 LTM pre-tax ROC n/m Operating Performance and Financial Position ($ millions.608 14.21 27 EV/ LTM EBIT 9x Insider ownership: 24% FYE 5/30/16 n/a n/a n/a P / tangible book 13.386 26.726 3.818 20.12 1.628 6.0% 35. investments 7.8% 36.15 1.520 7.24 0.430 5.313 13.7% 12.443 26.001 3.692 15.034 Intangible assets 14.686 43.019 11.2% 11.686 Payables 268 315 383 271 775 494 438 361 442 361 Short-term debt 159 1.958 6.202 R&D 1.332 10. Member of S&P 500 REDWOOD CITY CA www.145 8.809 2.2% 12.263 29.001 1.133 5.3% Adjusted operating income 34.656 4.014 5.255 8.820 35.469 28.235 10.034 2.777 18.8% 38.58 $0.7% 11 Greenblatt Criteria Insider sales (last six months): 6 EPS Surprise Actual Est.996 22.195 2.922 2.670 10.150 2.857 3.451 10.070 5.827 6.380 17.196 5. T Rowe Technology: Software & Programming.020 11.oracle.19 3.9% 12.524 -3.763 2. except Fiscal Years Ended May 31.584 11.com July 2013 – Page 70 of 117 .3 billion Next quarter 0.43 Latest Ago Ests P/E FYE 5/31/14 10x Market value: $142.764 Tangible assets 14.250 0 1. All rights reserved.741 2.838 12.037 4.958 Gross profit 11.911 9.4% R&D 13.605 7.164 Adjusted net income 3.7% 10.05 0.732 9.056 27.717 3.122 45.8% 80.585 6.681 11.149 26.859 3.391 1.0% Cash.832 44. Eagle.69 0.5% 34.735 6.2% 12.743 13.8% 12.0% 36.38 1. Harris.555 9.407 Receivables 3.603 1.233 7.589 5.805 17.237 11.095 13.408 Adjusted pretax income 5.169 PP&E.0% 12.5% 76.584 TBV / tangible assets 5% -17% -16% -5% 3% 23% 24% 23% 27% 23% Ten-Year Stock Price Performance and Trading Volume Dynamics $40 $35 $30 $25 $20 $15 $10 $5 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.92 43 EV/ LTM revenue 3.021 1.9% 37.145 1.043 12.936 3.057 13.81 2.252 26.848 30.523 4.309 46.194 Capex 236 319 243 529 230 450 648 684 142 116 Free cash flow 4.726 8.58 35 P/E FYE 5/31/15 9x Enterprise value: $128.14 (as of 6/21/13) Month # of P/E FYE 5/31/13 15x 52-week range: $27. GMO.35 0.066 8.524 18. net 1.010 3.4x Insider buys (last six months): 7 LT growth 10.495 8.122 10.502 Tangible equity 675 -2. FMR.121 37.254 4.21 0.54 Dividend – – – 0.430 23.87 $0.manualofideas.2% 80.24–$36.7% 11.599 10.129 20.603 4.4% 78.048 5.510 14.235 9.0 billion This quarter $0.433 5.274 32.742 33.519 4.420 4.015 4.1% 12.882 21.337 19.377 4.052 10.772 13.3% 77.86 1.170 5. MFS.764 13.056 8.06 2. Value-oriented Equity Investment Ideas for Sophisticated Investors Oracle (ORCL) – Cap Re.449 18.624 18.305 31.

30 sales represented 14% of Oracle’s revenue in FY13.844 ∆ shares out (avg) -1% -1% -1% 1% -1% -4% • Competition includes technology heavyweights 1 Adjusted for unusual items of -$222 million in 2008. as shares trade at an FCF yield.4 23. All rights reserved. -$234 million in 2009. DOWNSIDE PROTECTION Low risk of permanent loss?  edly the key driver behind Oracle’s success.6 37.46 deal. The company is EMEA 32% 0% 12% 29% 1% -3% also gaining share in engineered systems versus Asia Pacific 26% 8% 19% 42% 10% 0% IBM’s P-Series.24 0. 2 Software & Programming industry median. -$351 million in 2012. -$776 million in IBM. ∆ software revenue 26% 6% 9% 17% 9% 5% ∆ services revenue 21% -5% -11% 19% 1% -7% INVESTMENT HIGHLIGHTS ∆ total revenue 25% 4% 15% 33% 4% 0% • World’s #1 enterprise software provider. Shares out (avg) (mn) 5. while risky.) ($) 1. adjusted for net cash. Oracle has ably leveraged its strength in relational databases into application software and hardware. EBIT (adjusted)1 36% 37% 37% 35% 38% 39% • Founder and CEO Larry Ellison (69) owns 23% Pretax income (adjusted)1 36% 35% 34% 34% 36% 37% and has grown Oracle into one of the largest IT Net income (adjusted)1 26% 25% 26% 26% 28% 29% companies since 1977. as customers use complex Oracle solutions to power mission-critical applications. the longer-term impact is unclear. Hardware Dividends per share ($) – 0. Challenges 2010. FINANCIAL STRENGTH Solid balance sheet?  MAJOR HOLDERS MOAT Able to sustain high returns on invested capital?  CEO Ellison 23% | Cap Re 3% | Cap World 2% | MFS 2% | EARNINGS MOMENTUM Fundamentals improving?  FMR 2% | GMO 1% | Harris 1% | Eagle 1% | T Rowe 1% MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE Oracle is rivaled by only a handful of companies as a long-term software success story. -$575 million in 2011. also emerge over time. Industry gross margin2 61% 62% 63% 61% 62% 62% • Strong balance sheet and shareholder-friendly Industry EBIT margin2 -1% 2% 3% 3% 1% 2% capital allocation.21 0.048 5. The company benefits from some of the highest switching costs in the IT industry. appears to be paying off.014 5. both via acquisitions.133 5.67 1.4 billion in 2010.05 0.8 35. eclipsing SAP Americas 20% 5% 16% 33% 5% 3% and most other key competitors.3 31.12.070 5.8 44. As a result. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA Oracle provides enterprise software.3 46.21 1. investments 53% 59% 58% 65% 68% 72% $1+ billion in dividends in FY13. Ellison has proven a shrewd capital allocator. Return on equity (ROE) 29% 24% 25% 26% 25% 25% ROE – industry median2 9% 8% 10% 9% 7% 8% • Vulnerability to technological change may have Trailing P/E (end) 17x 23x 26x 15x 17x 10x increased due to hardware business entry. © 2008-2013 by BeyondProxy LLC. HP.9 21.1 45. making any move to a Americas 51% 51% 52% 52% 52% 53% competitor an expensive and risky proposition. net 8% 9% 9% 6% 7% 6% ST debt 5% 5% 10% 3% 7% 3% INVESTMENT RISKS & CONCERNS LT debt 49% 43% 36% 33% 30% 40% • Open-source software and software-as-a-service Other LT liabilities 19% 18% 14% 11% 13% 12% offerings may lead to less customer demand for Tangible equity -16% -5% 3% 23% 24% 23% buying software licenses and/or lower profitability. from best-in-class software firms. which has $14 billion of Tangible assets ($bn) 20. The Sun R&D 12% 12% 12% 13% 12% 13% acquisition. who is undoubt. and $29 million in 2013. Revenue ($bn) 22. Ellison MANAGEMENT Capable and properly incentivized?  is in this regard not dissimilar from Jobs at Apple. Microsoft. JOIN TODAY! www. Oracle. While Forward P/E (end) 16x 20x 19x 13x 11x 11x the Sun acquisition appears to have been a shrewd Diluted EPS (cont. modestly growing FCF machine. and SAP.015 4.09 1. Oracle Asia Pacific 14% 15% 15% 16% 17% 17% Revenue growth by geography: has quickly grown “cloud” revenue.20 0. EMEA 35% 34% 33% 32% 31% 30% • Well-positioned in growth segments of IT. with related Oracle sales up 45% in Selected items as % of revenue: Gross profit 78% 79% 79% 76% 79% 56% 4Q13 while P-Series sales declined 32%.7 net cash. EMC. of ~11%. Despite a penchant for D&A 7% 8% 8% 8% 8% 8% Capex 1% 2% 1% 1% 2% 2% M&A.com July 2013 – Page 71 of 117 . The recent revenue growth disappointment provides an opportunity. PP&E. with per-share value creation helped by friendly capital allocation policies.1 37. such as People- Soft. thanks in large part to the execution skill of CEO Larry Ellison.2 The purchases of PeopleSoft and Siebel extended % of revenue by business: Oracle into application software and boosted the Software 80% 81% 77% 67% 70% 74% Hardware 0% 0% 9% 19% 17% 14% already high customer switching costs. VALUE Intrinsic value materially higher than market value?  • Key-man risk related to Ellison. The company has Receivables 28% 21% 18% 15% 14% 9% doubled the quarterly dividend for FY14 to $0. It entered the hardware FYE May 31 2008 2009 2010 2011 2012 2013 business by buying Sun Microsystems for $7.manualofideas.3 26. Oracle has skillfully RATINGS eliminated thorny competitors by acquiring them.06 1. bought back $11 billion of stock and paid Selected items as % of tangible assets: Cash.96 1. Oracle has become a predictable. Oracle ∆ assets 37% 0% 30% 19% 7% 7% ∆ book value 36% 9% 23% 29% 10% 1% has added to its strength in relational databases by ∆ BV per share 37% 10% 24% 28% 11% 8% acquiring 50 companies for $40 billion since 2005. Oracle Services 20% 19% 15% 13% 13% 12% customers rely on the company for mission-critical % of revenue by geography: databases and applications.

2013 EBIT margin for past seven fiscal years 31.4 billion in dividends Source: Company presentation dated October 2012.35 divided by Assumed fair value multiple of EBIT: multiplied by Industry median FCF yield: 4. Value-oriented Equity Investment Ideas for Sophisticated Investors ORACLE – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Valuation methodology: Valuation methodology: Valuation methodology: Based on revenue for the twelve months Based on median consensus EPS Based on free cash flow for the twelve ended February 28.595 22.19 equals Estimated EBIT: $13 billion equals Free cash flow: $13 billion multiplied by Revised FY14 EPS estimate: $3./ ∆ Rev.19 has been revised down by 2% from $3.189 3% 3% neg.301 7% 9% 7% 10% 11% 29% 313 -31% -66% 80% 13% 37% Abbreviations: MV = market value | EV = enterprise value | LTM = last twelve months | FY = fiscal year | empl.2% (*) 8.com / CRM -86% 24% 22.7x fair value P/E multiple) equals Estimated fair value of the common equals Estimated fair value of the common equity of Oracle: Estimated fair value of the common equity of Oracle: $120 billion. stock price ($30 per share) (§) The FY14 consensus EPS estimate of $3.9% Assumed upside/downside to Capex: $680 million equals FY14 EPS estimate: 5% * $3.19 (§) Operating cash flow: $14 billion multiplied by minus minus Average 7-year EBIT margin: 35. = adjusted | ∆ = change Explanations: ∆ revenue represents year-over-year change in revenue | EPS yield for this and next FY is based on consensus EPS estimates | EBIT is adjusted for certain unusual items ORACLE – CAPITAL ALLOCATION. ST investments: $33 billion Assumed ORCL multiple as a percentage of the industry FCF yield: minus percentage of the industry multiple: 95% Total debt: $20 billion 90% (4. Low High ($mn) ($mn) MV Yield LTM FY FY EV ($000) LTM Q Profit R&D EBIT IBM / IBM -64% 10% 216. Oracle repurchased $11. Source: Company filings.800 217. 2013. Last Gross Adj. = revenue | tang.512 21% 10% 6% 8% 9% 35% 809 4% 18% 75% 13% 44% Salesforce. 2014 ▼ ▼ ▼ TTM net sales: $37 billion Consensus FY14E EPS: $3.474 88.7 billion shares out) $264 billion ($56 per share) (based on 4.24 three months ago.0% required FCF yield) equals (16. © 2008-2013 by BeyondProxy LLC. FY2005-FY2013 Cheap on forward EPS estimates In the fiscal year ended May 31.7 billion shares out) 130% upside to the recent stock price ($30 per share) 86% upside to the recent stock price ($30 per share) (*) Represents Software & Programming median. or $26 per share equity of Oracle: $327 billion.130 n/m 7% 7% 9% 9% 43% 238 -3% -5% 48% 6% 23% Microsoft / MSFT -55% 13% 277.382 n/m 3% 4% 4% 4% 24% 335 96% 8% 71% 14% 28% Oracle / ORCL -60% 21% 141.0x Corresponding industry P/E: 18.6x (*) equals equals equals Industry FCF yield-implied fair value: Estimated fair enterprise value of Industry multiple-implied fair value: $310 billion ($66 per share) Oracle: $107 billion $293 billion ($62 per share) multiplied by plus multiplied by Assumed required FCF yield as a Cash. LTM EPS Yield LTM Rev. 2013 and average estimate for the fiscal year ending May months ended February 28. % LTM Rev. = employee | rev. The Manual of Ideas.956 128.725 238. = tangible | adj. 2013. relevant websites) 7-Year MV EV Book/ FCF This Next Rev. All rights reserved.manualofideas. or $69 per share (based on 4.0 billion of stock and paid out $1. ORACLE – ANALYSIS OF SELECTED COMPARABLE COMPANIES Trading Data Public Market Valuation Operating Performance (Click to visit ∆ to Reach Tang./ Empl.com July 2013 – Page 72 of 117 . 1% 2% 15% 331 32% 28% 77% 14% 0% SAP / SAP -60% 16% 89. press release dated June 20. JOIN TODAY! www.7 billion shares out) 15% downside from the recent (based on 4.

All rights reserved. 2013. FY2012-FY2013 Consistently strong FCF generation ORACLE – SELECTED GROWTH RATES by GEOGRAPHY. FY2012-FY2013 ($ in millions) ORACLE – CALCULATION of FREE CASH FLOW. despite stagnant revenue ORACLE – CALCULATION of ADJUSTED OPERATING INCOME and NET INCOME.manualofideas.com TODAY! is helping to offset weakness in Europe July 2013 – Page 73 of 117 . © 2008-2013 by BeyondProxy LLC. FY2012-FY2013 Source for the above tables: Company press release dated June 20. Asian JOIN growth www. Value-oriented Equity Investment Ideas for Sophisticated Investors Earnings growth continued in FY13.

259 58.950 n/a 12. Dodge & Cox.16 1.734 13.86 2.179 40.320 5. net 16.454 20.037 18.72 0.673 7.392 9.986 57.46 (as of 6/21/13) Month # of P/E FYE 12/31/12 23x 52-week range: $22.47 15 P / tangible book n/m Insider buys (last six months): 14 LT growth 2. FMR.682 12.5% 12.378 12.00–$31.pfizer.543 31.269 65.21 2.673 11. MFS.342 9. GMO Health Care: Major Drugs.189 7.817 7.0% 78.314 7.410 34.708 35.8% 84.885 13. Value-oriented Equity Investment Ideas for Sophisticated Investors Pfizer (PFE) – Wellington.1% 80.438 -13.521 2.512 7.9 billion This quarter $0.226 41.56 13 P/E FYE 12/31/15 12x Shares outstanding: 7.735 14.481 33.43 1.353 18.733 9.424 8.551 15.926 31.192 13.513 1.275 254 202 Free cash flow 15.346 Receivables 9.4% 37.165 65.7% 81.7% 2.707 Adjusted operating income 15.205 1.442 7.238 16.35 18 EV/ LTM EBIT 10x Insider ownership: <1% FYE 12/31/15 2.320 73.379 13.880 1.972 35.840 -5.203 1.397 7.287 22.058 12.963 43.7% 25.275 6.392 PP&E.988 47.4% 16.473 16.7% R&D 15.80 0.948 15.531 92.701 1.99 1.843 4.249 95.41 Dividend 0.57 $0.193 38.418 48.55 0.1% 79.825 9.56 LTM pre-tax ROC 79% Operating Performance and Financial Position ($ millions.403 8.479 26.952 Adjusted diluted EPS 1.608 -9.007 8.861 98.039 … % of revenue: Gross profit 84.727 15.64 0.587 11.753 90.610 7.08 2.3% n/a 82.241 Capex 2.603 4.298 -20.122 9.092 24.774 2.490 19.856 11.632 15.4% 32.9% 28.660 1.com Trading Data Consensus EPS Estimates Valuation Price: $28.96 1.371 48.814 14.478 13.89 1.103 16. T Rowe.036 31. LTM EBIT yield 10% Institutional ownership: 74% 4/30/13 $0.manualofideas.093.135 Adjusted pretax income 15.999 2.082 20.219 10.4% 4 Greenblatt Criteria Insider sales (last six months): 14 EPS Surprise Actual Est.897 51.6x Ownership Data FYE 12/31/14 2.88 0.113 99. JOIN TODAY! www.392 10.6% 15.8% 15.388 71.185 110.503 3.240 17.287 18.469 5.164 28.9% 12.380 13. except Fiscal Years Ended December 31. LTME FQE FQE per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 4/1/12 3/31/13 Revenue 48.054 16.685 87.921 14.035 7.735 Inventory 6.892 4.22 0.963 102.218 16.103 16.111 5.941 18.896 5.537 15.com July 2013 – Page 74 of 117 .500 Gross profit 40.434 5.722 -13.15 Latest Ago Ests P/E FYE 12/31/13 13x Market value: $201. investments 28.287 18.124 4.423 7.601 14.391 101.929 40.747 9.242 6.594 13.481 Tangible equity 25.246 2.7% 30.950 16.6% Adjusted operating income 32.90 0.063 7.719 4.135 Adjusted net income 13.082 27.44 2.053 87.537 7.1% 31.54 $0.381 12.036 7.24 Shares out (avg) 7.580 15.449 8.327 1.645 13.555 27.682 12.731 37.050 16.2% 76.502 18.958 14.880 39.558 93.7% 83.34 2.464 -5.452 32.537 Short-term debt 2.391 11.016 6.843 8.227 26.719 4.546 7. Cap World.6% Cash.296 49.632 15.727 7.890 R&D 7.8% 12.887 50.3% 15.461 13.537 87.302 4. All rights reserved.630 99.346 23.9 billion Next quarter 0.780 18.21 18 EV/ LTM revenue 3.4% 11.53 0.187 Cash from operations 17.62 2.58 13 P/E FYE 12/31/14 12x Enterprise value: $206.7% 47.431 1.4% 30.724 14.896 Long-term debt 5.2 million FYE 12/31/13 2.050 16.991 23.378 7.917 6.382 9.645 15.4% 25.28 0.755 1.149 15.035 LT investments 3. Member of S&P 500 NEW YORK NY www.182 12.7% 14.502 18.520 2.96 1.861 Tangible assets 70.483 95.80 0.649 EBIT/capital employed 79% 50% 56% 54% 35% 46% 52% 79% 44% 80% Ten-Year Stock Price Performance and Trading Volume Dynamics $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.526 8.950 Intangible assets 45.910 18.649 -14.910 18.

It is.2 65.2 14.S. Celebrex to expire in 2014). Pricing may come under MANAGEMENT Capable and properly incentivized?  scrutiny as government programs try to save money.1 16. -$7.2 34% 28% 24% 22% 26% 22% returns $6+ billion to shareholders annually in the D&A 11% 10% 13% 14% 13% 13% form of dividends (3. Pfizer took public its animal health Emerging Markets 15% 14% 16% 17% 20% 22% business.0 million in 1Q13.3 15.007 8.7 17. + Short-term debt 7. Pfizer Specialty care and oncology n/a 52% 64% 65% 68% 65% broadened its revenue sources by adding a focus on Est. The trailing FCF yield of 7-8% is decent but not compelling.036 7. -$6.Cash. Specialty care and oncology n/a 18% 25% 25% 26% 26% Asia (7%). JOIN TODAY! www. -$6. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA Pfizer develops and markets branded medicines.5 -29.8 A bright spot: Pfizer expects to grow revenue in = Return on capital employed 104% 81% 63% 69% 78% 72% emerging markets in the high single digits in 2013. apparently with some success.727 7.com July 2013 – Page 75 of 117 . Despite the efforts. products. ST debt 13% 5% 6% 4% 7% 9% however. 42% 43% 44% 41% 39% 40% Developed Europe 27% 26% 25% 25% 23% 22% pharma company King for $3 billion in 2011. Longer term. above-average value creation becomes tough. Zoetis (NYSE: ZTS).6 93.3 -25. 3 Major Drugs industry median. In Developed RoW 16% 16% 15% 17% 18% 16% February 2013.4 billion in 2008. including those of Lipitor (2011). © 2008-2013 by BeyondProxy LLC. (12% share). Tangible assets ($bn) 72.2 95.1 billion in 2012. Japan (6%). revenue fell 10% in 2012 and 9% in 1Q13. emerging mkts n/a 28% 29% 28% 34% 35% possesses a strong global distribution platform. products.817 7.442 7. However.9 61.4 6. with expected sales of $55-57 billion.2 6. VALUE Intrinsic value materially higher than market value?  DOWNSIDE PROTECTION Low risk of permanent loss?  • Regulatory pressure.3 65. indicating that the retrenchment continues.1 16. Revenue ($bn) 48.S. It Est.2 to $2.4 -32.14-2.8 26.9 -27.5 4. $114 million in 2009. Pfizer also bought pain treatment U.2 7. we are skeptical.0 .0 102.1 99. difficult for us to judge to what extent the LT debt 11% 42% 41% 38% 33% 32% Tangible equity 25% -20% -15% -15% -10% -6% pipeline will translate into new blockbuster drugs.0 13. $1.8 -28.1 -32.7 10. All rights reserved.4 billion in 2009. In late 2012. Current assets 45.8 23.3 59. and $4. activity is tacit admission that Pfizer’s internal drug 2 Adjusted for nonrecurring items of $78 million in 2008.1 4.1 despite management’s best efforts on execution.6 7. FINANCIAL STRENGTH Solid balance sheet?  MAJOR HOLDERS MOAT Able to sustain high returns on invested capital?  Insiders <1% | Wellington 2% | T Rowe 2% | FMR 2% | EARNINGS MOMENTUM Fundamentals improving?  MFS 1% | Cap World 1% | Dodge & Cox 1% | GMO 1% MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE Pfizer has sought to improve the drug pipeline and pursue strategic deals in order to mitigate the impact of patent expirations.8 5.2 22.5 % of revenue by segment: and #4 in vaccines globally.4% recent annualized yield). The company also Net income (adjusted)1.0 52. Gross profit 85% 83% 78% 80% 81% 81% R&D 16% 16% 15% 13% 12% 13% • Repurchased $18 billion of stock from 2010-2012 EBIT (adjusted)1 37% 33% 26% 28% 31% 31% and another $6+ billion YTD. Pfizer is the pharma Primary care n/a 46% 36% 35% 26% 24% market leader in the U.3 60.9 • Revenue and adjusted income down ~10% in Q1.7 The firm has lowered 2013 adjusted EPS guidance + Net fixed assets 14. with high-ROIC internal pharma development at scale.4 billion in 2010.24.manualofideas.1 Value creation is difficult under such circumstances. Viagra (2012).1 63.0 20.187 of our mid-to-late stage pipeline”.1 3.6 -34.8 26. Continued M&A 1 Adjusted for unusual items of -$8. Capital employed 17.4 5. Other n/a 8% 10% 12% 13% 14% Pretax margin by segment (excl. RATINGS Strategic sellers rarely leave money on the table.3 49. Pfizer has sought Cash. emerging mkts n/a 50% 54% 51% 56% 59% vaccines and biologics via the $68 billion purchase % of revenue by geography: of Wyeth in 2009.0 0.9 18. investments 34% 26% 30% 29% 34% 36% to improve the productivity of internal pharma LT investments 16% 13% 10% 11% 15% 15% discovery.3 12. although sales should decline a more modest 3-7% in 2013.Current liabilities -24. 2010. -$5. Forward P/E (end) 15x 18x 17x 17x 11x 13x While management is “excited about the potential Shares out (avg) (mn) 6. corporate and other): • Strategically active in an attempt to improve the Primary care n/a 67% 68% 66% 62% 62% drug pipeline and optimize the portfolio.0 billion in 2012. FYE December 31 2008 2009 2010 2011 2012 1Q13 ∆ revenue 0% 2% 32% 0% -10% -9% INVESTMENT HIGHLIGHTS ∆ gross profit 10% 0% 24% 2% -8% -11% • #1 position in cardiovascular and #2 in infectious Employees (end) (‘000) 82 117 111 104 92 n/a disease and central nervous system treatments. A near-term fix is not in sight. ST investments -25.4 61. Capex 4% 2% 2% 3% 2% 1% Industry gross margin3 76% 74% 73% 72% 70% 71% INVESTMENT RISKS & CONCERNS Calculation of return on capital employed ($bn): Reported operating income 9.7 billion in 2011. as the company continues to have a strong team and global platform.1 patent expired in 2011.2 reflecting some loss of portfolio exclusivity (Lipitor Adjusted EBIT 18. Pfizer appears capable of returning to growth in line with the pharma industry.7 9. $5. ∆ shares out (avg) -3% 4% 15% -3% -5% -5% • M&A cannot be long-term fix.5 Selected items as % of tangible assets: • Organic innovation a challenge.5 18.8 -27. .3 19.8 -28.5 18. and -$214 million in 1Q13. + special items 8.5 92. Europe (10%). and Latin America (6%). -$30 million in efforts are not delivering sufficient value. Pfizer Selected items as % of revenue: sold its nutrition business to Nestlé for $12 billion.2 billion in 2011.5 12.4 7.9 -28. and Celebrex (2014).4 5.

= employee | rev.051 n/m 2% 5% 8% 9% 31% 407 33% -3% 72% 13% 37% Merck / MRK -57% 31% 141.45 divided by Assumed fair value multiple of EBIT: multiplied by Industry median FCF yield: 3.1% (*) 7.1 billion shares out) equity of Pfizer: (based on 7. Last Gross Adj.34 equals Estimated EBIT: $18 billion equals Free cash flow: $15 billion multiplied by Revised FY14 EPS estimate: $2. LTM EPS Yield LTM Rev.3 billion equals FY14 EPS estimate: 5% * $2. 2010-2012 Pfizer’s revenue challenges reflect patent expirations.759 n/m 0% 4% 7% 8% 31% 412 -3% -9% 70% 14% 24% Pfizer / PFE -59% 9% 201. Value-oriented Equity Investment Ideas for Sophisticated Investors PFIZER – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Based on revenue for the twelve months Based on median consensus EPS Based on free cash flow for the twelve ended March 31. or $53 per share Estimated fair value of the common $269 billion ($38 per share) (based on 7.36 three months ago.1 billion shares out) 86% upside to the recent $138 billion. = adjusted | ∆ = change Explanations: ∆ revenue represents year-over-year change in revenue | EPS yield for this and next FY is based on consensus EPS estimates | EBIT is adjusted for certain unusual items PFIZER – REVENUE by SEGMENT and GEOGRAPHY. especially that of Lipitor Source: Company financial report 2012. relevant websites) 7-Year MV EV Book/ FCF This Next Rev.100 3% 6% 6% 7% 8% 28% 453 -2% 2% 67% 16% 21% Sanofi / SNY -53% 9% 136. © 2008-2013 by BeyondProxy LLC. = revenue | tang. % LTM Rev.34 has been revised down by 1% from $2./ Empl. assumptions and estimates. 2014 ▼ ▼ ▼ TTM net sales: $58 billion Consensus FY14E EPS: $2. 32% downside from the recent (§) The FY14 consensus EPS estimate of $2.725 9% 6% 4% 7% 8% 31% 564 -4% -9% 76% 17% 44% Novartis / NVS -52% 9% 189. stock price ($28 per share) Source: Company filings.191 204. PFIZER – ANALYSIS OF SELECTED COMPARABLE COMPANIES Trading Data Public Market Valuation Operating Performance (Click to visit ∆ to Reach Tang.5x Corresponding industry P/E: 12. ST investments: $35 billion Assumed PFE multiple as a percentage of the industry FCF yield: plus percentage of the industry multiple: 130% Long-term investments at fair value 120% (4. or $19 per share 33% upside to the recent stock price ($28 per share) (based on 7.34 (§) Operating cash flow: $17 billion multiplied by minus minus Average 7-year EBIT margin: 30.127 131.5x fair value P/E multiple) equals minus equals Estimated fair value of the common Total debt: $40 billion Estimated fair value of the common equity of Pfizer: equals equity of Pfizer: $376 billion.873 206.com July 2013 – Page 76 of 117 .1 billion shares out) stock price ($28 per share) (*) Represents Major Drugs industry median multiple.4% Assumed upside/downside to Capex: $1.942 n/m 8% 5% 8% 8% 28% 630 -28% -9% n/m 16% 47% Abbreviations: MV = market value | EV = enterprise value | LTM = last twelve months | FY = fiscal year | empl.887 147. 2013 EBIT margin for past seven fiscal years December 31. Low High ($mn) ($mn) MV Yield LTM FY FY EV ($000) LTM Q Profit R&D EBIT GlaxoSmithKline / GSK -45% 22% 121. 2013 and average estimate for the fiscal year ending months ended March 31. = tangible | adj. All rights reserved. The Manual of Ideas analysis./ ∆ Rev. JOIN TODAY! www.922 146.manualofideas.0% required FCF yield) discount of 25%: $12 billion (15.9x (*) equals equals equals Industry FCF yield-implied fair value: Estimated fair enterprise value of Industry multiple-implied fair value: $489 billion ($69 per share) Pfizer: $131 billion $224 billion ($32 per share) multiplied by plus multiplied by Assumed required FCF yield as a Cash.

(2) Does not assume the completion of any business development transactions not completed as of March 31.02 unfavorable impact for Zoetis-related interest expense and certain duplicative and other costs given its potential separation.02 unfavorable impact for costs related to the establishment of Zoetis’ corporate and manufacturing support functions. 2013. and excludes the potential effects of the resolution of litigation-related matters not substantially resolved as of December 31. PFIZER – MANAGEMENT’S FINANCIAL GUIDANCE for 2013 (1) (2) Guidance for 2013 has been revised down modestly (1) At exchange rates that reflect a blend of the actual exchange rates in effect during the first three months of 2013 and the mid-April 2013 exchange rates for the remainder of the year. 2013. and certain costs that Zoetis expects to incur related to the potential separation. JOIN TODAY! www. Includes benefit of a full-year contribution from Zoetis except that earnings attributable to the 19. Reported diluted EPS guidance includes an additional $0. EPS guidance includes a $0. both recorded in 1Q13. Value-oriented Equity Investment Ideas for Sophisticated Investors PFIZER – SALES of TOP TEN DRUGS.manualofideas. PFIZER – ACTUAL PERFORMANCE versus PRIOR FINANCIAL GUIDANCE for 2012 (1) (2) Management delivered on guidance in 2012 (1) At mid-January 2013 exchange rates. including any one-time upfront payments associated with such transactions. 2013. Reflects a full-year contribution from Zoetis. 2013.com July 2013 – Page 77 of 117 . 2012. and excludes the potential effects of the resolution of litigation-related matters not substantially resolved as of March 31. (3) Adjusted for items deemed to be non-recurring. (3) Adjusted for certain items deemed by management to be non-recurring. Source: Presentation dated January 29. 2012. © 2008-2013 by BeyondProxy LLC.8% divested interest have been excluded from adjusted and reported diluted EPS guidance effective February 7. 2010-2012 Source: Company financial report for the year 2012. 2013. Source: Company presentation dated April 30. including any one-time upfront payments associated with such transactions. Reported diluted EPS guidance includes the gain associated with the transfer of certain product rights to the Pfizer-Hisun JV and an impairment charge. All rights reserved. (2) Does not assume the completion of any business development transactions not completed as of December 31.

952 2.77 22 P/E FYE 6/30/14 18x Enterprise value: $239.436 5.343 52.681 -22.53 0.996 38. except Fiscal Years Ended June 30.965 … % of revenue: Gross profit 50.06 0.234 1.640 19.063 66.9% 49.098 11.751 2.12 18 P/E FYE 6/30/15 17x Shares outstanding: 2.098 Long-term debt 35.694 77.702 3.6% 16.56 Shares out (avg) 3.354 68.979 15.495 15.343 -25.209 3.335 6.360 22.288 Adjusted net income 8.128 61.776 -22.202 1.341 21.191 Intangible assets 89.293 20.69 4.945 3.406 1.125 Preferred stock 1. Value-oriented Equity Investment Ideas for Sophisticated Investors Procter & Gamble (PG) – Berkshire. LTM EBIT yield 6% LTM pre-tax Institutional ownership: 60% 4/24/13 $0.172 47.245 41.7 billion Next quarter 1.410 15.652 13.377 21.715 42.237 3.681 EBIT/capital employed 72% 79% 74% 67% 76% 73% 59% 62% 66% 73% Ten-Year Stock Price Performance and Trading Volume Dynamics $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.375 13.0% 20.71 15 P / tangible book n/m Insider buys (last six months): 15 LT growth 7.0% 17.524 48.681 13.981 8.244 21.306 3.976 23.04 4.084 16.662 14. investments 7.540 20.01 3.33 26 EV/ LTM EBIT 16x Insider ownership: <1% FYE 6/30/15 4.667 2.5% 49.933 2.0% 49.291 6.000 89.570 -24.806 Tangible assets 46.740.648 90.629 6.804 2.366 1.451 1.920 14.901 2.159 3.0% 20.6% 52. LTME FQE FQE per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13 Revenue 64.406 62.7% 50. Yacktman.257 76.039 9.346 2.598 Gross profit 32.15 1.775 59.125 64.732 15.14 2.96 62% ROC Operating Performance and Financial Position ($ millions.28 1.581 20.957 10.262 86.manualofideas.698 11.25 0.325 Short-term debt 2.125 21.962 11.868 14. net 18.724 20.238 3.284 14.5% 20.525 41.128 12.770 19.652 21.931 Cash from operations 11.541 11.708 10.472 9.462 19.335 11.2% 50.321 3.63 4.416 72.416 6.669 Inventory 6.796 2.512 Adjusted diluted EPS 2.3% 50.com July 2013 – Page 78 of 117 .836 49.862 9.1% 19.8% Adjusted operating income 19.465 11.541 4.727 2.027 90.991 5.04 26 EV/ LTM revenue 2.324 1.680 83.567 81. Pershing Square.58 3.2% 50.992 45.384 21.04 4.195 1.761 5.556 3.240 7.008 14.143 Common equity 61.7% 7.669 6.441 79.2% 20.781 2.125 Tangible equity -27.668 47.033 21.485 15.806 86.115 10.862 Capex 2.081 2.277 1.99 $0. GMO Consumer Non-Cyclical: Personal & Household Products.997 15.024 9.104 83.19 4.275 6.080 21.330 13.872 -27.816 3.131 13.32 4.457 65.384 7.244 66.4% 16.200 6.80 1.320 10. Member of S&P 500 CINCINNATI OH www.964 3.725 6.54 Latest Ago Ests P/E FYE 6/30/13 19x Market value: $212.483 52.5% Cash.118 85.068 6.85 0.824 -25.067 3.07–$82.454 3.826 5.7% 4 Greenblatt Criteria Insider sales (last six months): 10 EPS Surprise Actual Est.876 Receivables 5.064 10.819 8.178 94.039 13. JOIN TODAY! www.320 8.413 14.488 10.61 3.879 2.761 86.549 37.pg.517 -20.501 11.325 48.97 2.8 million FYE 6/30/13 4.77 $0.239 7.12 1.2 billion This quarter $0.379 6.046 3.004 40.413 15.919 16.405 Adjusted pretax income 11.com Trading Data Consensus EPS Estimates Valuation Price: $77.182 84. Cap World.836 5.143 1.876 3.199 -20.595 41.240 PP&E.375 23.45 1.9x Ownership Data FYE 6/30/14 4.113 3.065 39.43 (as of 6/21/13) Month # of P/E FYE 6/30/12 25x 52-week range: $59.551 14.522 11.86 Dividend 1.3% 19.191 20.55 3.374 15. All rights reserved.727 883 897 Free cash flow 8.838 66.771 11.880 6.746 2.463 Adjusted operating income 12.5% 51.768 4.194 20.810 -23.64 1.337 2.721 7.885 14.

Head & Net margin by segment: Shoulders. including Gillette. ~13% share of the $300 Beauty 25% 25% 25% 24% 24% 24% billion beauty and grooming market.8 -3.Current liabilities -30.6 -5. Gillette. we do not consider the shares cheap at the recent trailing FCF yield of 5% and would wait for the inevitable performance hiccup before becoming shareholders.3 20. Crest.8 end of prior guidance).Cash.00 in FY13 (at high Adjusted EBIT 16. + Net fixed assets 20.3 22. Wella. All rights reserved.0 billion in 2010.9 23.7 63. making organic growth ST debt 26% 36% 20% 21% 18% 21% LT debt 47% 45% 50% 46% 44% 40% above the rate of GDP growth a challenge. Tangible equity -52% -60% -61% -49% -47% -40% Barriers to entry have come down in some niches. which has 70+% share of the global men’s blades and razors market.804 2.5 52. Baby and family care 18% 18% 19% 19% 20% 20% Charmin.805 as consumer preferences for natural and organic ∆ shares out (avg) -2% -4% -2% -3% -2% 2% products create an opportunity for new entrants (less 1 Adjusted for unusual items of -$2. Bounty.4 20. $784 million in 2008. Braun. Pampers.2 9.2 47. Duracell. P&G’s management talent and execution MANAGEMENT Capable and properly incentivized?  are likely to trump those of most local competitors. While other products may not have the attributes of the razor-and-blades model.5 = Return on capital employed 74% 67% 76% 73% 71% 70% • Organic sales rose 3% in FY12.6 14.6 -25. • P&G’s brands may hold less appeal in emerging RATINGS markets due to cultural differences. makes it likely that the company will retain market leadership in key consumer product categories for a long time to come.0 45.9 20.8 -30.2 20.3 23. $229 million in 2011.8 20.5 -4.7 15.2 The company is allocating $6 billion to repurchases . at the low end of Tangible assets ($bn) 50. and $1.1 up ~3% versus the prior year. Health care 17% 16% 16% 15% 15% 16% Snacks and pet care 8% 8% 10% 8% The latter contribute one-third of revenue. with net sales expected to be Current assets 24. net 41% 43% 45% 44% 43% 40% reinvest capital at high rates.8 INVESTMENT RISKS & CONCERNS Capital employed 21. up from 11% 12% Fabric and home care 14% 13% 14% 12% about 20% in 2000.4 15.manualofideas. Dawn.4 21. DOWNSIDE PROTECTION Low risk of permanent loss?  That said. Management is pursuing $10 billion Selected items as % of tangible assets: in savings to offset macro weakness.8 billion in 2009. Beauty 14% 14% 14% 13% 12% 14% Mach3. Net income (adjusted)1. P&G aims to reach five billion Baby and family care 12% 13% 14% 13% 13% 14% consumers by 2015. For example.6 billion in 2012. up from four billion currently.6 billion in 2012.3 76.3 20. while Cash. Gain. is finding it hard to PP&E.5 22. Fusion. coupled with a tradition of recruiting and grooming brand management talent from top universities.com July 2013 – Page 79 of 117 .4 9. and Pringles. Tide. Industry EBIT margin3 7% 8% 6% 7% 5% 7% Calculation of return on capital employed ($bn): • Guiding for core EPS of ~$4. YTD FYE June 30 2008 2009 2010 2011 2012 3/31/13 INVESTMENT HIGHLIGHTS ∆ revenue 9% -3% 1% 5% 3% 0% • Strong presence in consumer product markets.2 -3. Oral-B. P&G has ~20% share of the $200 billion Revenue ($bn) 79.9 -27. That said. $2.0 15.9 in FY13 and boosting the quarterly dividend by 7%.3 3-6% guidance. they generally have high and defensible market share. Selected items as % of revenue: • Aims to reach more consumers by extending core Gross profit 50% 50% 52% 51% 50% 51% EBIT (adjusted)1 20% 20% 20% 19% 19% 19% brands vertically and horizontally.2 14% 14% 14% 14% 14% 15% Gillette Fusion five-bladed razors are expanding the D&A 4% 4% 4% 3% 4% 3% category vertically into the premium-end.751 2. 2 Adjusted for nonrecurring items of the case in markets with low buying power).7 12.9 11. © 2008-2013 by BeyondProxy LLC.8 -26. investments 7% 10% 7% 6% 9% 11% consistently earning high ROIC. ∆ gross profit 8% -5% 7% 2% 1% 2% Globally. Forward P/E (end) 18x 17x 17x 21x 17x 18x Shares out (avg) (mn) 3.8 -2.952 2. FINANCIAL STRENGTH Solid balance sheet?  MAJOR HOLDERS MOAT Able to sustain high returns on invested capital?  Insiders <1% | FMR 2% | Berkshire 2% | T Rowe 1% | Cap EARNINGS MOMENTUM Fundamentals improving?  World 1% | Pershing Square 1% | Yacktman 1% | GMO <1% MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE P&G is home to many of the world’s best-selling branded consumer products. eliminations): household care market. 3 Personal & Household Products industry median. Iams.7 42. P&G’s brand and distribution strength. Health care 15% 15% 15% 15% 15% 15% • Owns 22 brands with $1+ billion in sales each. Potentially VALUE Intrinsic value materially higher than market value?  higher marketing needs could reduce profitability.5 15. Other LT liabilities 40% 44% 50% 44% 48% 45% • Competition from branded and private-label Preferred stock 3% 3% 3% 3% 3% 2% products. Always.2 + Short-term debt 12. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA Procter & Gamble (P&G) provides branded consumer goods.081 2. and ~5% share Grooming 10% 10% 10% 10% 10% 9% of the $240 billion consumer healthcare market.1 19. Snacks and pet care 4% 4% 4% 4% 33% 32% Fabric and home care 30% 30% 30% 30% comprised of Ariel. . while Capex 4% 4% 4% 4% 5% 4% Febreze candles exemplify horizontal extension by Industry gross margin3 51% 50% 49% 49% 50% 48% adding an adjacent product line to the odor remover. P&G. Grooming 20% 18% 19% 20% 22% 24% • Exploiting opportunities in developing markets. Olay.4 22.1 20.5 48. Pantene. also an improvement.1 -26. JOIN TODAY! www. Wal-Mart accounts for 16% of revenue.3 9.901 2. Downy. ST investments -4.5 % of revenue by segment (ex.1 83.7 77. $2.7 21.6 81.

708 n/m 5% 5% 5% 6% 35% 664 0% 2% 50% 18% Abbreviations: MV = market value | EV = enterprise value | LTM = last twelve months | FY = fiscal year | empl. 2014 ▼ ▼ ▼ TTM net sales: $84 billion Consensus FY14E EPS: $4.36 three months ago. LTM EPS Yield LTM Rev.699 227. 2013 and average estimate for the fiscal year ending June months ended March 31. JOIN TODAY! www. Value-oriented Equity Investment Ideas for Sophisticated Investors PROCTER & GAMBLE – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Based on revenue for the twelve months Based on median consensus EPS Based on free cash flow for the twelve ended March 31.32 (§) Operating cash flow: $14 billion multiplied by minus minus Average 7-year EBIT margin: 19. ST investments: $5. = employee | rev. Source: Company filings.7 billion shares out) 25% upside to the recent stock price ($77 per share) 2% upside to the recent stock price ($77 per share) (*) Represents Personal & Household Products median.manualofideas. Last Gross Adj.5% (*) 10. % LTM Rev. stock price ($77 per share) (§) The FY14 consensus EPS estimate of $4./ ∆ Rev.719 n/m 1% 5% 6% 6% 55% 389 101% 140% n/m 14% Procter & Gamble / PG -49% 7% 212.1% required FCF yield) equals (17. © 2008-2013 by BeyondProxy LLC. or $50 per share equity of Procter & Gamble: $265 billion./ Empl. Low High ($mn) ($mn) MV Yield LTM FY FY EV ($000) LTM Q Profit EBIT Clorox / CLX -45% 9% 10.218 239. 2013 EBIT margin for past seven fiscal years 30.7% Assumed upside/downside to Capex: $3. = adjusted | ∆ = change Explanations: ∆ revenue represents year-over-year change in revenue | EPS yield for this and next FY is based on consensus EPS estimates | EBIT is adjusted for certain unusual items PROCTER & GAMBLE – MANAGEMENT’S UPDATED OUTLOOK for FY2013 P&G continues to execute well amid unimpressive top- line growth * Initial guidance did not include Venezuelan Bolivar devaluation. The Manual of Ideas. PROCTER & GAMBLE – ANALYSIS OF SELECTED COMPARABLE COMPANIES Trading Data Public Market Valuation Operating Performance (Click to visit ∆ to Reach Tang.011 n/m 5% 5% 5% 6% 43% 669 4% 1% 43% 17% Colgate Palmolive / CL -53% 10% 52. or $97 per share (based on 2.923 7% 5% 4% 7% 7% 30% 538 6% 8% 67% 32% Kimberly-Clark / KMB -55% 11% 36.873 13.756 3% 6% 5% 6% 6% 49% 364 0% 1% 33% 14% Unilever / UN -56% 11% 117.0x Corresponding industry P/E: 15. relevant websites) 7-Year MV EV Book/ FCF This Next Rev.32 has been revised down by 1% from $4.54 divided by Assumed fair value multiple of EBIT: multiplied by Industry median FCF yield: 4.32 equals Estimated EBIT: $17 billion equals Free cash flow: $11 billion multiplied by Revised FY14 EPS estimate: $4.837 42. All rights reserved.1x (*) equals equals equals Industry FCF yield-implied fair value: Estimated fair enterprise value of Industry multiple-implied fair value: $238 billion ($87 per share) Procter & Gamble: $165 billion $188 billion ($69 per share) multiplied by plus multiplied by Assumed required FCF yield as a Cash. = revenue | tang.7 billion shares out) $216 billion ($79 per share) (based on 2.9 billion Assumed PG multiple as a percentage of the industry FCF yield: minus percentage of the industry multiple: 90% Total debt: $33 billion 115% (4.250 n/m 5% 4% 5% 6% 30% 456 2% 3% 58% 22% Johnson & Johnson / JNJ -44% 8% 233.4x fair value P/E multiple) equals Estimated fair value of the common equals Estimated fair value of the common equity of Procter & Gamble: Estimated fair value of the common equity of Procter & Gamble: $138 billion.989 57.7 billion shares out) 35% downside from the recent (based on 2.com July 2013 – Page 80 of 117 .145 122. = tangible | adj. Source: Company presentation dated June 2013.7 billion equals FY14 EPS estimate: 5% * $4.

All rights reserved. © 2008-2013 by BeyondProxy LLC. JOIN TODAY! www. Source for the above tables and charts: Company presentation dated June 2013. ** Excludes food businesses. Value-oriented Equity Investment Ideas for Sophisticated Investors P&G: Struggling to match global GDP growth… PROCTER & GAMBLE – ORGANIC SALES GROWTH EXPECTATIONS for FY2013 PROCTER & GAMBLE – MANAGEMENT’S CALCULATION of PROJECTED CORE EPS “Core” EPS should keep growing in the low to mid single digits PROCTER & GAMBLE – COMPARATIVE EXPOSURE to DEVELOPING MARKETS P&G’s relatively large exposure to emerging markets is not quite evident from the company’s overall growth figures PROCTER & GAMBLE – COMPARATIVE BREAKDOWN of SALES into DEVELOPED versus DEVELOPING MARKETS Unilever and Colgate may have more potential for incremental emerging markets growth than does P&G * Expected sales at the end of FY2013.manualofideas.com July 2013 – Page 81 of 117 .

com Trading Data Consensus EPS Estimates Valuation Price: $33.9% 41.84 0.051 11.071 3.26 0.107 11.355 8.033 6.049 11.6% 9.9% 10.071 7.164 2.4% 40.46 $0.5% 10.4% 11.355 3.53 0.199 8.92 1.332 1.767 1.603 -3.51 9 P/E FYE 12/31/15 14x Shares outstanding: 361.033 Tangible equity -172 -278 -3.599 334 420 Capex 327 293 387 826 795 937 904 844 274 215 Free cash flow 185 369 125 570 639 830 610 755 60 205 … % of revenue: Gross profit 37.568 7.107 8.176 3.193 8.8% 11. JOIN TODAY! www.0% 20.38 2.104 1.45 (as of 6/21/13) Month # of P/E FYE 12/31/12 22x 52-week range: $25.058 214 210 Adjusted operating income 520 536 369 1. Artisan Services: Waste Management Services.50 $0.3x Ownership Data FYE 12/31/14 2.3% 38.947 6.0 billion Next quarter 0. investments 29 22 69 48 88 66 68 130 74 130 Receivables 318 322 996 922 944 949 945 874 852 874 LT investments 0 10 57 45 34 32 78 69 91 69 PP&E.397 1.804 -3.495 8.50 9 P/E FYE 12/31/14 16x Enterprise value: $19.90 2.1% 9. Value-oriented Equity Investment Ideas for Sophisticated Investors Republic Services (RSG) – Cascade.93 1.999 Gross profit 1.22 0.6% 10.40 0.109 779 776 D&A 296 306 354 870 834 844 849 1. net 2.36 Dividend 0. Sentry.6% 10.167 11.300 -3.910 6.373 8.9% 34.2% 40.117 948 915 223 190 Adjusted net income 280 290 159 734 712 800 696 827 143 131 Adjusted diluted EPS 1.4% 16.92 9 EV/ LTM revenue 2.553 1.594 1.172 1.5% 13.93 0.599 Debt 1.manualofideas.81 1.0% D&A 9.5% Capex 10.0% 10.434 1.9% 16.040 11.963 6.836 2.7% Cash.905 7.922 7.658 6.792 6.com July 2013 – Page 82 of 117 .8% 10.11 2.308 EBIT/capital employed 27% 28% 7% 25% 23% 22% 19% 20% 23% 18% Ten-Year Stock Price Performance and Trading Volume Dynamics $40 $35 $30 $25 $20 $15 $10 $5 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.0% 16.4% 5.308 -3.582 11.15–$35.836 8.24 Shares out (avg) 198 190 197 380 383 376 367 366 371 363 Cash from operations 511 661 512 1.5% 14.695 1. Member of S&P 500 PHOENIX AZ republicservices.3% 38.982 1.703 6.268 3.41 LTM pre-tax ROC 20% Operating Performance and Financial Position ($ millions.375 -3.086 11.3% 10.3% 10.11 11 EV/ LTM EBIT 15x Insider ownership: <1% FYE 12/31/15 2.4% 13.568 8.699 6.4% 17.2% 39.405 8.164 6.1% 10. LTM EBIT yield 7% Institutional ownership: 95% 4/25/13 $0.118 8.4% 2 Greenblatt Criteria Insider sales (last six months): 7 EPS Surprise Actual Est.7% 19.51 0.813 6.78 0. LTME FQE FQE per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13 Revenue 3.146 1.345 -3.91 0.35 3 P / tangible book n/m Insider buys (last six months): 6 LT growth 5.113 3.886 8.260 -3.1 billion This quarter $0.414 327 279 Adjusted pretax income 444 468 245 1.72 0.6% 38.6% 9.3% 36.738 6.040 Tangible assets 2.547 1.514 1.599 8.685 8.9 million FYE 12/31/13 1.6% 9.76 0.86 2.8% Adjusted operating income 16.328 3.28 Latest Ago Ests P/E FYE 12/31/13 17x Market value: $12. Sasco.057 11.39 0.083 1.41 1.5% 19.744 6.947 Intangible assets 1.2% 10. Cap Re. except Fiscal Years Ended December 31.55 0.584 1.135 1.342 3.8% 10. All rights reserved. Franklin.13 1.

MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE Republic Services became the second-largest waste management company in the U. Municipal authorities and private West 36% 38% 38% 38% 39% 40% firms control about 22% and 19% of the market. RATINGS Index-based price increases may hurt margins in an VALUE Intrinsic value materially higher than market value?  inflationary environment. predictable free cash flow.599 Selected items as % of tangible assets: volume.86-1. INVESTMENT RISKS & CONCERNS 1 Adjusted for unusual items of -$86 million in 2008. as price adjustments lag DOWNSIDE PROTECTION Low risk of permanent loss?  by 12-18 months and CPI may understate inflation. Garbage is collected in all times.796 -1. shareholder-friendly manner.Current liabilities -1. ∆ revenue 16% 122% -1% 1% -1% 1% ∆ gross profit 8% 164% 0% 0% -6% 0% INVESTMENT HIGHLIGHTS Employees (end) (‘000) 35 31 30 30 30 n/a Revenue ($mn) 3.and mid-size Central 17% 22% 23% 22% 20% 19% (35% of revenue) and franchise markets (26%).118 1.264 6.S. residential/ Net income (adjusted)1 4% 9% 9% 10% 9% 7% municipal. 191 active landfills. with ~14% market % of net revenue by major segment: share of the $55 billion non-hazardous solid waste East 33% 32% 31% 31% 30% 30% services industry. run in a “clean”. Shares out (avg) (mn) 197 380 383 376 367 363 Adjusted EPS is estimated at $1.685 8.256 1. Leader Waste Management has Central 31% 30% 29% 30% 30% 29% about 23% share.7 million in 1Q13.193 8.695 1. respectively. and 70 Gross profit 34% 41% 41% 41% 38% 39% EBIT (adjusted)1 10% 21% 20% 19% 16% 14% recycling facilities. Flat landfill volumes are helped by recycling and other volumes.91 in 2013.107 8.199 8.373 8. + Net fixed assets 4. and industrial customers accounted for D&A 10% 11% 11% 10% 11% 11% 40%. Current assets 870 1. Republic owns or operates Selected items as % of revenue: 196 transfer stations.295 1.000 homes per truck.227 raising productivity by 800-1. including FYE December 31 2008 2009 2010 2011 2012 1Q13 collection and disposal of non-hazardous solid waste.S. Management ST debt 6% 6% 11% 0% 0% 0% expects adjusted FCF of $675-700 million in 2013. Mgmt <1% | Cascade 24% | FMR 3% | Sentry 2% | Franklin • Contractual pricing restrictions apply to one-half 2% | Sasco 2% | Cap Re 2% | Artisan 1% | Sound Shore 1% of revenue. JOIN TODAY! www. and an expanding Sale of recyclables. the lack of growth makes the current period FCF yield of 5-6% un-compelling.394 revenue has an annuity-type profile.745 6.249 1.836 8. -$124 million in 2012. performed under multi. and 25% of collection revenue in 2012.597 -2. Capex 10% 10% 10% 11% 11% 11% • Ongoing efficiency improvements. following the acquisition of Allied Waste in late 2008.S. Operating margin by major segment: East 5% 23% 23% 22% 19% 19% RSG is especially strong in small. 80% of Capital employed 3. -$239 million in 2009. Only 9% of the Industry gross margin2 28% 32% 36% 30% 29% 24% Industry EBIT margin2 2% 6% 7% 2% -1% 0% fleet uses natural gas. 35%.568 8.932 5. MAJOR HOLDERS Commercial and industrial volumes are cyclical. other 4% 5% 6% 7% 6% 6% recycling infrastructure. Population = Return on capital employed 9% 29% 27% 25% 21% 17% growth and business formation are key drivers of Tangible assets ($mn) 8. % of net revenue by service line: • Vertically integrated national platform. ST investments -45 -58 -68 -77 -67 -99 .901 5. EBITDA FINANCIAL STRENGTH Solid balance sheet?  margin approaches that of Waste Management.698 6. with a Collection 78% 77% 76% 75% 77% 78% Transfer 6% 6% 5% 5% 5% 5% modern fleet.332 279 routes have been converted to an “automated” fleet. Nonetheless.584 1. Volume growth is in the 2 Waste Management Services industry median. limiting RSG’s ability to raise prices.553 1.manualofideas.287 -1. ∆ shares out (avg) 3% 93% 1% -2% -2% -2% * The company acquired Allied Waste Industries effective December 2008.613 -2. PP&E. with incremental fuel savings Calculation of return on capital employed ($mn): likely as conversion continues. . Financially strapped municipalities may Cash.685 • Non-discretionary service.094 6.451 6. MANAGEMENT Capable and properly incentivized?  • Limited margin expansion potential.355 8. Commercial. low-single digits in normal times.929 though there is less of it in bad times. net 76% 80% 80% 80% 81% 81% • Strong. Republic EARNINGS MOMENTUM Fundamentals improving?  has responsibility for about 128 closed landfills.964 6. The larger Republic has benefited from industry consolidation. -$211 million in 2011. Major U.256 1.com July 2013 – Page 83 of 117 . investments 1% 1% 1% 1% 1% 2% increasingly favor privatization opportunities. -$206 million in 2010. barriers to entry. long-lived landfill network (80% of Landfill 12% 12% 12% 12% 12% 11% sites have lives of 10+ years).495 8. • Low-growth business. in West 17% 27% 24% 23% 22% 22% which it is either the leader or exclusive provider.Cash.6 billion of environmental liabilities. All rights reserved. © 2008-2013 by BeyondProxy LLC.557 -2.678 6. 63% of residential Adjusted EBIT 369 1. waste management firms are rightly regarded as good businesses. LT debt 81% 77% 70% 81% 82% 81% Tangible equity -43% -43% -39% -40% -39% -38% of which $320 million and $340 million will be Forward P/E (end) 19x 21x 19x 18x 15x 17x allocated to repurchases and dividends. + Short-term debt 253 524 711 457 27 22 year contracts. and non-discretionary nature of services provided. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA * Republic provides waste management services. and -$6. MOAT Able to sustain high returns on invested capital?  • $1.999 • #2 garbage hauler in the U.851 6.

Value-oriented Equity Investment Ideas for Sophisticated Investors

REPUBLIC SERVICES – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative Base Case Aggressive
Based on revenue for the twelve months Based on median consensus EPS
Based on free cash flow for the twelve
ended March 31, 2013 and average estimate for the fiscal year ending
months ended March 31, 2013
EBIT margin for past seven fiscal years December 31, 2014
▼ ▼ ▼
TTM net sales: $8.1 billion Consensus FY14E EPS: $2.11 (§) Operating cash flow: $1.6 billion
multiplied by minus minus
Average 7-year EBIT margin: 17.1% Assumed upside/downside to Capex: $840 million
equals FY14 EPS estimate: 5% * $2.11 equals
Estimated EBIT: $1.4 billion equals Free cash flow: $760 million
multiplied by Revised FY14 EPS estimate: $2.21 divided by
Assumed fair value multiple of EBIT: multiplied by Industry median FCF yield: 4.0% (*)
10.0x Corresponding industry P/E: 16.7x (*) equals
equals equals Industry FCF yield-implied fair value:
Estimated fair enterprise value of Industry multiple-implied fair value: $19 billion ($52 per share)
Republic Services: $14 billion $13 billion ($37 per share) multiplied by
plus multiplied by Assumed required FCF yield as a
Cash, ST investments: $130 million Assumed RSG multiple as a percentage of the industry FCF yield:
minus percentage of the industry multiple: 95%
Total debt: $7.0 billion 110% (3.8% required FCF yield)
equals (18.4x fair value P/E multiple) equals
Estimated fair value of the common equals Estimated fair value of the common
equity of Republic Services: Estimated fair value of the common equity of Republic Services:
$7.0 billion, or $19 per share equity of Republic Services: $20 billion, or $55 per share
(based on 360 million shares out) $15 billion ($41 per share) (based on 360 million shares out)
42% downside from the recent (based on 360 million shares out) 64% upside to the recent
stock price ($33 per share) 22% upside to the recent stock price ($33 per share)
(*) Represents Waste Management Services median. stock price ($33 per share)
(§) The FY14 consensus EPS estimate of $2.11 has been revised down by 0% from $2.11 three months ago. Source: Company filings, The Manual of Ideas.

REPUBLIC SERVICES – ANALYSIS OF SELECTED COMPARABLE COMPANIES
Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) 7-Year MV EV Book/ FCF This Next Rev./ Empl. Last Gross Adj. Tang.
Low High ($mn) ($mn) MV Yield LTM FY FY EV ($000) LTM Q Profit EBIT Assets
Waste Connections / WCN -66% 3% 4,978 7,187 n/m 6% 3% 4% 5% 24% 263 12% 20% 43% 20% -9%
Waste Management / WM -45% 8% 18,616 28,318 n/m 5% 4% 5% 6% 48% 315 1% 1% 64% 28% -3%
Republic Services / RSG -55% 9% 12,106 19,009 n/m 6% 5% 6% 6% 43% 271 -1% 1% 38% 17% -38%
Abbreviations: MV = market value | EV = enterprise value | LTM = last twelve months | FY = fiscal year | empl. = employee | rev. = revenue | tang. = tangible | adj. = adjusted | ∆ = change
Explanations: ∆ revenue represents year-over-year change in revenue | EPS yield for this and next FY is based on consensus EPS estimates | EBIT is adjusted for certain unusual items

REPUBLIC SERVICES – CALCULATION of ADJUSTED EPS and FREE CASH FLOW, 2012-2013E

FCF is expected to
decline modestly in
2013 even as EPS
creeps higher

Source: Company presentation dated June 2013.

© 2008-2013 by BeyondProxy LLC. All rights reserved. JOIN TODAY! www.manualofideas.com July 2013 – Page 84 of 117

Value-oriented Equity Investment Ideas for Sophisticated Investors

REPUBLIC SERVICES – REVENUE by BUSINESS, 2012 REPUBLIC SERVICES – REVENUE by MARKET TYPE, 2012

REPUBLIC SERVICES – PROFIT SENSITIVITY to CHANGES in COMMODITY and FUEL PRICES

REPUBLIC SERVICES – COMPANY VOLUME versus SINGLE FAMILY UNITS (one year lag; percentage change)

As housing picks up,
Republic Services
should see
increasing volumes

Source for the above charts: Company presentation dated June 2013.

© 2008-2013 by BeyondProxy LLC. All rights reserved. JOIN TODAY! www.manualofideas.com July 2013 – Page 85 of 117

Value-oriented Equity Investment Ideas for Sophisticated Investors

Stratasys (SSYS) – Kornitzer, Primecap, Samson, Tiger Tech, Turner, Wells
Technology: Computer Peripherals REHOVOT, Israel www.stratasys.com
Trading Data Consensus EPS Estimates Valuation
Price: $82.15 (as of 6/21/13) Month # of P/E FYE 12/31/12 >99x
52-week range: $43.68–$94.90 Latest Ago Ests P/E FYE 12/31/13 43x
Market value: $3.2 billion This quarter $0.44 $0.44 10 P/E FYE 12/31/14 33x
Enterprise value: $3.0 billion Next quarter 0.48 0.48 10 P/E FYE 12/31/15 29x
Shares outstanding: 38.5 million FYE 12/31/13 1.91 1.91 11 EV/ LTM revenue 11.3x
Ownership Data FYE 12/31/14 2.46 2.46 11 EV/ LTM EBIT 1160x
Insider ownership: <1% FYE 12/31/15 2.88 2.88 2 P / tangible book 12.9x
Insider buys (last six months): 0 LT growth 30.5% 30.5% 1 Greenblatt Criteria
Insider sales (last six months): 0 EPS Surprise Actual Est. LTM EBIT yield 0%
Institutional ownership: 70% 5/13/13 $0.43 $0.38 LTM pre-tax ROC 2%

Operating Performance and Financial Position
($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13
Revenue 104 112 125 99 118 156 215 268 45 97
Gross profit 51 60 66 46 56 82 110 125 23 37
R&D 7 8 9 8 10 14 20 26 4 11
Adjusted operating income 16 18 21 6 13 30 27 12 7 -17
Adjusted net income 11 14 14 4 9 21 18 10 5 -16
Adjusted diluted EPS 0.55 0.69 0.68 0.20 0.46 1.00 0.79 0.37 0.21 -0.41
Shares out (avg) 20 21 21 20 21 21 23 27 21 38
Cash from operations 12 21 15 26 22 23 2 -18 7 -12
Capex 8 14 11 4 9 17 15 17 3 5
Free cash flow 5 7 4 22 13 5 -14 -35 4 -18
… % of revenue:
Gross profit 49.5% 53.2% 53.3% 46.9% 47.5% 52.9% 51.2% 46.5% 51.1% 38.5%
R&D 6.5% 6.7% 7.2% 7.8% 8.3% 9.2% 9.2% 9.8% 9.8% 11.1%
Adjusted operating income 15.0% 16.4% 16.9% 5.9% 11.4% 19.0% 12.4% 4.5% 16.2% -17.2%
Cash, investments 37 47 37 68 40 38 159 146 46 146
Receivables 25 26 27 19 20 25 76 72 28 72
Inventory 10 13 20 15 18 23 68 66 22 66
LT investments 14 22 20 10 57 38 10 10 35 10
PP&E, net 20 27 30 26 30 40 62 64 42 64
Intangible assets 6 8 8 8 6 51 1,333 1,320 50 1,320
Tangible assets 112 141 139 145 172 171 399 395 178 395
Debt 0 0 0 0 0 0 0 0 0 0
Tangible equity 92 116 114 122 146 133 239 246 139 246
TBV / tangible assets 82% 82% 82% 84% 85% 77% 60% 62% 78% 62%
TBV per share 4.55 5.57 5.53 6.02 7.09 6.27 10.47 6.39 6.54 6.39
EBIT/capital employed 40% 44% 41% 12% 29% 50% 17% 2% 51% -37%

Ten-Year Stock Price Performance and Trading Volume Dynamics

$100

$90

$80

$70

$60

$50

$40

$30

$20

$10

$0
Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13

© 2008-2013 by BeyondProxy LLC. All rights reserved. JOIN TODAY! www.manualofideas.com July 2013 – Page 86 of 117

With 3D printing applications on the rise in both enterprise and consumer markets.com July 2013 – Page 87 of 117 . Stratasys grows high-margin. Management projects stock comp of $20. -$0. Stratasys enables Services 21% 25% 21% 18% 16% 16% designers and manufacturers to create concept Gross margin by type: models and prototypes cost-effectively. % of revenue by geography: • Large professional market opportunity. as the company came from behind to unseat 3D Systems. In this innovation-driven Forward P/E (end) 54x 39x 34x 84x 42x 36x market. intangibles Tangible assets ($mn) 139 145 172 171 399 395 Selected items as % of tangible assets: amortization. The % of revenue by type: company has 1. 260 resellers and Products 79% 75% 79% 82% 84% 84% agents. Total current liabilities 18% 16% 14% 17% 24% 21% Debt 0% 0% 0% 0% 0% 0% it is impossible to forecast how the competitive Tangible equity 82% 84% 85% 77% 60% 62% landscape will evolve. and merger expenses. The financial attractiveness of the long-term ∆ shares out (avg) 0% -2% 2% 3% 8% 81% 1 Unusual items of -$0. and 16-21% net margin. ∆ product revenue 15% -25% 32% 31% 41% 118% ∆ services revenue 16% -1% 1% 12% 25% 108% INVESTMENT HIGHLIGHTS ∆ total revenue 11% -20% 19% 32% 38% 116% • Leader in professional 3D printing systems. net 21% 18% 17% 23% 16% 16% • Uncertain evolution of 3D printing market. .000 units sold through 1Q13 (cumulative). Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA Stratasys provides 3D printers and production systems for FYE December 31 2008 2009 2010 2011 2012 1Q13 rapid prototyping and manufacturing applications. .Cash. we find that the market’s value appraisal (2-3% adjusted EPS yield) fully reflects the positive outlook. Deferred revenue. as there North America 54% 56% 53% 53% 53% n/a are five million 3D mechanical computer-aided Europe 30% 27% 28% 32% 29% n/a design (CAD) seats. Sales Products 52% 44% 48% 52% 52% 40% Services 59% 56% 55% 58% 48% 30% outside of North America are one-half of the total. 3D printing is an Asia Pacific 15% 16% 17% 14% 16% n/a Other 1% 1% 2% 1% 1% n/a underpenetrated market. As a result. Capex 9% 4% 8% 11% 7% 5% recurring consumables and service revenue. VALUE Intrinsic value materially higher than market value?  23 million. business model is also highly uncertain. respectively. Inventory 14% 10% 10% 13% 17% 17% LT investments 14% 7% 33% 22% 2% 2% INVESTMENT RISKS & CONCERNS PP&E.Current liabilities -25 -24 -24 -27 -62 -89 + Short-term debt 0 0 0 0 0 0 • Guiding for adjusted EPS of $1. and M&A DOWNSIDE PROTECTION Low risk of permanent loss?  expenses of $7-9 million in 2013. It did so by building a distribution network that became more valuable as 3D equipment prices fell over time. fueling share gains. Stratasys appears well-positioned to take advantage of industry growth. and -$9.200 employees. with ∆ gross profit 11% -30% 21% 47% 34% 63% Revenue ($mn) 125 99 118 156 215 97 31.5 million in 2008.49 and $359 million. Management’s Cash. D&A 6% 8% 8% 7% 9% 30% As unit sales grow. with ~50.95 in 2013. The two Current assets 88 97 95 89 208 320 companies have cross-trained 112 resellers. EBIT (adjusted)1 17% 6% 11% 19% 12% -17% Net income (adjusted)1 11% 4% 8% 14% 8% -16% • Attractive model. 20. investments 26% 47% 23% 22% 40% 37% long-term targets include 20+% revenue growth. as the industry remains immature. with strong cash generation.6 million in 2011. FINANCIAL STRENGTH Solid balance sheet?  NOTABLE HOLDERS MOAT Able to sustain high returns on invested capital?  CEO Reis 2% | Chairman Crump 1% | Samson 11% | AGM EARNINGS MOMENTUM Fundamentals improving?  8% | FMR 2% | Primecap 1% | Tiger Tech 1% | Kornitzer 1% MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE Stratasys has become the leader in 3D printing. • Reporting GAAP losses. even as adjusted EPS is RATINGS positive. Stratasys may become less competitive over Shares out (avg) (mn) 21 20 21 21 23 38 time. All rights reserved. The Calculation of return on capital employed ($mn): company has 550+ patents and patents pending. other 13% 13% 10% 12% 15% 15% While Stratasys appears well-positioned at present. amortization of $60 million. it is difficult to forecast how the moat will evolve. and 8.5 million in 2012.80-1. ST investments -42 -52 -54 -39 -99 -153 representing 54% of dealers and 80% of sales.000+ customers. = Return on capital employed 42% 12% 29% 51% 27% -47% Adjusted income excludes stock comp. Stratasys also found ways to create a recurring stream of consumables revenue.000 commercial Selected items as % of revenue: 3D systems sold. similar to the ink cartridge franchises in traditional printing. © 2008-2013 by BeyondProxy LLC. However. JOIN TODAY! www. + Net fixed assets 28 28 28 35 51 63 based on revenue of $430-445 million (up from Capital employed 50 49 46 58 99 142 $1. These items push MANAGEMENT Capable and properly incentivized?  GAAP net income to a loss of $6-16 million in ‘13. in 2012). Management sees opportunity for Gross profit 53% 47% 48% 53% 51% 38% “20%+ top line with bottom-line leverage. and growing. Receivables 19% 13% 12% 14% 19% 18% 25% operating margin.” Unit R&D 7% 8% 8% 9% 9% 11% sales rose 29% while sales grew 30% in 2012. Reported operating income 21 6 13 29 17 -17 + non-recurring items 1 0 0 1 10 0 • Merger with Objet brings together complementary Adjusted EBIT 21 6 13 30 27 -17 3D printing products and technology.manualofideas.

2014 December 31.59 Revised FY14 EPS estimate: $2.8x (*) Corresponding industry P/E: 12.0 billion ($78 per share) (based on 38 million shares out) (based on 38 million shares out) (based on 38 million shares out) 50% downside from the recent 33% downside from the recent 5% downside from the recent stock price ($82 per share) stock price ($82 per share) stock price ($82 per share) (*) Represents Computer Peripherals industry median multiple.46 (§) minus minus minus Assumed upside/downside to Assumed upside/downside to Assumed upside/downside to FY13 EPS estimate: -5% * $1.46 equals equals equals Revised FY13 EPS estimate: $1. Source: Company filings.0x fair value P/E multiple) (21.89 three months ago.91 has been revised upward by 1% from $1. © 2008-2013 by BeyondProxy LLC. 2013 December 31.46 FY14 EPS estimate: 5% * $2.2x fair value P/E multiple) (30.91 (‡) Consensus FY14E EPS: $2.46 has been revised down by 1% from $2. The Manual of Ideas analysis.91 FY14 EPS estimate: 5% * $2.com July 2013 – Page 88 of 117 . All rights reserved. (‡) The FY13 consensus EPS estimate of $1.59 multiplied by multiplied by multiplied by Corresponding industry P/E: 13. (§) The FY14 consensus EPS estimate of $2.1x (*) equals equals equals Industry multiple-implied fair value: Industry multiple-implied fair value: Industry multiple-implied fair value: $960 million ($25 per share) $1.1x (*) Corresponding industry P/E: 12.manualofideas. JOIN TODAY! www.1 billion ($55 per share) $3.49 three months ago.81 Revised FY14 EPS estimate: $2.6 billion ($41 per share) $2.2 billion ($31 per share) $1.46 (§) Consensus FY14E EPS: $2. STRATASYS – MANAGEMENT’S FINANCIAL OUTLOOK for 2013 Source: Company presentation dated May 2013. Value-oriented Equity Investment Ideas for Sophisticated Investors STRATASYS – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Valuation methodology: Valuation methodology: Valuation methodology: Based on median consensus EPS Based on median consensus EPS Based on median consensus EPS estimate for the fiscal year ending estimate for the fiscal year ending estimate for the fiscal year ending December 31.3x fair value P/E multiple) equals equals equals Estimated fair value of the common Estimated fair value of the common Estimated fair value of the common equity of Stratasys: equity of Stratasys: equity of Stratasys: $1.2 billion ($31 per share) multiplied by multiplied by multiplied by Assumed SSYS multiple as a Assumed SSYS multiple as a Assumed SSYS multiple as a percentage of the industry multiple: percentage of the industry multiple: percentage of the industry multiple: 165% 175% 250% (20. assumptions and estimates. 2014 ▼ ▼ ▼ Consensus FY13E EPS: $1.

Value-oriented Equity Investment Ideas for Sophisticated Investors STRATASYS – 3D PRINTING PRODUCT SPECTRUM STRATASYS – THREE DISTINCT and COMPLEMENTARY 3D PRINTING TECHNOLOGIES Source: Company presentation dated May 2013. JOIN TODAY! www. © 2008-2013 by BeyondProxy LLC.com July 2013 – Page 89 of 117 .manualofideas. All rights reserved.

264 4.54 16 P/E FYE 9/30/15 13x Shares outstanding: 464.501 3.507 1.15 2.149 4.717 -234 134 … % of revenue: Gross profit 34.722 1.591 2.331 2.462 4. LTME FQE FQE per share data) 2006 2007 2008 2009 2010 2011 2012 3/29/13 3/30/12 3/29/13 Revenue 17.062 11.21 Dividend 1.3% 8. Iridian.413 670 836 881 1.084 14.2% 3 Greenblatt Criteria Insider sales (last six months): 11 EPS Surprise Actual Est.51 2. Dodge & Cox.994 4.6% Cash. LTM EBIT yield 5% Institutional ownership: 89% 4/26/13 $0.544 2.1 billion Next quarter 0.41 (as of 6/21/13) Month # of P/E FYE 9/30/12 n/m 52-week range: $24.48 $0.714 14.260 6.90 0.84 1.663 14.90 0.7% 36.882 11.491 1.75 1. Switzerland www.837 908 935 Adjusted operating income 1.504 14.492 Common equity 35.844 6. MFS.186 1.9% 35.9% 8.622 1.986 2.472 1.493 1.894 1.958 Tangible assets 48.8% 34.080 13.2% 35.0 million FYE 9/30/13 1.387 15.098 1.608 1.783 1.419 1.48 16 P/E FYE 9/30/14 15x Enterprise value: $16.074 437 471 317 9 154 96 Adjusted diluted EPS 1.421 2.349 2. Threadneedle Conglomerates: Conglomerates.tyco.719 7.7% 35.3% 9.0% 10.86 0.365 11. JOIN TODAY! www.748 2.983 5.709 2.80–$34.624 4.com Trading Data Consensus EPS Estimates Valuation Price: $32.354 1.8% 5.557 1.245 378 404 434 440 102 108 Free cash flow 4.900 2.702 12.020 10.54 0.188 4.com July 2013 – Page 90 of 117 .988 18. investments 2.649 Inventory 1.60 1.157 -132 242 Capex 929 1.2% 35.574 -890 2.14 17 EV/ LTM EBIT 18x Insider ownership: <1% FYE 9/30/15 2.152 14.061 9.187 6.714 Tangible equity 21.637 1.manualofideas.775 1.149 427 618 690 231 189 104 Adjusted net income 881 692 1.649 2.088 248 145 Adjusted pretax income 1.941 14. Member of S&P 500 SCHAFFHAUSEN.9% Adjusted operating income 8.494 12.5x Ownership Data FYE 9/30/14 2.4% 6.198 1.437 4.194 1.8% 8.403 10.668 4.370 1.066 18.193 1.106 1. ClearBridge. Value-oriented Equity Investment Ideas for Sophisticated Investors Tyco (TYC) – Citadel.616 3.2% 33.484 2.5% 10.229 844 430 1.542 2.105 21.493 3.878 13.1% 7.777 3.877 1.300 11.624 15.278 3.443 539 634 654 1.526 3.02 0.080 Total assets 63.670 1.33 0.364 1.140 1.99 0.086 430 Receivables 2.667 3.156 1.519 2.27 0.51 7 P / tangible book n/m Insider buys (last six months): 11 LT growth 16. except Fiscal Years Ended September 28.340 782 897 783 1.176 2.804 25.208 6.449 2.609 1.557 10.2% 16.156 2.668 Intangible assets 14.958 27.608 Gross profit 5.326 783 Debt 9.441 1.157 5.84 0.82 Latest Ago Ests P/E FYE 9/30/13 18x Market value: $15.477 19.99 0.562 4.075 1.953 6.815 28.166 -163 -366 687 -366 TBV / tangible assets 44% 8% 8% 11% 8% 42% -2% -5% 5% -5% EBIT/capital employed 4% -10% 35% -30% 11% 11% 3% 24% 19% 24% Ten-Year Stock Price Performance and Trading Volume Dynamics $40 $35 $30 $25 $20 $15 $10 $5 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.16 Shares out (avg) 503 495 484 473 485 474 463 464 463 466 Cash from operations 5.39 LTM pre-tax ROC 24% Operating Performance and Financial Position ($ millions.547 1.83 17 EV/ LTM revenue 1.274 4.878 Payables 1.129 1.128 26.045 1.711 1.6% 32.71 0.012 3.988 1.020 1.0 billion This quarter $0.875 5.150 1.023 14.023 4.25 0.65 0.499 -1.68 2.543 654 PP&E.434 13.42 $0.619 1.60 0.011 32.40 2. net 3.119 14.492 4.3% 36.553 27.733 16.68 0.295 1. All rights reserved.

-$649 million in 2012. we do not find the shares compelling from a valuation standpoint. with 35% of revenue coming from installation and 45% from mostly recurring services.4 4.1 is well-positioned to benefit from global growth. With Calculation of return on capital employed ($bn): Adjusted EBIT 2. at a trailing FCF yield of less than 5%. Infrastructure and = Return on capital employed 40% 29% 14% 9% 12% 38% administration account for another 40% of costs.A.0 -0.5 8. 2 Adjusted for nonrecurring items of $491 million in 2008. Tyco Current assets 10. more focused company following the September 2012 separation of the fire and security businesses from the spun-off North American residential security and flow control businesses (ADT and Pentair). EMEA n/a n/a 27% 27% 27% n/a • Attractive model and market.1 14.3 0.Current liabilities -7. FY12 GAAP EPS. Net income (adjusted)1.5 14. RoW installation and services n/a n/a 39% 42% 42% 42% INVESTMENT HIGHLIGHTS Global products n/a n/a 14% 17% 20% 21% Corporate and other n/a n/a 13% 3% 0% 0% • Leading “pure play” fire and security company. However.3 billion.7 16.4 -3. “New” Tyco has generated adjusted Tangible equity 8% 11% 8% 42% -2% -5% FCF of ~$650 million per year over three years.2 7% 6% 4% 4% 3% 5% 10% in installation (#1). Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA * Tyco provides building fire and security solutions. on September 28. Management has Receivables 21% 18% 18% 7% 24% 24% pursued value-accretive M&A and aims to return PP&E.1 21.0 billion in 2015. based 1 Adjusted for unusual items of -$233 million in 2008. MOAT Able to sustain high returns on invested capital?  including $600 million in pension liabilities. $835 million in $12.7 As 45% of costs relate to purchased materials and Capital employed 5..9 making “branch in a box” a key management tool.4 0.Cash.0 goal of achieving ~$100 million in net cost savings.3 4. ST investments -1.4 billion in 2012 to 2010. Shares out (avg) (mn) 484 473 485 474 463 466 • Targeting adjusted operating margin expansion ∆ shares out (avg) -2% -2% 3% -2% -2% 1% * Data for 2010-1H13 reflects “new” Tyco.9 11.2 % of revenue by segment (“new” Tyco): and flow control businesses. Selected items as % of tangible assets: Cash. MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE “New” Tyco is a smaller. Tyco has 9% share in products (#1-2). + Net fixed assets 3. Tyco has embraced shareholder-friendly capital allocation. installation and services n/a n/a 34% 38% 38% 37% ADT) and Pentair (NYSE: PNR). Cox 3% | ClearBridge 3% | Iridian 2% | Threadneedle 1% INVESTMENT RISKS & CONCERNS RATINGS • M&A growth strategy may not yield satisfactory VALUE Intrinsic value materially higher than market value?  financial returns and may make it difficult to grow DOWNSIDE PROTECTION Low risk of permanent loss?  while maintaining a cohesive culture and processes.1 FINANCIAL STRENGTH Solid balance sheet?  billion and other long-term liabilities of $2. and $1.e. © 2008-2013 by BeyondProxy LLC.4 -5. $804 million in 2012.9 0. and “normalized” EPS NOTABLE HOLDERS were -$0. 65% of the latter is EBIT (adjusted)1 11% 8% 6% 8% 8% 8% recurring. N.7% in 2012.5 3.4 billion.7 0.6 • Optimizing cost structure of ~$9.0 -5.7 7.4 5.9 billion in 2009.8 0. Sensormatic. $1.0 10. items. and $2.1 billion in 2011. There EARNINGS MOMENTUM Fundamentals improving?  is little room for value creation through leverage.9 4. and -$50 million in 1H13. Tyco holds leading market share in the $100 billion market for building fire and security systems. The result would be an EPS 2010.9 1. MANAGEMENT Capable and properly incentivized?  • No tangible book value. $1. % of revenue by geography (“new” Tyco): North America n/a n/a 54% 51% 51% n/a Key brands include Tyco.4 50% of revenue from outside North America. as Capex 6% 7% 3% 4% 4% 4% local and regional players have 65-80% share.4 0.60.8 2. Simplex.5 0. The CEO Oliver <1% | Chairman Breen 1% | MFS 4% | Dodge & latter includes cost savings and interest reductions.1 -1. respectively.2 services.0 7.000 employees and $10+ billion in revenue. without the ADT and Pentair businesses.A.6 1.2 -5. -$142 million in on revenue growing from $10. with 35% from systems Selected items as % of revenue: Gross profit 35% 36% 33% 35% 36% 36% installation and 45% services.5 3.0 + Short-term debt 0. Latin America n/a n/a 5% 4% 4% n/a Grinnell.manualofideas.0 0. Operating margin by segment (excl. to 15-16% in 2015.5 -4. 2012. with a .9 -2. All rights reserved. with payout LT debt 26% 29% 26% 19% 21% 22% Other LT liabilities 27% 27% 29% 13% 39% 41% of 30-35%). Tyco derives 20% Asia Pacific n/a n/a 15% 17% 19% n/a of revenue from products. and 15% in services (#1). -$2. The company owns Global products n/a n/a 16% 17% 17% 7% leading technologies and enjoys scale advantages.com July 2013 – Page 91 of 117 . sourcing is a key focus. The FYE September 28 2008 2009 2010 2011 2012 1H13 company spun off its North American residential security Revenue ($bn) * 19. and ADT (outside North America).8 11. JOIN TODAY! www.2 7.4 0.8 9. $47 million in 2009. Tangible assets ($bn) 14. with a 30-35% dividend payout and material share repurchases.72.7 -1.7 12.1 1. . investments 10% 17% 13% 6% 12% 6% • Friendly capital allocation. i. $146 million in 2011. up from 12. CAGR of 15% over the three-year period. EPS ex. corporate and other): with 70. net 24% 24% 29% ~25% 23% 24% excess capital via buybacks ($200 million YTD) ST debt 4% 2% 4% 0% 0% 0% and dividends (~$300 million annually.5 -1. installation and services n/a n/a 9% 11% 9% 10% New Tyco leads a $100 billion fragmented market RoW installation and services n/a n/a 9% 9% 11% 10% growing in excess of GDP.35. D&A 6% 7% 4% 4% 4% 4% Installation and services are fragmented markets. Opportunities remain to improve the cost structure and grow in fragmented global markets.5 2.6 10.2 6. ADT Corporation (NYSE: N. Tyco has net debt of $1.0 million in 1H13.

15 equals equals equals Free cash flow: $1.7 billion Revised FY13 EPS estimate: $1. All rights reserved.566 64. % LTM Rev./ ∆ Rev.47 Revised FY14 EPS estimate: $2./ Empl. 2014 ▼ ▼ ▼ Consensus FY13E EPS: $1. 2013 September 28.82 three months ago.1x (*) equals equals equals Industry FCF yield-implied fair value: Industry multiple-implied fair value: Industry multiple-implied fair value: $25 billion ($55 per share) $15 billion ($33 per share) $19 billion ($41 per share) multiplied by multiplied by multiplied by Assumed required FCF yield as a Assumed TYC multiple as a Assumed TYC multiple as a percentage of the industry FCF yield: percentage of the industry multiple: percentage of the industry multiple: 95% 80% 110% (6.5x fair value P/E multiple) (20. = revenue | tang.84 has been revised upward by 1% from $1.8% (*) Corresponding industry P/E: 22.84 (‡) Consensus FY14E EPS: $2.2 billion minus minus minus Assumed upside/downside to Assumed upside/downside to Capex: $440 million FY13 EPS estimate: -20% * $1.545 549.0x fair value P/E multiple) equals equals equals Estimated fair value of the common Estimated fair value of the common Estimated fair value of the common equity of Tyco International: equity of Tyco International: equity of Tyco International: $27 billion. The Manual of Ideas.15 has been revised upward by 1% from $2.2x (*) Corresponding industry P/E: 18. 2012 Source for above charts and table on the right: Company presentation dated June 2013.13 three months ago. Value-oriented Equity Investment Ideas for Sophisticated Investors TYCO – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Based on median consensus EPS Based on median consensus EPS Based on free cash flow for the twelve estimate for the fiscal year ending estimate for the fiscal year ending months ended March 29.798 n/m 3% 6% 7% 8% 58% 274 8% 16% 27% 14% Tyco International / TYC -77% 7% 15.4% required FCF yield) (14.741 102. Source: Company filings. Last Gross Adj.com July 2013 – Page 92 of 117 . 2013 September 28.84 FY14 EPS estimate: 5% * $2. = employee | rev. Low High ($mn) ($mn) MV Yield LTM FY FY EV ($000) LTM Q Profit EBIT General Electric / GE -75% 80% 241. (‡) The FY13 consensus EPS estimate of $1. (§) The FY14 consensus EPS estimate of $2. JOIN TODAY! www. = tangible | adj.138 n/m 5% 5% 6% 7% 59% 286 1% 0% 25% 13% United Technologies / UTX -59% 7% 84.manualofideas.105 16% 6% 6% 7% 8% 27% 483 2% 0% 42% 12% Honeywell International / HON -71% 4% 61.038 16. relevant websites) 7-Year MV EV Book/ FCF This Next Rev. TYCO – ANALYSIS OF SELECTED COMPARABLE COMPANIES Trading Data Public Market Valuation Operating Performance (Click to visit ∆ to Reach Tang. LTM EPS Yield LTM Rev. © 2008-2013 by BeyondProxy LLC. or $58 per share $12 billion ($26 per share) $21 billion ($45 per share) (based on 460 million shares out) (based on 460 million shares out) (based on 460 million shares out) 78% upside to the recent 19% downside from the recent 39% upside to the recent stock price ($32 per share) stock price ($32 per share) stock price ($32 per share) (*) Represents Conglomerates industry median multiple.100 n/m 11% -2% 6% 7% 66% 151 -32% 3% 36% 10% Abbreviations: MV = market value | EV = enterprise value | LTM = last twelve months | FY = fiscal year | empl.15 (§) Operating cash flow: $2. = adjusted | ∆ = change Explanations: ∆ revenue represents year-over-year change in revenue | EPS yield for this and next FY is based on consensus EPS estimates | EBIT is adjusted for certain unusual items OVERVIEW of “NEW” TYCO TYCO – CALCULATION of “NORMALIZED” EPS.26 divided by multiplied by multiplied by Industry median FCF yield: 6.

© 2008-2013 by BeyondProxy LLC. TYCO – MANAGEMENT’S FINANCIAL OUTLOOK by SEGMENT Source: Company presentation dated June 2013.manualofideas.com July 2013 – Page 93 of 117 . JOIN TODAY! www. All rights reserved. Value-oriented Equity Investment Ideas for Sophisticated Investors The “new” Tyco remains a leader in several attractive market segments TYCO – MARKET POSITION Source: Company presentation dated June 2013.

49 2.240 1.612 2.7% 14.25 12.086 1. Winslow.69 Shares out (avg) 539 532 511 503 498 486 473 472 478 468 Cash from operations 2.745 6.3% 32.545 Adjusted net income 1.79 8.780 7.90 10.926 21.184 43.660 3.202 38.104 5.5% Adjusted operating income 18.35 8.323 12.8% Cash.643 13.6% 10.283 17.manualofideas.4% 14.175 15.633 Adjusted pretax income 2.142 2. Primecap Transportation: Railroads.9% 15.7% 22.965 19. Member of S&P 500 OMAHA NE www.873 6.515 38.9% 29. All rights reserved.161 6.833 Adjusted operating income 2.970 14.98 1.1% 8.404 1.009 3.5x Insider buys (last six months): 10 LT growth 14.158 35.269 6.401 1.1% 7.240 PP&E.204 4.9% 74. Cap Re.854 11.722 42.03 $1.336 48. JOIN TODAY! www.971 15. JPM.290 Gross profit 10.6% 23.880 3.65 38.044 3.05 Dividend 0.557 20.4% 29.874 1.31 1.30 30.070 3.93 2.25 42.096 47. except Fiscal Years Ended December 31.5% 17.512 LT investments 877 923 974 1.917 Receivables 679 632 594 666 1.778 3.651 2.331 1.3% 14.8 million FYE 12/31/13 9.5% 67.60–$161.990 804 782 Free cash flow 102 160 902 750 1.7% 71.643 3.043 863 957 Adjusted diluted EPS 3.376 40.52 29 EV/ LTM revenue 3.478 1.981 5.376 Tangible assets 36.62 6.89 29 EV/ LTM EBIT 12x Insider ownership: <1% FYE 12/31/15 12.149 2.5% 71.327 1.8% 19. net 32.69 (as of 6/21/13) Month # of P/E FYE 12/31/12 18x 52-week range: $112.063 1.5% 20.253 39.08 1.81 2.861 Tangible equity 15.6% 16.561 45.2% 32.906 8.06 39.3% 8.137 1.175 1.144 18.447 16.144 TBV / tangible assets 42% 41% 39% 40% 41% 41% 42% 41% 41% 41% TBV per share 28.00 Latest Ago Ests P/E FYE 12/31/13 16x Market value: $71.312 15.57 1. investments 827 878 1.578 16.510 1.35 $2.up.7% 69.755 20.184 1.454 2.482 3.524 Capex 2.736 12.835 9.58 2.578 19.763 18.5% 72.6% 29.49 4.8% 8.57 3.309 42. DFA.036 1.801 17. T Rowe.512 1.105 5.861 8.210 1. LTME FQE FQE per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13 Revenue 15.277 4.112 5.934 41.8x Ownership Data FYE 12/31/14 10.997 9.724 6.949 4.561 Debt 6. Value-oriented Equity Investment Ideas for Sophisticated Investors Union Pacific (UNP) – Cap World.95 LTM pre-tax ROC 17% Operating Performance and Financial Position ($ millions.153 48.012 3.848 9.391 1.890 2.088 45.379 4.3 billion This quarter $2.297 3.58 0.06 EBIT/capital employed 9% 10% 12% 9% 13% 15% 17% 17% 16% 16% Ten-Year Stock Price Performance and Trading Volume Dynamics $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.850 1.801 3.21 12 P / tangible book 3.291 600 742 … % of revenue: Gross profit 69.41 29.75 0. LTM EBIT yield 9% Institutional ownership: 81% 4/18/13 $2.701 37.60 0.724 1.348 3.7% 19.6% 72.855 2.997 42.281 1.917 995 1.623 2.76 5.117 3.4% 72.324 6.52 9.454 5.58 24 P/E FYE 12/31/15 12x Shares outstanding: 466.974 4.143 16.1% 17.217 1.5% 30.25 33.40 35.20 3.242 8.2% 18.9% D&A 7.335 1.9% 8.884 3.4% 8.927 9.35 26 P/E FYE 12/31/14 14x Enterprise value: $79.01 43.60 0.1% 75.com July 2013 – Page 94 of 117 .249 1.25 43.261 4.4% 8.2% Capex 17.com Trading Data Consensus EPS Estimates Valuation Price: $152.259 1.2 billion Next quarter 2.3% 5 Greenblatt Criteria Insider sales (last six months): 11 EPS Surprise Actual Est.4% 8.033 39.682 8.585 15.375 4.877 20.873 34.059 10.

rail networks. Employees (avg) (‘000) 48.0 million in 2012. while natural gas substitution is likely to lower the MAJOR HOLDERS share of coal in the U. ores. we find trailing FCF of roughly $2. as volume changes often VALUE Intrinsic value materially higher than market value?  have a disproportionate effect on pricing and profit.5 42.118 3. UNP owns 26.124 n/a domestic truckload conversions. and -$6.6 37. shale production exceeds pipeline 3% | Winslow 2% | JPM 1% | DFA 1% | Primecap 1% capacity.49 in Cash.999 9.000 route miles connecting 23 states in the Revenue ($bn) 18. Rail is more fuel.7 1.2 43.868 n/a efficient than trucking.596 6.006 8. -$5.000 full. Adjusted EBIT 4. PP&E. RATINGS • Economically sensitive. = Return on capital employed 12% 9% 13% 15% 17% 16% with management targeting “sub 65%” by 2017. Trains Capex 17% 17% 15% 17% 19% 15% Industry EBIT margin3 18% 17% 18% 21% 17% 21% are three times cleaner than trucks on a ton-mile Calculation of return on capital employed ($bn): basis.6 40.7 42. Shares out (avg) (mn) 511 503 498 486 473 468 INVESTMENT RISKS & CONCERNS ∆ shares out (avg) -4% -1% -1% -3% -3% -2% • Coal weakness affects 20% of revenue.5 41.8% in 2012.1 45.S.3 western two-thirds of the U.5 billion.S. UNP’s main competitor is Freight – chemicals 14% 15% 14% 14% 15% 17% Berkshire Hathaway’s BNSF.584 6. Steel 1 Adjusted for unusual items of -$21 million in 2010. which makes the former Other main line 6.112 3. Environmental concerns could D&A 8% 10% 9% 8% 8% 8% benefit railroads despite lower coal volumes. All rights reserved.1 17. ROIC has increased EBIT (adjusted)1 23% 24% 29% 29% 32% 31% from 5% in 2004 to 14% in ‘12. with replacement and Tangible equity 39% 40% 41% 41% 42% 41% Forward P/E (end) 13x 12x 14x 13x 13x 14x growth capex comprising one-half of the allocation. agricultural (17%). insufficient to entice us to invest in UNP. That said. MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE Union Pacific has executed well on all fronts. JOIN TODAY! www. chemicals (16%). while EPS is up Net income (adjusted)1 13% 13% 17% 17% 19% 18% from $1. © 2008-2013 by BeyondProxy LLC.020 847 931 978 959 228 (9%). with a ~3 million Switching/classif.4 with 32. industrial Terminal dwell time (avg) (hours) 25 25 25 26 26 27 (18%).9 45.644 6.4 5.1 3. the business remains capital-intensive and subject to price competition should volumes decline materially below capacity. Berkshire’s pricing and Freight – industrial products 18% 15% 16% 16% 17% 17% Freight – intermodal 17% 18% 19% 18% 19% 19% capital allocation discipline are positive for UNP. industry weakness is having a near-term impact. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA Union Pacific provides freight rail transportation. On Mgmt 1% | Cap World 7% | FMR 4% | Cap Re 3% | T Rowe the other hand. implying a 3-4% FCF yield.715 n/a attractive for long hauls. 2 Weight of freight multiplied by tariff miles. yard lines 9.898 31. leading to growth in crude oil carloads.6 Selected items as % of tangible assets: • Raised dividend from $0.040 3.953 31.046 n/a truckload opportunity originating from Mexico.e. assuming a fair entry price. This key expense ratio / Capital employed 33. i.6 • Declining operating ratio.9 5.094 31.167 9. taking advantage of improving industry economics to deliver impressive improvement in ROIC and EPS over the past decade. Future capital allocation should be tilted even Debt (mostly long term) 23% 24% 22% 19% 19% 20% more toward return of capital.27.42 to $8.7 6.0 5. As a result. net 90% 88% 89% 89% 89% 87% 1Q13. Selected items as % of revenue: Gross profit 67% 76% 75% 71% 73% 72% • Economics have improved. Tangible assets ($bn) 39.2 43. which has parallel Freight – coal 21% 22% 21% 21% 19% 18% routes in UNP corridors.75 in 2007 to $2. as rational pricing and high barriers to entry combine to produce a strong margin profile. Repurchases exceeded $6 billion from 2008.3% in 2007 to 67.S.8 has declined from 79. moving of containers Revenue ton-miles (bn) 563 479 520 544 521 124 using multiple modes of transportation (20%).com July 2013 – Page 95 of 117 .0 14. and grains. The company should continue to enjoy favorable economics alongside key competitor BNSF. MOAT Able to sustain high returns on invested capital?  • Unionized workforce. Track miles (end): Route 32.2 38.0 million in 2011.1 47. Other revenue 5% 5% 5% 5% 6% 6% • Revenue base diversified across six freight types: Train speed (avg) (miles/hour) 24 27 26 26 27 26 coal (20% of 2012 freight revenue). UNP sees up to 10 million Passing lines and turnouts 3.8 35. Each train can take 300 trucks off highways. and intermodal. Shareholders can MANAGEMENT Capable and properly incentivized?  expect a high single digit to low teens return in a FINANCIAL STRENGTH Solid balance sheet?  normal environment. 3 Railroads industry median.9 46.2 48.012 32.000 % of revenue by commodity group: Freight – agricultural 18% 19% 18% 17% 16% 15% track miles and operates the remainder under Freight – automotive 7% 6% 7% 8% 9% 9% trackage rights or leases.0 19. EARNINGS MOMENTUM Fundamentals improving?  time employees are represented by a rail union. investments 3% 4% 3% 3% 2% 4% 2012.207 9.510 6.. FYE December 31 2008 2009 2010 2011 2012 1Q13 ∆ revenue 10% -21% 20% 15% 7% 3% INVESTMENT HIGHLIGHTS ∆ assets 4% 6% 2% 5% 5% 7% • Operates one of the largest U.6 20. auto Rail car inventory (avg) (‘000) 301 283 274 273 269 264 Gross ton-miles (bn) 2 1. DOWNSIDE PROTECTION Low risk of permanent loss?  • Capital-intensive business.manualofideas.9 44. Customer satisfaction index 83 88 89 92 93 94 such as coal.037 3. Operating ratio (%) 77 76 71 71 68 69 • Advantage in moving low value-per-ton goods. energy mix over time. 86% of UNP’s 46.

777 25.com July 2013 – Page 96 of 117 .272 79. © 2008-2013 by BeyondProxy LLC.095 25% 1% 3% n/a n/a 22% 368 5% 9% 50% 30% 36% CSX Corp.manualofideas.3 billion multiplied by minus minus Average 7-year EBIT margin: 25. Last Gross Adj.90 has been revised upward by 1% from $10. = tangible | adj. or $97 per share equity of Union Pacific: $115 billion. = employee | rev.985 32.227 26% 4% 6% n/a n/a 20% 406 7% 5% 53% 37% 41% Can. LTM EPS Yield LTM Rev. = revenue | tang.45 divided by Assumed fair value multiple of EBIT: multiplied by Industry median FCF yield: 1./ Empl.2% Assumed upside/downside to Capex: $4. The Manual of Ideas. Source: Company presentation dated June 2013.0 billion equals FY14 EPS estimate: 5% * $10.90 (§) Operating cash flow: $6.272 79. Source: Company filings.75 three months ago.0% required FCF yield) equals (14. Railway / CNI -69% 10% 40. ST investments: $1.3 billion equals Free cash flow: $2. All rights reserved.768 44% 3% 8% 8% 9% 36% 355 -3% -2% 36% 28% 33% Union Pacific / UNP -78% 5% 71.2x fair value P/E multiple) equals Estimated fair value of the common equals Estimated fair value of the common equity of Union Pacific: Estimated fair value of the common equity of Union Pacific: $45 billion. Equity/ relevant websites) 7-Year MV EV Book/ FCF This Next Rev. or $247 per share (based on 470 million shares out) $76 billion ($162 per share) (based on 470 million shares out) 36% downside from the recent (based on 470 million shares out) 62% upside to the recent stock price ($153 per share) 6% upside to the recent stock price ($153 per share) (*) Represents Railroads industry median multiple. JOIN TODAY! www. = adjusted | ∆ = change Explanations: ∆ revenue represents year-over-year change in revenue | EPS yield for this and next FY is based on consensus EPS estimates | EBIT is adjusted for certain unusual items UNION PACIFIC – LONG-TERM FINANCIAL TRACK RECORD Major improvement in key financial metrics reflects strong management execution as well as improving industry economics * 2004 adjusted for asbestos charge of $247 million. Value-oriented Equity Investment Ideas for Sophisticated Investors UNION PACIFIC – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Based on revenue for the twelve months Based on median consensus EPS Based on free cash flow for the twelve ended March 31. stock price ($153 per share) (§) The FY14 consensus EPS estimate of $10.216 28% 3% 6% 6% 7% 27% 454 5% 3% 73% 33% 41% Union Pacific / UNP -78% 5% 71.7% (*) 10.970 30. / CSX -71% 15% 23. Low High ($mn) ($mn) MV Yield LTM FY FY EV ($000) LTM Q Profit EBIT Assets Can.9x (*) equals equals equals Industry FCF yield-implied fair value: Estimated fair enterprise value of Industry multiple-implied fair value: $132 billion ($284 per share) Union Pacific: $53 billion $69 billion ($148 per share) multiplied by plus multiplied by Assumed required FCF yield as a Cash. UNION PACIFIC – ANALYSIS OF SELECTED COMPARABLE COMPANIES Trading Data Public Market Valuation Operating Performance Tang.3 billion multiplied by Revised FY14 EPS estimate: $11.331 39% 4% 8% 8% 9% 36% 367 -1% 0% 68% 30% 31% Norfolk Southern / NSC -63% 11% 22. 2013 and average estimate for the fiscal year ending months ended March 31. 2013 EBIT margin for past seven fiscal years December 31.90 equals Estimated EBIT: $5.0x Corresponding industry P/E: 12. Pacific Railway / CP -79% 18% 20. Tang.216 28% 3% 6% 6% 7% 27% 454 5% 3% 73% 33% 41% Abbreviations: MV = market value | EV = enterprise value | LTM = last twelve months | FY = fiscal year | empl. (Click to visit ∆ to Reach Tang. 2014 ▼ ▼ ▼ TTM net sales: $21 billion Consensus FY14E EPS: $10. % LTM Rev.169 47. Nat./ ∆ Rev.9 billion Assumed UNP multiple as a percentage of the industry FCF yield: minus percentage of the industry multiple: 115% Total debt: $9.9 billion 110% (2.

Value-oriented Equity Investment Ideas for Sophisticated Investors UNION PACIFIC – CAPITAL ALLOCATION UNION PACIFIC – GEOGRAPHIC OVERVIEW of RAIL FRANCHISE Source for the above charts: Company presentation dated June 2013. © 2008-2013 by BeyondProxy LLC.com July 2013 – Page 97 of 117 . JOIN TODAY! www.manualofideas. All rights reserved.

022 6.066 3.254 408.7 million FYE 1/31/14 5.158 20.437 40.511 32.281 164.04 5.855 Receivables 2.734 Tangible assets 137.025 54.9% 24.3% 9.191 Inventory 33.64 16.164 4.010 114.097 182.734 21.3% 25.574 6.491 2.651 20.079 41.85 27 EV/ LTM EBIT 10x Insider ownership: <1% FYE 1/31/16 6.551 Tangible equity 47.867 22.440 96.36 3.9% 5.348 12.235 20.9% 6.840 3.7% Adjusted operating income 5.766 16.378 23.187 Gross profit 84.402 34.019 172.453 176.398 25.863 13.189 12.767 5.742 3.811 5.886 100.301 Cash from operations 20.023 404.88 0.93 3.533 Long-term debt 30.999 17.968 20.846 50.767 24.085 421.551 45.401 43.147 26.409 3.515 47.737 25.06–$79.630 12.828 147.80 4.82 5. Franklin.8x Insider buys (last six months): 24 LT growth 9.803 43.26 24 P/E FYE 1/31/15 13x Enterprise value: $289.324 116.823 116. net 88.979 106.08 1.313 103. investments 7.260 16.894 Capex 15.968 Free cash flow 4. except Fiscal Years Ended January 31. Cap World.635 148.117 8.46 1.735 33.262 25.387 6.9% 5.065 10. JOIN TODAY! www.855 8.14 $1.089 5.907 6.944 10.283 11.07 1.497 19.879 15.389 92.09 1.515 TBV / tangible assets 35% 33% 34% 35% 32% 29% 31% 28% 27% 28% TBV per share 11.355 15.55 15.10 1.434 4.608 182.729 50.558 27.9% 24.538 24.849 446.768 6.manualofideas.59 1.643 24.560 3.693 11.6% 5.664 55. All rights reserved.431 113.70 14.235 14.866 3.549 36.159 34.88 Shares out (avg) 4.98 12.714 43.144 5.950 469.642 3.31 29 EV/ LTM revenue 0.642 23.1% 5.801 27.497 21.284 43.066 8. Value-oriented Equity Investment Ideas for Sophisticated Investors Wal-Mart (WMT) – Berkshire.685 35.6% 24.937 6.656 3.832 28.784 Adjusted diluted EPS 2.763 20.96 Latest Ago Ests P/E FYE 1/31/14 14x Market value: $240.16 3.719 12.191 5.375 2.5% 25.905 4.7% 5.42 6.919 6.755 182.51 (as of 6/21/13) Month # of P/E FYE 1/31/13 15x 52-week range: $67.952 22.6x Ownership Data FYE 1/31/15 5.709 15.003 7.499 12.138 41. LTM EBIT yield 10% Institutional ownership: 30% 5/16/13 $1.307 107.17 25 P/E FYE 1/31/16 11x Shares outstanding: 3.059 1.com July 2013 – Page 98 of 117 .926 … % of revenue: Gross profit 24.2% 24.368 377.9% 5.003 19.533 8. Markel Services: Retail (Department & Discount).041 3.961 50.456 Adjusted pretax income 18.356 3.705 11.002 27.779 50.49 11.95 1.852 5.269 7.460 3.713 36.7% Cash.8% 5.653 102.996 44. LTME FQE FQE per share data) 2007 2008 2009 2010 2011 2012 2013 4/30/13 4/30/12 4/30/13 Revenue 348.25 $1.569 5.814 48.30 14.669 4.15 Dividend 0.8% 25.759 15.891 6.06 14.51 9 P / tangible book 4.67 0.16 14.542 26.926 Adjusted net income 12.492 7.160 Adjusted operating income 20.472 116.07 15.453 Short-term debt 8.9% 5.138 PP&E.249 23.681 116.374 3.417 44.169 154.431 Intangible assets 13. GMO.20 4.648 14.184 12.842 47.342 51.15 LTM pre-tax ROC 27% Operating Performance and Financial Position ($ millions.1 billion Next quarter 1.903 111.745 12.276.870 6.939 3.591 25.867 95.126 16.0% 24.17 1.898 13.162 470.937 11.59 3.9 billion This quarter $1.com Trading Data Consensus EPS Estimates Valuation Price: $73.699 13.674 117.56 5.510 12.255 25.3% 7 Greenblatt Criteria Insider sales (last six months): 13 EPS Surprise Actual Est.6% 24.30 5. Eagle.30 EBIT/capital employed 24% 25% 25% 26% 27% 26% 26% 27% 27% 26% Ten-Year Stock Price Performance and Trading Volume Dynamics $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC. Member of S&P 500 BENTONVILLE AR walmartstores.666 14.878 112.331 113.21 1.051 5.275 7.

Without a pickup in SSS.com.S. U. If Wal-Mart can D&A 2% 2% 2% 2% 2% 2% replicate its U. which makes the risk-reward attractive.5% 3.5%): Walmart U.939 3.099 4. Japan.2% 3. EBIT margin by segment (ex.200 stores (32% owned). and home goods. Wal-Mart has a defensible U. with ∆ gross profit 8% 3% 3% 5% 4% 1% the rest smaller discount and neighbor-hood stores. and -$67 million in 2012. JOIN TODAY! www..K.S. 7. Walmart U.755 3. 2 Adjusted for nonrecurring items of $146 million in 2009. investments 5% 5% 5% 3% 4% 5% low prices” marketing (versus changing promotions) Inventory 23% 21% 22% 24% 24% 24% PP&E.S. Structural issues such as record consumer debt and high unemployment may be future headwinds.73 4.18 4. 64% 64% 62% 60% 59% 59% Walmart International 24% 24% 26% 28% 29% 29% Sam’s Club (~5% of EBIT) runs 600+ U. All rights reserved.S.4% 3. Return on equity (ROE) 20% 22% 22% 23% 23% 5% ROE – industry median3 4% 6% 12% 15% 16% 16% • Disciplined capital allocation by incentivized Trailing P/E (end) 17x 14x 13x 13x 14x 15x chairman and founder’s son Rob Walton (68).21 1.S. the rest splits roughly evenly into Stores – Walmart U. Mexico and Canada. however. “Everyday Cash.866 3.4% 3.S.S. apparel.4 million employees in the U.88 • Stagnant to declining Walmart U. Canada. stores) and Return on tang.000 sq ft). although not compelling. Forward P/E (end) 15x 13x 12x 12x 13x 14x Diluted EPS (cont.0% 5. walmart. Groceries ∆ BV per share 4% 10% 3% 10% 10% 5% are 55% of revenue. equity 27% 28% 29% 31% 32% 7% FCF generation. and ~30% of non-U. 3.S. Debt 28% 27% 31% 31% 30% 31% • Downside protection due to real estate ownership Tangible equity 34% 35% 32% 29% 31% 28% (~85% of U. 3% -1% -2% 0% 2% -2% Walmart U.4% 7. 8% 1% 0% 2% 4% 0% INVESTMENT HIGHLIGHTS Walmart International 6% 1% 12% 15% 7% 3% • World’s largest retailer and one of the largest Sam’s Club 1% 0% 3% 9% 5% 0% private employers in the U.S.S.. 133K sq ft.7% 7.0% 5.S. $1. may ∆ shares out (avg) -3% -2% -5% -5% -2% -3% 1 Adjusted for unusual items of -$260 million in 2010. Walmart U. Revenue ($bn) 404 408 422 447 469 113 38% in Mexico. ∆ SSS – Sam’s Club 5% -1% 4% 8% 4% -1% Wal-Mart owns 87% of stores and 80% of 133 distribution ∆ revenue 7% 1% 3% 6% 5% 1% sites. Tangible assets ($bn) 148 154 164 173 183 183 • Price leadership through scale and supply-chain Selected items as % of tangible assets: expertise results in a sustainable moat.651 6. Sam’s Club 3.com July 2013 – Page 99 of 117 .S.374 3. -$79 million in 2010.35 3.manualofideas. RATINGS Mart’s low-cost positioning. despite ~$50 billion of net debt.148 6. find it difficult to maintain ROI over time. model abroad (evidence to date Capex 3% 3% 3% 3% 3% 3% appears favorable). net 65% 66% 66% 65% 64% 64% reinforces the pricing strategy in customers’ minds. The result should produce decent EPS growth in the long term.0 billion in • Directly exposed to U. the recent equity valuation may Industry gross margin3 34% 36% 36% 36% 36% 33% Industry EBIT margin3 1% 3% 4% 6% 7% 7% not reflect the value of global growth opportunities. 79% of stores are supercenters (avg 181.000+ stores.14 INVESTMENT RISKS & CONCERNS Dividends per share ($) 0. corporate ~-0.8% million internationally.0% 3. samsclub.000 sq ft (50% supermarkets/discount stores). Stagnant to declining same-store sales in the U. % of revenue by segment: Store size is ~55.703 3.8% 8. and 0.S. Net income (adjusted)1. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA Retail giant Wal-Mart operates through three segments: FYE January 31 2009 2010 2011 2012 2013 1Q14 ∆ SSS – Walmart U.S.656 3.54 5. Wal.301 sales.59 1.02 1.4% 3.8% • Valuation implies little to no growth expectation Selected items as % of revenue: at an 8% forward earnings yield. the valuation remains undemanding at an 8% forward earnings yield.194 entertainment.7% 7. © 2008-2013 by BeyondProxy LLC. market position (supported by its “everyday low prices” strategy and real estate ownership) and its incentivized and capable leadership is successfully replicating the high-return operating model in large markets abroad.8 Walmart International 5.0% with 1.09 1. including part-time staff. 2011. VALUE Intrinsic value materially higher than market value?  • Challenges to international expansion include DOWNSIDE PROTECTION Low risk of permanent loss?  bigger or more favored incumbents (with local MANAGEMENT Capable and properly incentivized?  support) and other.460 3. have justifiably muted expectations for growth.S.1% 7. same-store Shares out (avg) (mn) 3.043 Stores – Walmart Int’l 3. is a plus.2 3% 4% 4% 4% 4% 3% • Global reinvestment opportunity.46 1.9% 5. non-economic considerations.) ($) 3. based on Gross profit 25% 25% 25% 25% 25% 25% EBIT (adjusted)1 6% 6% 6% 6% 6% 6% consensus EPS of $5.804 3.005 4.1% 4. 6-10% each in Brazil. (~75% of EBIT): 4. 3 Retail (Department & Discount) industry median.95 1.595 4. Revenue growth by segment: Walmart U.S. However. Stores – Sam’s Club 611 605 609 611 620 620 International (~20% of EBIT): ~6.557 5. health.com. hardlines. warehouse clubs Sam’s Club 12% 12% 12% 12% 12% 12% (82% owned. FINANCIAL STRENGTH Solid balance sheet?  MOAT Able to sustain high returns on invested capital?  NOTABLE HOLDERS EARNINGS MOMENTUM Fundamentals improving?  Walton family ~50% | Non-Walton insiders <1% | Berkshire MACRO Poised to benefit from economic and secular trends?  Hathaway 2% | Markel Gayner <1% | Eagle Capital <1% THE BOTTOM LINE Despite a ~50% rise in Wal-Mart’s share price over the last two years.868 4. average store size). consumer spending.S.82 for the year to January 2015.

or $53 per share equity of Wal-Mart: $423 billion.9% Assumed upside/downside to Capex: $13 billion equals FY14 EPS estimate: 5% * $5.87 three months ago. 2013 margin for past seven fiscal years January 31.9x (*) equals equals equals Industry FCF yield-implied fair value: Estimated fair enterprise value of Industry multiple-implied fair value: $402 billion ($123 per share) Wal-Mart: $221 billion $278 billion ($85 per share) multiplied by plus multiplied by Assumed required FCF yield as a Cash./ Empl.3 billion shares out) 28% downside from the recent (based on 3. © 2008-2013 by BeyondProxy LLC. = adjusted | ∆ = change Explanations: ∆ revenue represents year-over-year change in revenue | EPS yield for this and next FY is based on consensus EPS estimates | EBIT is adjusted for certain unusual items WAL-MART – FREE CASH FLOW. stock price ($74 per share) (§) The FY14 consensus EPS estimate of $5. Tang.098 21% 5% 7% 7% 8% 163% 214 3% 1% 25% 6% 28% Abbreviations: MV = market value | EV = enterprise value | LTM = last twelve months | FY = fiscal year | empl.446 45.0x Corresponding industry P/E: 13. Equity/ relevant websites) 7-Year MV EV Book/ FCF This Next Rev. All rights reserved.7% required FCF yield) equals (15. WAL-MART – ANALYSIS OF SELECTED COMPARABLE COMPANIES Trading Data Public Market Valuation Operating Performance Tang. 2015 ▼ ▼ ▼ TTM net sales: $470 billion Consensus FY14E EPS: $5. Low High ($mn) ($mn) MV Yield LTM FY FY EV ($000) LTM Q Profit EBIT Assets Costco Wholesale / COST -72% 7% 47. FY2007-FY2013 ($ in billions) Wal-Mart has generated $60 billion of free cash flow over the last five years (~25% of recent market value). = revenue | tang. The Manual of Ideas. capex during the period totalled $63 billion (1.manualofideas. Last Gross Adj.3 billion shares out) 76% upside to the recent stock price ($74 per share) 27% upside to the recent stock price ($74 per share) (*) Represents Retail (Department & Discount) median. or $129 per share (based on 3. (Click to visit ∆ to Reach Tang. JOIN TODAY! www. 2013 and average EBIT estimate for the fiscal year ending months ended April 30.7x D&A) Source: Company presentation dated March 2013. = tangible | adj.3x fair value P/E multiple) equals Estimated fair value of the common equals Estimated fair value of the common equity of Wal-Mart: Estimated fair value of the common equity of Wal-Mart: $173 billion.093 10% 8% 13% 3% 35% Target / TGT -64% 6% 44./ ∆ Rev.82 (§) Operating cash flow: $25 billion multiplied by minus minus Average 7-year EBIT margin: 5.9 billion Assumed WMT multiple as a percentage of the industry FCF yield: minus percentage of the industry multiple: 95% Total debt: $57 billion 110% (2. Source: Company filings.9% (*) 8. ST investments: $8. LTM EPS Yield LTM Rev.823 22% 3% 4% 4% 5% 229% 1.563 37% 9% 6% 6% 8% 129% 203 -16% -1% 31% 8% 37% Wal-Mart / WMT -43% 9% 240.82 has been revised down by 1% from $5. = employee | rev.869 289. Value-oriented Equity Investment Ideas for Sophisticated Investors WAL-MART – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Valuation methodology: Valuation methodology: Valuation methodology: Based on revenue for the twelve months Based on median consensus EPS Based on free cash flow for the twelve ended April 30.82 equals Estimated EBIT: $28 billion equals Free cash flow: $12 billion multiplied by Revised FY14 EPS estimate: $6. implying an average 5% FCF yield However.11 divided by Assumed fair value multiple of EBIT: multiplied by Industry median FCF yield: 2.3 billion shares out) $306 billion ($93 per share) (based on 3.168 56.com July 2013 – Page 100 of 117 . % LTM Rev.

consisting of a steadily growing dividend stream as well as steady and opportunistic share repurchases The return of capital over the past decade amounts to more than one-third of recent equity market value Source: Company presentation dated March 2013. All rights reserved. and continued investment to expand its international store base WAL-MART – MANAGEMENT’S CALCULATION of ROI and ROA. Value-oriented Equity Investment Ideas for Sophisticated Investors WAL-MART – RETURN of CAPITAL to SHAREHOLDERS. 2012-2013 Source: Company annual report for the fiscal year ended January 31.com July 2013 – Page 101 of 117 . © 2008-2013 by BeyondProxy LLC. Wal-Mart has managed to maintain high rates of return despite stagnating same-store sales in the U. 2013.manualofideas.S. JOIN TODAY! www. FY2004-FY2013 Wal-Mart has returned nearly $100 billion to shareholders over the past ten years.

60 0.118 4.679 3.9% 19.812 2.863 9.915 1.966 7. T Rowe Services: Broadcasting & Cable TV.351 31.40 1.578 1.510 37.897 8.442 1.058 5.512 21.0% 21.199 2.004 1.281 9.35 0.722 3.85 0. Value-oriented Equity Investment Ideas for Sophisticated Investors Walt Disney (DIS) – Children’s.79 $0.914 2.854 5.417 2.670 3.532 17.566 1.036 4.5% 20.816 Tangible assets 29.123 3.565 3.797 1.368 2.252 38.166 11.271 1.04 $1.306 7.3% 19.050 3.702 29.703 6.92 2.751 7.477 574 Free cash flow 4.77 LTM pre-tax ROC 41% Operating Performance and Financial Position ($ millions. net 17.062 35.35 0.154 Inventory 694 641 1.355 6.063 40.8% Adjusted operating income 15.354 11.195 Adjusted operating income 5.110 3.7x Insider buys (last six months): 16 LT growth 12.373 4.815 1.788 4.794 1.0 billion Next quarter 0.408 1.182 6.766 3.666 39.566 3.578 6.952 Receivables 4.682 3.994 7.56 4.55 21 P / tangible book 49.514 5.597 17.614 3.697 6.336 Adjusted net income 3.233 4.292 1.556 Long-term debt 11.5% 7 Greenblatt Criteria Insider sales (last six months): 8 EPS Surprise Actual Est.1% Cash.185 3.9% 22.com July 2013 – Page 102 of 117 .manualofideas.484 2.21 2.893 42.280 3.726 7.855 4.73 (as of 6/21/13) Month # of P/E FYE 9/30/12 20x 52-week range: $46.098 9.7% 15.816 34.800.7% 19.0 billion This quarter $1.784 6.542 40. investments 2.890 1.842 21.8% 19.503 1.566 PP&E.149 38.529 1. All rights reserved. LTM EBIT yield 7% Institutional ownership: 65% 5/7/13 $0. except Fiscal Years Ended September 29.95 34 EV/ LTM EBIT 13x Insider ownership: <1% FYE 9/30/15 4.914 2.94 3.566 4.540 7.4% 12.89 Latest Ago Ests P/E FYE 9/30/13 18x Market value: $113.952 3.774 1.647 29.35 0.173 1.403 1.595 1.731 3.005 2.862 5.182 4.582 13.981 13.884 1.793 1.411 3.com Trading Data Consensus EPS Estimates Valuation Price: $62.8% 17.35 2.447 3.0% 22. Tiger Global. Member of S&P 500 BURBANK CA disney.878 1.226 33.273 3.051 3.779 3.792 1.098 9.032 5.850 39.8% 22.287 29.650 Intangible assets 30.49 33 EV/ LTM revenue 2.443 5.954 33.35 0.724 1.781 8.695 21.932 335 1.554 Gross profit 5.60 – – Shares out (avg) 2.556 3.843 36.435 4.586 … % of revenue: Gross profit 15.05 31 P/E FYE 9/30/14 16x Enterprise value: $126.765 9.154 6.571 4.381 12.539 3.751 7.167 17.66 0.559 3.319 6.001 3.53–$67.232 41.286 4.160 Capex 1.1% 19.18 3.721 10.421 5. LTME FQE FQE per share data) 2006 2007 2008 2009 2010 2011 2012 3/30/13 3/31/12 3/30/13 Revenue 33.210 34.707 5.922 6.336 Adjusted pretax income 5. Markel.9 million FYE 9/30/13 3.9% 16.055 33.124 1.403 LT investments 1.514 5.7% 21.9x Ownership Data FYE 9/30/14 3. FMR.383 41.2% 17.650 20.57 0.700 4.784 2.40 0.897 8.855 7.64 2.210 10.501 40.753 2. Davis.273 TBV / tangible assets 4% 3% 9% 14% 10% 10% 13% 5% 8% 5% EBIT/capital employed 32% 46% 42% 31% 36% 40% 42% 41% 38% 46% Ten-Year Stock Price Performance and Trading Volume Dynamics $80 $70 $60 $50 $40 $30 $20 $10 $0 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 © 2008-2013 by BeyondProxy LLC.387 3.629 10.59 3.47 3.762 5.804 Cash from operations 6.3% 19.go.278 43.31 0.351 11.281 9.566 2.468 3.350 3.85 31 P/E FYE 9/30/15 14x Shares outstanding: 1.574 Adjusted diluted EPS 1.283 7.4% 18.135 12.747 35.055 3.687 2.537 1.701 5.093 2.433 17.856 1.206 2.806 19. JOIN TODAY! www.271 1.542 Short-term debt 2.623 34.381 Tangible equity 1.181 1.922 6.306 7.0% 21.87 Dividend 0.

∆ U. Revenue growth by major geography: Star Wars and many other leading franchises.60 of EBIT. Value-oriented Equity Investment Ideas for Sophisticated Investors BUSINESS OVERVIEW SELECTED OPERATING DATA Media company Disney operates through five segments: FYE September 29 2008 2009 2010 2011 2012 1H13 ∆ revenue 7% -4% 5% 7% 3% 7% Media Networks: owns cable. Parks and resorts 30% 30% 28% 29% 30% 31% Studio entertainment 19% 17% 18% 16% 14% 13% Consumer Products: licenses character-based merchandise. licenses ∆ BV per share 11% 6% 8% 2% 11% 10% Employees (end) (‘000) 150 144 149 156 166 n/a a venue in Tokyo. Hawaii. © 2008-2013 by BeyondProxy LLC.60 – vulnerable to programming cost rises. the valuation is hardly compelling. In EBIT margin by major geography: the six months to March. mainly ESPN. television % of revenue by major geography: U. JOIN TODAY! www. Interactive -36% -41% -31% -31% -26% -9% subscribers).03 2.878 1. is one of many examples. Capex 4% 5% 6% 9% 9% 5% • Inflation protection due to proven pricing power Tangible assets ($bn) 33. and Lucasfilm (‘12).28 1. which still represent only EBIT 20% 16% 17% 20% 22% 20% ~25% of company revenue. VALUE Intrinsic value materially higher than market value?  • $13 billion of net debt and significant minority DOWNSIDE PROTECTION Low risk of permanent loss?  interest due to 20% minority stake in ESPN. the valuation at a 6% forward earnings yield leaves us waiting for a better margin of safety.94 for the year to LT debt 34% 34% 29% 29% 27% 32% September 2014.40 0.S. Assets Consumer products 32% 25% 25% 27% 29% 31% include sports network ESPN (98 million U.S.9 42.S. Interactive 2% 2% 2% 2% 2% 2% EBIT margin by segment (ex.2 34. Even with expected y-y EPS Tangible equity 9% 14% 10% 10% 13% 5% growth of ~13%. Iron Man. Although we like Disney’s moat and global reinvestment opportunities.manualofideas. U.3 38. Lion King. All rights reserved. Return on tang. predominantly from an 80% stake in ESPN. Revenue ($bn) 37. parks spend/guest 3% -6% 3% 7% 7% 8% Parks & Resorts: owns venues in California.890 1. Hong Kong (48%). Lucasfilm.13 1.S. Asia Pacific 5% 5% 6% 6% 7% n/a Spider-Man. ∆ employees 9% -4% 3% 5% 6% n/a Paris (51%). ∆ shares out (avg) -6% -2% 3% -2% -4% 0% • Relying on acquisitions for part of the growth. and 50% of A&E. ∆ U.76 2./Canada 75% 76% 74% 75% 75% n/a networks). Despite diversified assets.) ($) 2. net 53% 52% 51% 51% 53% 52% ST debt 11% 4% 7% 8% 9% 9% based on consensus EPS of $3.1 40.794 1. Winnie the Pooh. parks. While many investors will associate Disney mainly with cartoon characters such as Mickey Mouse.35 0. and UTV. durability of moat. Shanghai Disneyland. and Shanghai (43%). attendance is up 6% at U. these Shares out (avg) (mn) 1. Disney. Disney Princess. equity 222% 93% 103% 133% 129% 89% • Media segment. Disney spent a total of $16+ billion on Pixar (‘06). PP&E. Music banners include Media networks 42% 45% 45% 46% 46% 46% Walt Disney Records. Consumer products 6% 7% 7% 7% 8% 8% Interactive: produces games and owns online media assets.1 38. The forward earnings yield is only 6%. Cars. Marvel.35 0. and Lyric Street. owns the Disney Cruise Line. it actually generates about two thirds of operating profit from media networks. MANAGEMENT Capable and properly incentivized?  FINANCIAL STRENGTH Solid balance sheet?  NOTABLE HOLDERS MOAT Able to sustain high returns on invested capital?  Insiders <1% | Steve Jobs estate 7% | Children’s Investment EARNINGS MOMENTUM Fundamentals improving?  Fund <1% | Markel Gayner <1% | Tiger Global <1% MACRO Poised to benefit from economic and secular trends?  THE BOTTOM LINE Disney owns entertainment content with timeless appeal and “one-of-a-kind” media production and distribution assets. Net income 12% 9% 10% 12% 13% 13% D&A 4% 5% 5% 5% 5% 5% due to open in 2015.S. represents ~65% Return on equity (ROE) 14% 11% 12% 13% 15% 8% Diluted EPS (cont. production and distribution Studio entertainment 15% 3% 10% 10% 12% 12% assets with universal and timeless appeal. 80% of ESPN. Europe 21% 19% 19% 24% 27% n/a Asia Pacific 21% 23% 27% 25% 28% n/a • Attractive reinvestment opportunities. ABC (one of only four U.com July 2013 – Page 103 of 117 .8 36. parks attendance 2% 2% -1% 2% 3% 6% including ABC. continuing the growth of recent years.40 0.9 Studio: owns film banners.856 1. % of revenue by segment: Pixar.S./Canada 4% -4% 3% 9% 3% n/a Europe 15% -12% 9% -1% -4% n/a • Growth in theme park attendance suggests Asia Pacific 5% 3% 25% 8% 19% n/a enduring brand relevance. Disney’s Selected items as % of revenue: brands have universal appeal that may be exploited Gross profit 20% 16% 18% 19% 21% 20% in international markets. Toy Story.3 21./Canada 21% 16% 18% 21% 22% n/a U. profits are Dividends per share ($) 0.1 35. Florida. corporate: -1%): INVESTMENT HIGHLIGHTS Media networks 31% 29% 30% 33% 34% 31% Parks and resorts 16% 13% 12% 13% 15% 14% • One-of-a-kind content. investments 9% 10% 8% 8% 8% 10% INVESTMENT RISKS & CONCERNS LT investments 9% 11% 11% 11% 11% 6% • Valuation. Selected items as % of tangible assets: Cash.915 1.5 40. including Walt Disney Pictures. So far. RATINGS Marvel (‘09). and a valuable content library including Europe 18% 17% 17% 16% 15% n/a Mickey Mouse.5 and generally low-capital-intensity business model.52 3.S.2 41. Playdom (‘10). broadcasting and radio assets.S. Hollywood Records.791 have been offset by higher affiliate fees and ad rates.

94 (§) multiplied by minus minus Average 7-year EBIT margin: 19.manualofideas.3 billion on M&A Source: Company annual report for the fiscal year ended September 30.94 has been revised upward by 1% from $3.8 billion Assumed upside/downside to equals equals FY14 EPS estimate: 10% * $3. The Manual of Ideas analysis.3% required FCF yield) 125% equals equals (17. or $39 per share $115 billion. Source: Company filings.8 billion shares out) stock price ($63 per share) stock price ($63 per share) 17% upside to the recent (*) Represents Broadcasting & Cable TV industry median multiple. All rights reserved. stock price ($63 per share) (§) The FY14 consensus EPS estimate of $3.8% (*) multiplied by 10.4 billion Free cash flow: $4.3 billion of net cash from operations and spent $1.7 billion Consensus FY14E EPS: $3. 2013 and average estimate for the fiscal year ending months ended March 30.com July 2013 – Page 104 of 117 .94 Estimated EBIT: $8. JOIN TODAY! www.9 billion equals multiplied by divided by Revised FY14 EPS estimate: $4. © 2008-2013 by BeyondProxy LLC. It also spent $2.0x equals Corresponding industry P/E: 13.33 Assumed fair value multiple of EBIT: Industry median FCF yield: 4. as Disney generated $3.1% Capex: $2. FY2010-FY2012 ($ in millions) Disney’s FCF is underwhelming relative to its recent market value of ~$115 billion This trend has continued in 1H13. 2014 ▼ ▼ ▼ TTM net sales: $44 billion Operating cash flow: $7.8 billion shares out) $133 billion ($74 per share) 38% downside from the recent 1% upside to the recent (based on 1.0 billion percentage of the industry FCF yield: Assumed DIS multiple as a minus 90% percentage of the industry multiple: Total debt: $17 billion (4. 2012. Value-oriented Equity Investment Ideas for Sophisticated Investors WALT DISNEY – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS Conservative Base Case Aggressive Valuation methodology: Valuation methodology: Valuation methodology: Based on revenue for the twelve months Based on median consensus EPS Based on free cash flow for the twelve ended March 30. assumptions and estimates. WALT DISNEY – COMPOSITION of FREE CASH FLOW.6x (*) equals Industry FCF yield-implied fair value: equals Estimated fair enterprise value of $103 billion ($57 per share) Industry multiple-implied fair value: Walt Disney: $84 billion multiplied by $106 billion ($59 per share) plus Assumed required FCF yield as a multiplied by Cash.8 billion shares out) (based on 1. ST investments: $4. 2013 EBIT margin for past seven fiscal years September 29.88 three months ago.1 billion on capex.0x fair value P/E multiple) Estimated fair value of the common Estimated fair value of the common equals equity of Walt Disney: equity of Walt Disney: Estimated fair value of the common $71 billion. or $64 per share equity of Walt Disney: (based on 1.

(j) The Walt Disney Company has a majority stake in the management company and 43% ownership of Shanghai Disney Resort. All rights reserved. but does not include Disney Vacation Club properties.. (i) The Walt Disney Company owns a 48% interest in the Hong Kong Disneyland Resort through Hongkong International Theme Parks Limited. dining and entertainment areas and surrounding land.. including undeveloped land. A subsidiary of The Walt Disney Company manages the resort and another subsidiary earns royalties on Disneyland Paris revenues. © 2008-2013 by BeyondProxy LLC. one property at Disneyland Resort. (d) Includes Disney’s Fort Wilderness Resort & Campground. a publicly held French entity that owns Disneyland Paris. The resort is also home to a 481 unit Disney Vacation Club facility that is being constructed in phases.C. a Disney Resort & Spa. which is owned and operated by Oriental Land Co. hotels. Hawaii.A. and Hongkong International Theme Parks Limited.C.. which is under construction. CA.manualofideas.. Oriental Land Co. and three beach resorts including Aulani. (b) Includes only hotels and Disney Vacation Club properties owned and operated by The Walt Disney Company. Value-oriented Equity Investment Ideas for Sophisticated Investors Disney’s world-renowned destinations keep the brand alive with customers and give the company proprietary distribution channels worldwide WALT DISNEY – OVERVIEW of PARKS and RESORTS (a) Includes theme parks. (f) Total acreage including 461 Company-owned acres and 49 acres under long-term lease in Anaheim. (h) The Walt Disney Company has an indirect investment in Euro Disney S. Euro Disney S. a Japanese corporation not affiliated with The Walt Disney Company.. JOIN TODAY! www..A. Source: Company fact book for the year 2012. (k) A subsidiary of The Walt Disney Company earns royalties on revenues generated by the Tokyo Disney Resort. A separate Hong Kong subsidiary of the Company is responsible for managing Hong Kong Disneyland Resort. (c) Total acreage. (l) Includes the seven Disney Vacation Club properties at the Walt Disney World Resort. Ko Olina. (e) Excludes the approximately 800 campsites at Disney’s Fort Wilderness Resort & Campground. Ltd. (m) Adventures by Disney provided 24 specialized excursion packages during 2012.com July 2013 – Page 105 of 117 . (g) Represents hotel rooms only. Ltd.

674 1.7x <1% 5/3 41 Daily Journal DJCO 107.0x 25% 1090% 42% 3.00 -14% 9% 644 376 .15 -53% 7% 46.916 5.4x 3% 6/5 31 * Ebix EBIX 9.4x 51% 113% 8% 1.37 -42% 24% 325 1.043 1.331 16.0x 12% 14 / 7 43 * Comverse CNSI 29.575 60. All rights reserved.14 -48% 7% 12.645 4.5x 59% 136% n/m >9.4x 52% 210% n/m n/m 8% 4/2 16 Hewlett-Packard HPQ 24.com July 2013 – Page 106 of 117 .7x 27% infinite 37% >9.1x 44% 122% 1% 5.480 2.723 .48 -11% 97% 180 536 1.78 -62% 2% 4.2x 28% infinite 35% 2.11 -16% 29% 2.3x 26% 243% 25% n/m <1% -/- 34 TeleComm Systems TSYS 2.596 8.84 -2% 71% 2.3x <1% -/- 2 Argan AGX 15.8x 64% 340% n/m n/m 3% 17 / 9 8 Education Management EDMC 6.0x 51% -/5 29 Central Euro.694 3.5x 49% 236% n/m n/m <1% 16 / 10 17 Unisys UIS 20.52 -14% 162% 354 388 1.6x 3% 9/5 26 SciClone Pharma SCLN 4.405 .3x 43% 127% n/m 2.399 2.2x 38% 266% 47% n/m 1% 20 / 12 18 Gentiva Health GTIV 10.84 -9% 59% 1.4x 51% 428% 42% 2.3x 21% 1066% n/m n/m 2% 2/4 28 Northern Tier Energy NTI 24.33 -24% 13% 148 37 1.07 -33% 84% 653 225 . Value-oriented Equity Investment Ideas for Sophisticated Investors 10 Essential Screens for Value Investors “Magic Formula.6x 61% 156% n/m 1.9x 20% 994% 9% n/m 10% 5/5 32 GameStop GME 40.209 3.7x 3% 2/5 7 Harte-Hanks HHS 8.286 .0x 2% 8/6 40 * PBF Energy PBF 24.2x <1% -/- 37 * Terra Nitrogen TNH 209.7x 101% 280% n/m n/m <1% -/- 9 Engility Holdings EGL 27.88 -26% 19% 818 320 .084 1.09 -35% 5% 1.817 1.7x 16% infinite 41% 2.manualofideas.0x 31% 455% n/m 4.981 2.075 .5x 16% infinite 84% n/m <1% -/2 44 Lender Processing LPS 31.7x 5% 6/4 4 ITT Educational ESI 23.2x <1% 15 / 11 13 Perion Network PERI 11.244 6.1x 30% infinite 35% n/m <1% 7/- 12 WellCare WCG 53.9x <1% 3/3 38 Quicksilver Resource KWK 1.99 -20% 10% 281 210 1. Screening criteria: ► Market value > $100 million ► ADRs and banks excluded ► China RTOs excluded © 2008-2013 by BeyondProxy LLC. BPI 12.8x 66% infinite n/m 2.6x 37% 270% n/m n/m 4% 8/9 19 Callwave CALL 14.3x 38% infinite n/m n/m 2% 16 / 14 6 Apollo Group APOL 19. Media CETV 3.2x 25% 1119% n/m 4.5x <1% 10 / 9 21 Endo Pharma ENDP 37.1x 16% infinite 31% 1.82 -11% 224% 321 2.548 1.5x 73% 273% n/m n/m 4% 16 / 4 10 InterDigital IDCC 44.4x 77% 1166% 39% 3. trading at high trailing EBIT-to-enterprise value yield ▼ ▼ Move To Trailing EBIT/ Price/ Insiders Price 52-Week MV EV EV/ EBIT/ Capital Tax Tangible % Buys/ Company Ticker ($) Low High ($mn) ($mn) Sales EV Employed Rate Book Own.578 1.27 -30% 2% 644 308 .2x 86% infinite 38% 1.4x <1% 1/- 27 * Ascent Media ASCMA 74.797 4.54 -50% 180% 550 490 .40 -22% 252% 144 251 1.33 -61% 165% 173 136 .4x <1% 8/7  Company website SEC Y! Price Charts Proxy Y! * New additions are highlighted.2x 30% infinite 33% 5.308 1.8x 1% 16 / 12 11 PDL BioPharma PDLI 7.0x 2% 15 / 10 23 Boston Scientific BSX 9.880 3.76 -31% 25% 402 473 .5x 95% 157% n/m 1.317 2.384 2.79 -42% 13% 592 565 .230 1.90 -25% 55% 265 182 1.20 -50% 23% 129 246 .126 .9x 5% 10 / 5 35 Sealed Air Corp.0x 36% 188% n/m n/m <1% 11 / - 30 CRA International CRAI 18.22 -54% 29% 775 1.3x 38% 225% n/m n/m <1% 20 / 15 24 ZaZa Energy ZAZA 1.45 -25% 130% 430 1.88 -17% 24% 222 53 .80 -31% 30% 334 318 1.2x 33% 221% n/m 2.190 856 .535 .5x 33% 207% 2% 5.4x 32% 161% n/m 3.7x 100% 111% n/m n/m 11% 13 / 9 39 Amedisys AMED 12.551 .3x 29% 392% n/m n/m <1% 9/6 22 USA Mobility USMO 12.1x 31% 170% n/m n/m 2% 23 / 15 36 * Logitech LOGI 6.65 -73% 14% 807 1.47 -51% 7% 4.9x <1% -/- 42 Vonage VG 2.56 -66% 29% 139 131 2.2x 2% 16 / 5 33 * Constellium CSTM 15.70 -7% 22% 3. Sells 1 Bridgepoint Edu.16 -43% 10% 1.9x 17% 403% 45% n/m 2% 14 / 7 45 Kulicke and Soffa KLIC 10.32 -13% 2% 1.74 -18% 9% 1.9x <1% -/- 14 QuinStreet QNST 7. SEE 23.2x 71% infinite 38% 2.96 -48% 33% 2.1x 3% 2/1 3 Digital River DRIV 18.4x 23% infinite n/m n/m 8% 1/1 20 PMC-Sierra PMCS 6.66 -26% 89% 272 227 1.8x <1% 1/- 15 DG FastChannel DGIT 6.96 -43% 9% 560 606 .167 1.03 -23% 14% 1.24 -17% 99% 2.2x 100% 161% 43% n/m 4% 7/6 25 Neutral Tandem IQNT 5.037 1.31 -27% 22% 896 728 .5x 28% 231% n/m 6.5x 17% 1313% n/m >9.33 -27% 26% 187 158 .887 .420 3.81 -34% 5% 4.79 -50% 2% 477 773 .” Based on Trailing Operating Income Companies with high returns on capital employed.72 -33% 8% 2.5x 2% 16 / 7 5 Orbitz Worldwide OWW 7. JOIN TODAY! www.405 .138 2.295 2.

1x 9% 98% 21% 2.405 .281 2.0x <1% 15 / 6 9 IDT Corp.34 -30% 10% 3.4x 15% 89% 37% 2.775 .11 -16% 29% 2.9x 1% 19 / 8 41 ePlus PLUS 62.1x <1% 5/6 16 CF Industries CF 182. BPI 12.6x 8% 330% 40% >9.919 1.5x 10% infinite 21% >9.27 -21% 8% 277.1x <1% 7/6 38 EMC EMC 24.25 -14% 14% 17.753 2.7x 7% infinite 35% 2. Value-oriented Equity Investment Ideas for Sophisticated Investors “Magic Formula.405 .2x 2% 16 / 5 44 Nature’s Sunshine NATR 16.” Based on This Year’s EPS Estimates Companies with high returns on capital employed.228 12.3x <1% -/- 31 CTC Media CTCM 11.551 .286 . IDT 19.8x <1% 9/2 25 Broadcom BRCM 33. JOIN TODAY! www.19 -53% 8% 14.0x 9% 167% n/m 6.3x <1% -/- 32 Nevsun Resources NSU 2.7x 5% 6/5 24 Brocade Comms BRCD 5.5x 21% 75% 0% 2.2x 9% infinite 35% 2.9x <1% 5/1 40 Lexmark LXK 30.5x 8% 1/2 35 Western Digital WDC 60.3x 1% 14 / 11 34 PhotoMedex PHMD 15.2x <1% 5/- 45 * Korn/Ferry KFY 17.0x <1% 2/2 28 United Therapeutics UTHR 63. SDT 13.167 1.355 .1x 10% 3869% 26% 3.92 -8% 71% 592 257 .723 .33 -12% 16% 51.5x 2% 16 / 7 3 Apollo Group APOL 19.3x 15% 79% 36% 2.301 3.64 -30% 17% 619 604 1.299 2.5x <1% -/- 2 ITT Educational ESI 23. Criteria: ► MV > $100 million ► ADRs.84 -2% 71% 2.2x 9% infinite n/m 5.45 -31% 6% 208 169 1.10 -51% 2% 506 495 .0x 12% 14 / 7 18 Seagate Technology STX 42.0x 13% 89% 2% 6.618 2.122 1.4x 14% 428% 42% 2.0x <1% 8/6 17 Vonage VG 2.278 1.108 936 1.4x <1% 11 / 12 36 * ValueClick VCLK 23.53 -37% 10% 323 260 1.7x 14% 88% 32% 3.manualofideas. Sells 1 SandRidge Miss.5x 8% 102% 32% 2.24 -17% 99% 2.31 -21% 13% 259 179 .5x 8% 102% 0% >9.3x <1% -/- 13 HollyFrontier HFC 41.6x 15% 70% 7% 1.321 16.22 -50% 47% 4.7x <1% 7/7 29 Global Sources GSOL 6.4x 12% 67% 34% 3.4x <1% 1/3  Company website SEC Y! Price Charts Proxy Y! * New additions are highlighted.274 3.07 -33% 84% 653 225 .7x <1% 19 / 13 26 Cisco Systems CSCO 24.5x 12% 62% 31% 2.54 -28% 10% 854 610 .295 2.1x 8% 4/7 10 Questcor Pharma QCOR 43.2x 9% 163% 40% 5.89 -11% 70% 1.2x <1% 15 / 11 12 Magic Software MGIC 5.1x 13% 80% 34% 4.882 1.2x 12% 221% n/m 2.0x 51% -/5 5 SciClone Pharma SCLN 4.6x 12% 8 / 10 20 CVR Refining CVRR 29.32 -16% 23% 4.956 128.181 .817 1.43 -10% 119% 376 375 4.4x 9% 604% n/m 5.131 348.146 2.90 -40% 13% 1.2x <1% 10 / 4 14 VAALCO Energy EGY 5.1x <1% 6/2 23 Microsoft MSFT 33.180 .9x <1% 12 / 4 11 WellCare WCG 53.2x 12% 93% 32% 2.546 2.225 1.9x <1% -/- 33 Sturm.7x 9% infinite 41% 2.75 -26% 42% 2. RGR 48. trading at high earnings yields (based on this FY EPS estimates) ▼ ▼ Move To This FY EBIT/ Price to Insiders Price 52-Week MV EV EV/ EPS Capital Tax Tangible % Buys/ Company Ticker ($) Low High ($mn) ($mn) Sales Yield Employed Rate Book Own.7x <1% 5/3 7 Oracle ORCL 30.399 2.6x <1% 12 / 15 39 * Rentech Nitrogen RNF 28.25 -47% 7% 15.7x 3% 2/5 4 Northern Tier Energy NTI 24.5x 10% 83% 39% .768 2.4x 3% 6/5 43 GameStop GME 40.6x <1% 14 / 1 21 ZAGG ZAGG 5.512 2.4x 17% 1166% 39% 3.11 -7% 129% 157 175 .800 217.9x 9% 98% 31% 2.50 -7% 71% 388.835 99.1x 18% 82% 97% 1.53 -23% 43% 8.51 -19% 17% 2.7x 14% 65% 12% 2.5 ► China RTOs excluded © 2008-2013 by BeyondProxy LLC.2x 8% infinite 38% 1.830 10.994 2.308 1.1x 16% 122% 1% 5.45 -47% 6% 1.96 -48% 33% 2.14 -10% 21% 141.9x 8% infinite 23% 4.149 15.910 .6x <1% -/- 30 Bridgepoint Edu.96 -61% 34% 2.1x 8% 894% 22% 7.13 -15% 20% 380 491 1.67 -7% 28% 10.33 -27% 26% 187 158 .328 4.7x 8% 182% 37% 8.1x 9% 182% 36% 2.9x 5% 9/9 37 * CVR Energy CVI 49.744 2.90 -25% 55% 265 182 1.56 -1% 73% 322 219 1.695 2.738 .5x 8% infinite 41% 2.482 4.0x 12% 80% 50% 4.84 -42% 35% 1. Ruger & Co.com July 2013 – Page 107 of 117 .797 4.435 7.5x 3% 7/3 22 Smith & Wesson SWHC 9. banks excluded ► EV to MV < 1.4x 18% infinite n/m 1.5x 9% 7/5 42 CRA International CRAI 18.7x 13% 80% 39% 2.279 4. All rights reserved.4x <1% 1/- 6 * PBF Energy PBF 24.5x 8% 231% n/m 6.113 46.6x 8% 156% n/m 1.48 -3% 160% 1.5x 16% 207% 2% 5.1x <1% 15 / 15 27 America’s Car-Mart CRMT 42.5x 9% 1799% 33% >9.79 -42% 13% 592 565 .55 -55% 9% 448 313 .1x 8% infinite 10% 4.718 1.4x <1% 11 / 12 19 Western Refining WNR 27.443 2.78 -62% 2% 4.54 -50% 180% 550 490 .5x 3% -/1 15 Cirrus Logic CRUS 17.23 -25% 25% 932 886 1.9x 24% 7/6 8 Apple AAPL 413.65 -19% 28% 229 132 .48 -39% 2% 130.

Value-oriented Equity Investment Ideas for Sophisticated Investors “Magic Formula.512 2.328 4.33 -27% 26% 187 158 .53 -23% 43% 8. Criteria: ► MV > $100 million ► ADRs.48 -39% 2% 130.308 1.54 -50% 180% 550 490 .919 1.4x <1% 18 / 11 32 CTC Media CTCM 11.113 1.” Based on Next Year’s EPS Estimates Companies with high returns on capital employed.48 -3% 160% 1.956 128.7x 13% 88% 32% 3.5x 8% 1/2 39 Lexmark LXK 30.557 2.75 -26% 42% 2.281 2.435 7.19 -53% 8% 14.9x 11% 98% 31% 2.286 .6x <1% 12 / 15 41 * Rentech RTK 2.78 -62% 2% 4.2x 9% 163% 40% 5.0x 12% 14 / 7 27 Broadcom BRCM 33.882 1.4x 12% 428% 42% 2.800 217.11 -7% 129% 157 175 .7x 3% 2/5 6 Questcor Pharma QCOR 43.1x <1% 15 / 15 37 * ValueClick VCLK 23.5x 17% 207% 2% 5.4x <1% 8/7 8 Oracle ORCL 30.7x <1% 19 / 13 28 Western Digital WDC 60.695 2.4x <1% 11 / 12 16 HollyFrontier HFC 41.7x 5% 6/5 25 Smith & Wesson SWHC 9.197 1.34 -30% 10% 3.4x <1% 1/3 34 * Meritage Homes MTH 43.88 -26% 19% 818 320 .50 -7% 71% 388.797 4.2x <1% 10 / 4 17 CF Industries CF 182.2x 3% 14 / 8 42 LSI Corp.0x 12% 80% 50% 4.5x 12% 62% 31% 2.6x 9% infinite n/m 2.32 -16% 23% 4.9x 1% 19 / 8 40 EMC EMC 24.146 2.855 3.80 -12% 44% 4.295 2.405 .3x 14% 79% 36% 2.0x <1% 14 / 6 43 PMC-Sierra PMCS 6.5x <1% -/- 2 Northern Tier Energy NTI 24.5x 3% 7/3 15 Seagate Technology STX 42.546 2.56 -1% 73% 322 219 1.7x 9% infinite 41% 2.399 2.443 2.278 1.manualofideas.180 .4x 16% infinite n/m 1.6x <1% 14 / 1 20 United Therapeutics UTHR 63.51 -19% 17% 2.230 1.8x 11% 71% 3% 7.775 .551 .1x 9% infinite 10% 4. SDT 13.4x 11% 1166% 39% 3. All rights reserved.279 4.1x 12% 80% 34% 4.5x 15% 75% 0% 2.5x 2% 16 / 7 11 Nevsun Resources NSU 2.0x <1% 8/6 18 Western Refining WNR 27.90 -40% 13% 1. Sells 1 SandRidge Miss.4x <1% 1/- 4 * PBF Energy PBF 24.5x <1% 10 / 9 44 * M/I Homes MHO 22.9x <1% 5/1 22 Brocade Comms BRCD 5.0x 9% 167% n/m 6.225 1.14 -10% 21% 141.228 12.753 2.167 1.5x 11% infinite 21% >9.67 -7% 28% 10.835 99.33 -12% 16% 51.718 1.64 -30% 17% 619 604 1.6x 9% 330% 40% >9.25 -14% 14% 17.0x 8% infinite 4% 1.45 -47% 6% 1.8x <1% 9/2 23 America’s Car-Mart CRMT 42.24 -17% 99% 2.7x <1% 5/3 5 Apollo Group APOL 19.6x 9% 156% n/m 1.9x 5% 9/9 38 PhotoMedex PHMD 15.1x 10% 182% 36% 2.5x 27% 83% 39% .4x 3% 6/5 31 * Pulte Homes PHM 18.7x 16% 80% 39% 2.54 -28% 10% 854 610 .9x 9% infinite 23% 4.5x 11% 1799% 33% >9.5 ► China RTOs excluded © 2008-2013 by BeyondProxy LLC.84 -42% 35% 1.482 4.13 -15% 20% 380 491 1.81 -52% 30% 7.723 .618 2.2x 2% 16 / 5 30 CRA International CRAI 18.06 -34% 23% 1.00 -12% 59% 452 524 1.25 -47% 7% 15.3x 10% 76% 16% 9.2x 13% 221% n/m 2.4x 13% 113% 8% 1.79 -42% 13% 592 565 .3x <1% -/- 33 * Korn/Ferry KFY 17.8x <1% 3/5 45 * Skyworks Solutions SWKS 21.2x <1% 15 / 11 13 VAALCO Energy EGY 5.03 -23% 14% 1.92 -8% 71% 592 257 .2x 8% 1119% n/m 4.738 .108 936 1.7x <1% 13 / 6  Company website SEC Y! Price Charts Proxy Y! * New additions are highlighted.9x <1% -/- 12 WellCare WCG 53.84 -2% 71% 2.5x 11% 102% 0% >9.0x 13% 89% 2% 6.4x 13% 89% 37% 2.709 2. trading at high earnings yields (based on next FY EPS estimates) ▼ ▼ Move To Next FY EBIT/ Price to Insiders Price 52-Week MV EV EV/ EPS Capital Tax Tangible % Buys/ Company Ticker ($) Low High ($mn) ($mn) Sales Yield Employed Rate Book Own.43 -10% 119% 376 375 4.9x 24% 7/6 9 Apple AAPL 413.9x <1% 12 / 4 7 Kulicke and Soffa KLIC 10.96 -48% 33% 2.0x <1% 2/2 24 Microsoft MSFT 33.67 -40% 28% 548 818 1.1x 11% 3869% 26% 3.0x <1% 15 / 6 10 ITT Educational ESI 23.2x 10% infinite 35% 2.301 3. JOIN TODAY! www.53 -37% 10% 323 260 1.299 2.2x 10% 93% 32% 2.830 10.7x 9% infinite 35% 2.96 -61% 34% 2.1x 10% 98% 21% 2.7x 13% 65% 12% 2.6x 9% infinite n/m 3.299 1.4x <1% 11 / 12 29 GameStop GME 40.321 16.994 2.89 -11% 70% 1.138 2.7x <1% 7/7 21 Rentech Nitrogen RNF 28.5x 9% 231% n/m 6.11 -16% 29% 2.6x 12% 8 / 10 19 CVR Refining CVRR 29.168 3.2x 2% 12 / 8 35 Cirrus Logic CRUS 17.181 .5x 3% -/1 14 ZAGG ZAGG 5.1x <1% 6/2 26 Vonage VG 2.90 -25% 55% 265 182 1.149 15.02 -20% 15% 3.1x <1% 5/6 36 Cisco Systems CSCO 24. banks excluded ► EV to MV < 1.com July 2013 – Page 108 of 117 .1x 9% 894% 22% 7.289 8.744 2.113 46.355 . LSI 7.0x 51% -/5 3 SciClone Pharma SCLN 4.768 2.405 .817 1.1x 21% 122% 1% 5.122 1.131 348.1x 21% 82% 97% 1.27 -21% 8% 277.2x 12% 58% 18% 3.

3x 678x <1% 14 / 9 15 Eldorado Gold EGO 6.7x 6.33 173 136 n/m -50% 107% -58% .2x 12x <1% -/- 27 Bridgepoint Edu.01 481 393 45% -45% -28% -41% 1.37 149 115 n/m -57% -31% -59% .3x 61x 2% 14 / 10 38 * Audience ADNC 13.0x 1.2x 74x <1% 15 / 7 37 Vocera VCRA 15.473 4.71 2.23 153 132 n/m -29% -2% -53% 1. Value-oriented Equity Investment Ideas for Sophisticated Investors Contrarian: Biggest Losers over Past 52 Weeks (deleveraged & profitable) Non-financial companies with no net debt.653 1.4x 1.40 109 54 -73% -37% -11% -49% 5.9x 7x <1% -/- 13 Glu Mobile GLUU 2.530 -51% -72% -62% -63% 1. Sells 1 Harmony Gold Mining HMY 3.54 550 490 -65% -59% 36% -58% .1x .4x 2.068 950 -4% -52% 3% -32% 2.5x 16x <1% 9/2  Company website SEC Y! Stock Price Charts Proxy Y! * New additions are highlighted.3x 22x <1% 1/3 32 Cirrus Logic CRUS 17. Price TTM Tangible FY % Buys/ Company Ticker ($) ($mn) ($mn) 2006 2011 2012 Change Revenue Book P/E Own.32 1.com July 2013 – Page 109 of 117 .2x 7x <1% -/- 8 CafePress PRSS 6.1x 3.6x 61x 3% 9/5 10 ITT Educational ESI 23.1x 314x 2% 4/3 22 JAKKS Pacific JAKK 10.39 406 263 74% -63% -45% -55% >99x .238 16% -54% -52% -49% 3. SDT 13.70 385 258 n/m n/m -37% -37% 2.535 -78% -70% -61% -64% .01 1.36 1.600 28% -31% -43% -39% 8. JOIN TODAY! www. Criteria: ► Positive net cash ► Positive next FY EPS ► MV > $100 million ► China RTOs excluded © 2008-2013 by BeyondProxy LLC.022 965 88% -12% -21% -33% 1.597 1.2x 14x <1% 4/5 42 * Edwards Lifesciences EW 66.5x 7x <1% -/- 4 Endeavour Silver EXK 3.1x 11x 11% 7/3 17 Volterra Semi VLTR 13.661 6.4x 18x 3% 6/1 7 Compania de Minas BVN 15.9x 19x 1% 10 / 6 34 Fusion-io FIO 13.8x 16x 2% 13 / 12 39 * Hecla Mining HL 2.279 924 n/m -46% -43% -37% 2.31 1.9x 13x <1% -/- 16 * Pain Therapeutics PTIE 2.9x 1.167 1.6x 1. BPI 12.5x 5.4x 1.21 278 163 n/m n/m 27% -36% 1.84 1. and large price drop over past 52 weeks ▼ Price Change Since 52-Week EV / Price to Next Insiders Price MV EV December 31.3x .7x 12x <1% 1/1 3 IAMGOLD IAG 4.9x .1x 5.6x 39.51 222 259 -37% -52% -40% -40% 1.1x 5x <1% -/- 5 Silvercorp Metals SVM 2.7x 15x 3% 10 / 2 23 LivePerson LPSN 9. All rights reserved.75 7.3x 34x 9% 4/1 24 * Boingo Wireless WIFI 6.6x 9.8x 40x <1% 1/1 14 * Zynga ZNGA 2.9x 1.108 936 154% 10% -40% -39% 1.98 4.2x 44x <1% 2/3 25 Apollo Group APOL 19.12 105 81 n/m n/m 6% -58% .7x 12x <1% -/- 21 Brightcove BCOV 8.3x .0x 51x <1% 8/8 35 Procera Networks PKT 13.53 508 479 429% -55% -38% -64% 3.53 1.7x 9x <1% 7/- 40 Logitech LOGI 6.96 1.19 2.9x 28.0x 4x <1% -/- 6 Skullcandy SKUL 5.63 282 300 -76% -63% 27% -46% 9.141 183% -6% -26% -33% 3.29 273 157 -39% -15% -28% -37% 2.2x 1.93 836 690 -62% -44% -50% -35% 2.6x 3.6x 13x <1% 5/- 9 Neutral Tandem IQNT 5.2x 1.5x 3. VOLC 17.2x 21x <1% -/- 41 Liquidity Services LQDT 32.13 361 231 -25% -26% -25% -37% .5x 18x <1% 12 / 12 43 * VirnetX VHC 21.45 7.051 953 -73% -46% -47% -46% 4.02 224 211 -54% -29% -20% -44% .6x 2.27 952 622 -26% -22% -10% -32% 1.92 427 324 n/m -49% 41% -57% .5x 1.8x 38x <1% 18 / 7 30 Vocus VOCS 10.2x 2.190 856 -76% -12% -9% -35% .13 219 127 n/m -29% -19% -44% 1.9x 51x 3% 2/2 29 Tellabs TLAB 2.519 4.8x 1.4x 3.6x 2.0x 30x 2% 8/1 36 Volcano Corp.974 2.4x n/m 29x 7% 10 / 4 31 * Royal Gold RGLD 46.31 513 418 78% -26% -29% -44% 2.8x .780 43% -32% -33% -42% .405 -51% -64% -8% -42% .5x 13.24 2.5x .6x 21x 16% 6/- 44 * MicroStrategy MSTR 84.90 976 956 9% -25% -24% -37% 2.5x 6x <1% -/- 19 Emerald Oil EOX 6.94 1.9x 15x <1% 8/3 18 SandRidge Miss.96 349 197 -7% -45% -19% -47% 1.085 2424% -12% -25% -33% >99x 23.43 438 308 -83% -62% -53% -59% 1.5x 19x 5% 1 / 11 20 Aurico Gold AUQ 4.07 653 225 n/m -48% 17% -41% .4x 3.3x 3.2x 8.4x 3.4x 1.48 1.8x n/m 58x 3% 6/8 12 Rubicon Minerals RBY 1.17 230 203 n/m n/m -10% -46% 2.0x .2x 2.7x 9x 3% 2/5 26 * Lan Airlines LFL 15.480 14% -58% -56% -58% 2. positive analyst estimates for next year’s EPS.5x 8.1x 3.54 357 317 -9% -64% -55% -59% 1.151 983 n/m -71% 15% -53% .43 376 375 n/m -57% -18% -47% 4.01 713 141 -80% -50% -12% -40% .1x 10x <1% 5/6 33 Multi-Fineline MFLX 15.4x 6x <1% -/- 2 Gold Resource GORO 9.manualofideas.24 4.123 1.5x 9x 2% 16 / 7 11 Active Network ACTV 6.6x 27x <1% -/- 45 Quality Systems QSII 17.3x 22x <1% -/- 28 * Spectrum Pharma SPPI 8.6x 4.506 7.

3x 22x 14x 50% 45% .71 -26% 19% 263 710 .705 .25 -32% 4% 170 241 .16 -19% 59% 186 173 . <1% 14 / 11 45 * Basic Energy BAS 12.2x .506 2.com July 2013 – Page 110 of 117 .53 -10% 31% 295 1.R.18 -18% 30% 1. 17% 14% 4% 2% -/- 37 EnergySolutions ES 4.2x 22x 11x 22% 21% .31 -35% 50% 199 1.99 -20% 10% 281 210 1. 1% -/- 2 McClatchy MNI 2. 11% 20% % <1% 14 / 8 24 Global Cash Access GCA 5.0x 9x 8x 11% 32% .4x >99x >99x 65% 43% .271 . 2% 20 / 16 33 * Cott Corp.2x . Value-oriented Equity Investment Ideas for Sophisticated Investors Contrarian: Cheap Free Cash Flow Gushers Companies that trade at a high free cash flow yield. 2% 12 / 6 11 Bridgepoint Edu.663 1.361 .manualofideas. .00 -1% 87% 4.427 . P/E FCF Yield Price 52-Week MV EV EV/ This Next 5-Yr.1x 12x 9x 25% 25% .127 1. Sells 1 * Lee Enterprises LEE 1.68 -65% 28% 362 1.48 -11% 97% 180 536 1.4x 7x 9x 17% 24% .290 .12 -55% 58% 156 461 1.4x 9x 9x 23% 14% .5x 10x 9x 22% 13% 1% 10% 19 / 9 44 Journal Comms JRN 7. 2% 8/- 9 Xerium Technologies XRM 10.57 -37% 0% 385 622 1.6x 11x 10x 41% 23% .0x 18x 13x 17% 25% . Insider Buys/ Company Ticker ($) Low High ($mn) ($mn) Sales FY FY LTM Avg. 16% -/3 41 SkyWest SKYW 13.46 -32% 33% 526 1.29 -74% 9% 158 559 1.1x 13x n/m 23% 16% . <1% 10 / 7 15 Apollo Group APOL 19.0x .99 -45% 10% 104 958 1. <1% 5/5 12 DG FastChannel DGIT 6.244 . 10% 16 / 9 43 Lifetime Brands LCUT 13.70 -53% 6% 450 562 .544 4. 4% -1 / -1 18 Entercom ETM 9.716 . 15% 14% .2x 12x 22x 14% 28% .37 -42% 24% 325 1.600 .5x 7x 7x 19% 14% 2% <1% 9/2 35 Internet Initiative Japan IIJI 19. 4% 11 / 5 39 Xerox XRX 9.9x 8x 8x 15% 14% 2% <1% -/- 40 Consolidated Graphics CGX 46. <1% 10 / 5 28 Exelis XLS 13.710 1. <1% 11 / 3 14 Cloud Peak Energy CLD 17.07 -33% 84% 653 225 .61 -54% 20% 706 1. Div.8x 16x 14x 24% 20% .529 1. All rights reserved.167 1.8x 8x 7x 13% 19% . Criteria: ► LTM FCF yield > 10% ► 5-yr FCF yield > 10% ► MV > $100 million ► China RTOs excluded © 2008-2013 by BeyondProxy LLC. Yield Own. using average FCF for the past five years ▼ Move To Est.5x n/m 14x 16% 37% .8x 11x 9x 12% 13% .3x 26x 24x 11% 33% . .7x 8x 7x 13% 17% 5% 2% 20 / 11 30 TeleNav TNAV 5.6x . <1% 10 / 1 38 * PharMerica PMC 13.08 -37% 11% 160 476 .5x 8x 8x 11% 20% 8% 2% 4/4 23 * Nortel Inversora NTL 15. 21% 18% .05 -36% 4% 2.9x 8x 6x 42% 30% . 4% -1 / -1 20 TeleComm Systems TSYS 2.405 .5x 35x .4x .32 -32% 0% 2. BPI 12.64 -5% 47% 724 1.352 . 29% 33% .075 . 12% 12 / 6 6 Navistar NAV 26. 2% 7/7 10 Republic Airways RJET 11.22 -21% 29% 940 1. . <1% -/- 7 Alliance Imaging AIQ 16. . 3% 9/3 16 Petroleo Brasileiro PBR 13.15 -53% 7% 46.588 1.17 -25% 25% 391 655 .33 -71% 14% 115 909 2.170 5.905 166.5x 13x 10x 10% 18% 3% <1% 8/6 27 Radio One ROIAK 2. JOIN TODAY! www. 8% 5/7 13 Corinthian Colleges COCO 2. 18% 8/2 5 Global Geophysical GGS 4.5x 11x 9x 28% 13% 1% 2% 14 / 6 42 Skilled Healthcare SKH 6.14 -3% 26% 2.293 2.4x 6x 6x 51% 87% .23 -29% 4% 1.4x 18x 10x 12% 19% 1% 11% 2/- 26 Domtar UFS 69.24 -17% 99% 2.826 1.3x >99x 14x 11% 15% 2% <1% -/- 32 Westmoreland Coal WLB 11.41 -64% 5% 561 2.6x .99 -72% 19% 1.5x .6x 9x 9x 18% 17% 3% <1% 11 / 8 29 Valassis Comms VCI 24.235 .5x 9x 10x 17% 21% . 6% -1 / -1 31 * Peabody Energy BTU 16. 12% -1 / -1 4 Supervalu SVU 5.331 1.7x 9x 4x 36% 55% .8x 21x 11x 27% 14% .89 -1% 44% 390 437 . 11% 14% 3% 2% -/- 34 Hewlett-Packard HPQ 24. .76 -31% 25% 402 473 .5x 14x 12x 14% 13% . 3% 10 / 7 22 R.369 5.99 -33% 44% 2.045 1.5x 14x 10x 16% 13% .563 1.708 1.80 -1% 80% 91. 13% 10 / 5 19 Pantry PTRY 12.970 . 11% 14% 1% <1% 5/9 36 USA Mobility USMO 12.01 -49% 12% 1.09 -78% 5% 171 685 1. Donnelley RRD 13.20 -43% 10% 356 912 2. 2% -1 / -1 8 * Amedisys AMED 12. 5% 7/9 21 AmSurg AMSG 35.4x 43x 13x 31% 28% .314 9.13 -4% 64% 204 16 .14 -65% 0% 375 941 . . <1% 4/2 25 * Bon-Ton Stores BONT 17.4x 12x 10x 12% 22% .20 -50% 23% 129 246 .0x n/m 26x 15% 13% .905 . 54% 61% .2x 7x 6x 28% 23% 4% <1% -/1 17 Gentiva Health GTIV 10.28 -34% 4% 11.395 19. <1% -1 / -1 3 Cenveo CVO 2.575 60.17 -18% 44% 139 1.126 . COT 7.325 .15 -40% 25% 992 992 . . 7% -/-  Company website SEC Y! Price Charts Proxy Y! * New additions are highlighted.

manualofideas.8x 24x 1. 1.38 12. All rights reserved.49 1.8% .4x n/m 28% 2/- 9 Dun & Bradstreet DNB 95.5% n/m 21x .3x -19% <1% -/- 17 PartnerRe PRE 87.9x 12x 3.53 3.32 4.00 3. Value-oriented Equity Investment Ideas for Sophisticated Investors Value with Catalyst: Cheap Repurchasers of Stock Companies that may be creating value by reducing their shares outstanding at relatively cheap prices ▼ Q-Q EV / Next Price to Net Cash Insiders Price MV EV Change TTM FY Tangible as % of % Buys/ Company Ticker ($) ($mn) ($mn) in Shares Revenue P/E Book MV Own.25 112 n/m -2.2% . JOIN TODAY! www.3x 9x .370 4.1% 1.35 172 204 -3.5% 3.932 -3.211 n/m -2.003 -2.9% 1. 1.4x 16x 1.4% .2% 3.249 20.7% n/m 10x .5x n/m <1% -/- 13 DIRECTV DTV 61.479 51.08 5.5% n/m 9x 1.01 713 141 -2.73 34.39 3.929 -2.73 982 n/m -4.2% n/m .9x n/m 6% 6/5 27 * Silicon Image SIMG 5. TVL 14.4% 2.14 4.35 6.13 1.6x .1x 10% <1% 10 / 8 23 Aspen Insurance AHL 36.04 1.7% 1.3% 1.7% n/m 17x .4x .4% .4 ► MV > $100mn ► Q-Q ∆ shares < 0 © 2008-2013 by BeyondProxy LLC. 1.5% 1.32 1.97 682 n/m -2.2x 12x 3.7x 14% <1% 16 / 7 15 Horace Mann HMN 24.322 6.989 n/m -3.24 139 n/m -2.1% n/m 10x 3.5% 1. 1.7x 10x n/m -48% <1% -/- 14 * Lam Research LRCX 45.671 -2.5x n/m 1% 22 / 13 45 * Seacor Holdings CKH 79.8x 34% <1% 2/- 22 Lear LEA 58.37 156 103 -2.5% n/m 13x 1.93 278 n/m -2.154 7.0x n/m <1% 1/- 30 Northwest Bancorp NWBI 12.5% .407 n/m -2.165 -4.084 -4.2x n/m 2% 19 / 6 31 Computer Sciences CSC 44.6x 24% <1% -/- 20 Wienerberger WBRBY 2.8x n/m 2% 17 / 7 16 United Capital UCAP 29.2% .5x n/m 2% 21 / 13 43 * Yamana Gold AUY 9.3x n/m 3% 14 / 5 33 First Commonwealth FCF 6.2x -11% 1% 13 / 12 7 RenaissanceRe RNR 83.5x 11x 24.4x 16% 2% 11 / 4 38 * Legg Mason LM 30.7x 9x n/m -163% 4% 12 / 2 35 LIN TV Corp.2% n/m .2x -4% <1% 9/8 19 Conrad Industries CNRD 28.2x . FKYS 25.com SMPL 14.54 428 311 -2. 1.8% 1.9x 8x n/m -120% 5% 5/6 36 Bel Fuse BELFA 13. FBRC 24.07 1.79 1.5% n/m 15x 1.6x .7x 9% <1% -/- 6 Coinstar CSTR 59.2x 11% <1% -/- 2 Charter Financial CHFN 9.391 1.3% n/m .823 n/m -6.6x n/m <1% -/- 42 * Health Net HNT 30.80 122 43 -2.6x n/m <1% -/- 3 AXA AXAHY 19.660 1.341 -2.8% n/m .5% n/m 19x 1.3% .8x n/m <1% 20 / 11 18 * Zimmer Holdings ZMH 76.75 7.8x 11x n/m -4% <1% 24 / 15 26 Am. 1.9x -7% <1% -/- 44 * State Street STT 64.908 n/m -5.3x 9x 2.30 6.95 29.67 46.1% .00 7.712 n/m -6.262 -4.0% n/m 12x n/m n/m <1% 18 / 8 10 * First Citizens Banc FCNCA 199.4x 10x n/m 2% 1% 15 / 5 12 Primus Guaranty PRSG 10.183 4.34 2.8% n/m . . 1.0x 12x 5.8x 80% <1% 18 / 7 41 * First Keystone Corp.4% .694 n/m -2.168 -2.715 n/m -11.5% .85 19.504 993 -9.25 249 655 -2.49 7.9x 12x .3x -31% <1% -/- 21 * Comtech Telecomm.701 -2.22 772 1.1% 4.7x n/m 1% 21 / 13 24 SimPlayer.0% n/m 11x .0x 10x 2.1x n/m <1% -/- 4 Celestica CLS 9.819 n/m -2.661 6.9% 1.826 -3.860 13.3% .3% n/m 11x .1x n/m 8% 10 / 8 40 * Tellabs TLAB 2.9x 65% <1% 7/- 25 Northrop Grumman NOC 81.622 n/m -2.663 7.81 423 281 -3.3x -21% 4% 11 / 6  Company website SEC Y! Proxy Y! * New additions are highlighted. CMTL 25.476 1. Safety Insurance ASI 28.1x 38x .7x . Criteria: ► MV < 2 * BV ► Next FY P/E < 12 ► Debt/equity < 0.2% n/m 11x 2.5x -10% <1% 9/9 32 * Arch Capital ACGL 50.6x 12x 39.3% n/m 12x 10.15 346 n/m -4.780 -15. 1.9x n/m 6% 15 / 6 29 Heritage Financial HBOS 14.30 2.591 1. 1.43 292 n/m -2.83 539 n/m -6.2x 34% <1% -/- 5 Aurico Gold AUQ 4.497 n/m -2.5% n/m 7x 1.2x n/m 1% 11 / 1 34 Quality Distribution QLTY 9.847 -6. Sells 1 * Lan Airlines LFL 15.98 227 n/m -12.051 953 -8.9x 34% <1% -/- 37 Crocs CROX 15.11 1.361 -3.2% n/m 12x 2.1x 27% 1% 8/7 28 * White Mountains WTM 575.1x n/m 14% 1/1 11 IAC/InterActiveCorp IACI 47.8x 10x 11.406 n/m -3.4% n/m 9x 1.50 174 131 -3.1x 23x .69 3.com July 2013 – Page 111 of 117 .0% .2x n/m 3% 21 / 11 8 Enterra Energy ENT 9.3x n/m <1% 5/4 39 * FBR & Co.92 1.

185 n/m 11% 11% 6x 6x 1.9x <1% 5/1 14 Enduro Royalty NDRO 16.15 -3% 66% 242 242 25% 22% 4x 4x 1.5x <1% -/- 6 SandRidge Permian PER 14.8x <1% -/- 39 * Nevsun Resources NSU 2. SDT 13. Sells 1 Whiting USA Trust II WHZ 13.91 -39% 14% 470 n/m 4% 5% 18x 11x 4.65 -14% 33% 62.7x <1% -/- 33 * James Hardie JHX 42.73 -9% 47% 773 771 16% 16% 6x 5x 1.274 3.22 -50% 47% 4.4x <1% -/- 41 Calamos Asset Mgmt CLMS 10.34 -16% 31% 69.51 -12% 17% 215 n/m 4% 5% 17x 17x 1.7x <1% 11 / 3 9 * VOC Energy Trust VOC 13.3x <1% 4/4 26 IAMGOLD IAG 4.384 n/m 3% 6% 9x 8x 1.34 -36% 27% 46.7x 3% 15 / 4 37 TrustCo Bank Corp NY TRST 5.392 2.74 -7% 14% 36. NYCB 13.1x <1% 1/1 11 Banc Santander-Chile SAN 6.631 1.36 -2% 287% 1.1x <1% 5/7 31 GFI Group GFIG 3.22 -7% 13% 598 n/m 10% 10% 11x 10x .3x <1% -/- 28 CTC Media CTCM 11. WWE 9.52 -8% 20% 572 509 13% 14% 6x 7x 1.57 -26% 35% 70.690 18% 15% 10x 8x .84 -24% 3% 736 604 5% 5% 28x 22x 2.009 n/m 7% 7% 13x 14x 2.2x <1% -/- 35 Safety Insurance SAFT 49.02 -19% 11% 757 n/m 5% 5% 15x 15x 1.9x <1% -/- 15 Australia and NZ ANZBY 25.9x <1% 5/- 8 Cypress Sharpridge CYS 9.617 7% 8% 11x 14x 3.443 n/m 6% 7% 11x 11x 1.096 785 19% 17% 6x 6x .530 6% 6% 8x 7x . Value-oriented Equity Investment Ideas for Sophisticated Investors Profitable Dividend Payors with Decent Balance Sheets Dividend-paying companies with no net debt and EPS estimates in excess of 75% of the indicated annual dividend ▼ Move To Dividend Yield Est.1x 3% 10 / 4 42 American Software AMSWA 8.9x <1% -/- 16 CVR Partners UAN 22.4x 1% 22 / 22 22 Banco Argentaria BBVA 8.63 -12% 10% 6.70 -35% 16% 12. KKR 18.672 3.519 2% 5% 20x 15x >9.0x 1% 4/3 43 AXA AXAHY 19.324 n/m 5% 5% 15x 14x 2.02 -8% 16% 65. II SDR 13. P/E Price to Insiders Price 52-Week MV EV Last 12 Annual This Next Tangible % Buys/ Company Ticker ($) Low High ($mn) ($mn) Months Indicated FY FY Book Own.8x <1% 11 / 1 5 Sandridge Miss.1x <1% -/- 44 United Bankshares UBSI 26.70 -6% 22% 850 n/m 8% 7% 14x 14x 1.43 -10% 119% 376 375 21% 18% 6x 6x 1.34 0% 61% 1.98 -16% 48% 238 238 14% 14% 7x 7x >9.4x 1% 5/1 38 Sun Life Financial SLF 28.87 -37% 12% 62.5x <1% -/- 2 SandRidge Miss.04 -6% 6% 24.218 5.779 n/m 5% 5% 10x 9x 1.44 -15% 7% 230 178 4% 5% 21x 16x 4.414 n/m 5% 5% 12x 11x 1.51 -2% 33% 1.69 -2% 26% 2.69 -6% 25% 7.1x 6% 11 / 9 36 World Wrestling Ent.9x <1% -/- 12 PennyMac Mortgage PMT 20.6x <1% -/- 20 KKR & Co.9x <1% 5/4 21 First Financial Banc FFBC 14.9x <1% -/- 40 NTT DoCoMo DCM 15.0x <1% -/- 23 CVR Energy CVI 49.9x <1% -/- 34 * Himax Tech HIMX 5.3x <1% -/- 29 Citizens & Northern CZNC 19.92 -8% 71% 592 257 5% 5% 10x 4x .6x <1% -/- 7 Invesco Mortgage IVR 17.744 5% 5% 12x 11x 5. © 2008-2013 by BeyondProxy LLC.882 1. All rights reserved.manualofideas.910 2% 6% 9x 11x 3.2x 41% 10 / 8 32 Bank of Montreal BMO 56.06 -71% 62% 858 792 2% 5% 12x 8x 2.841 n/m 12% 12% 9x 10x 1. Capital Mortgage MTGE 18.35 -6% 12% 504 n/m 5% 5% 13x 12x 1.48 -15% 11% 2.8x <1% 6/3 17 NY Community Banc.00 -12% 29% 3.652 62.59 -2% 44% 1.883 n/m 7% 7% 7x 8x 6.89 -12% 58% 696 695 13% 17% 5x 5x 1.25 -9% 8% 237 n/m 5% 5% 12x 12x 1.1x 4% 1/2  Company website SEC Y! Price Charts Proxy Y! * New additions are highlighted.9x <1% -/- 4 Am.091 6% 6% 17x 19x 2.13 -6% 22% 532 532 3% 9% 11x 9x .645 1.9x <1% -/- 10 Ellington Financial EFC 22.253 15% 15% 7x 7x .5x <1% -/- 19 Nat’l Australia Bank NABZY 26.20 -20% 61% 656 654 14% 17% 6x 6x 1.90 -20% 37% 79.86 -29% 13% 259 225 12% 5% 15x 14x 4.67 -46% 10% 46.5x <1% -/- 27 Sumitomo Mitsui SMFG 8.09 -4% 44% 1.0x <1% -/- 25 Mercury General MCY 42.5x <1% -/- 3 Chesapeake Granite CHKR 14.0x 2% 17 / 9 13 Apollo Commercial RE ARI 16.433 23.653 1.1x <1% 7/6 24 Chunghwa Telecom CHT 31.715 n/m 5% 5% 8x 7x 1.4x 2% 19 / 1 30 Garmin GRMN 34.333 n/m 6% 6% 17x 16x 1. Criteria: ► Positive net cash ► Positive EPS for this/next FY ► MV > $100 million ► China RTOs excl.789 4% 5% 12x 11x 1.0x 2% 16 / 4 18 Westpac Banking WBK 127.2x 3% 9/- 45 PetMed Express PETS 12.979 5% 5% 15x 15x 2.404 n/m 2% 6% 8x 11x 1.30 -14% 4% 1.94 -32% 5% 17. JOIN TODAY! www.165 n/m 6% 9% 11x 11x 1.90 -40% 13% 1.118 n/m 6% 7% 12x 12x 2.com July 2013 – Page 112 of 117 .

725 2.2% .2x 1% 13 / 13 42 Sony SNE 20.9x <1% 9/9 18 Valero Energy VLO 35.22x 9x 7x .8x <1% 18 / 7 9 * CST Brands CST 32.3% 1.31 -14% 15% 2.313 .15x >99x 45x .908 .0x 12% 9/3 6 Insight Enterprises NSIT 17. Value-oriented Equity Investment Ideas for Sophisticated Investors Deep Value: Lots of Revenue.571 1.2x 1% 17 / 15 36 Nortel Inversora NTL 15. 1.40 -60% 43% 905 1. BPI 12.18x n/m n/m .548 12.23x >99x 28x .22x 16x 14x 1. All rights reserved. JOIN TODAY! www.970 .2% 3.manualofideas.3x <1% -/- 38 Centene CNC 50.81 -45% 27% 23.1x <1% 22 / 13 44 * Sims Metal SMS 7.39 -41% 26% 19.07x 14x 12x .5x ► MV < revenue ► MV > $500 million ► China RTOs excluded © 2008-2013 by BeyondProxy LLC.19x 18x 15x .26 -64% 9% 512 463 .228 .2% 2.9x 2% 12 / 10 24 Sears Holdings SHLD 44. .398 .323 11.27x n/m n/m .97 -41% 25% 1.147 27. Low Enterprise Value Companies that trade at low multiples of net revenue ▼ Move To Est.495 .17x 8x 11x 1.648 22.16x 18x 15x 1.01 -13% 56% 4. 3.855 2.048 1.967 .18x 10x 9x 1.1% 2.690 38.7x <1% 16 / 12 27 Flextronics FLEX 7.20x n/m n/m .502 5.56 -19% 22% 764 673 .09x 16x 14x 1.8x <1% -/- 40 Supervalu SVU 5.13 -57% 21% 7.1x <1% 16 / 12 19 Barnes & Noble BKS 18.74 -22% 11% 785 506 . Sells 1 Tech Data TECD 46.26x 7x 7x 1.139 1.7x <1% 5 / 10 26 Manpower MAN 54.24x 18x 16x 2.5x 9% 5/5 23 OfficeMax OMX 10.11 -16% 29% 2.301 24.21x 9x 8x 1.6% >9.230 4.7% 1.774 1.683 7.7x <1% 5/3 8 Tellabs TLAB 2.5% n/m <1% 5/8 12 SYNNEX SNX 42.32 -16% 5% 1. n/m 23% 14 / 11 20 Bunge BG 70.2x 1% 16 / 13 7 * PBF Energy PBF 24.13x 6x 5x 4.135 2.93 -59% 25% 14.94 -53% 4% 4.098 9.07 -33% 84% 653 225 .19 -17% 15% 10.26x 10x 9x 3.12x 12x 11x 1.638 1.97 -24% 8% 25.144 17.55 -21% 17% 625 797 . .23 -22% 4% 16.399 2.597 .3x 3% 10 / 7 3 Core-Mark CORE 63.0x 61% 11 / 6 17 Cardinal Health CAH 47. 2.7x <1% 12 / 10 32 Best Buy BBY 26.44 -35% 9% 649 637 .63 -23% 8% 2.7% n/m <1% 10 / 10 30 Nokia NOK 3.7% 3.327 .26x 26x 10x 2.07x 9x 8x .9x <1% -/- 45 Alcatel-Lucent ALU 1.23x 10x 8x .17x 7x 8x 2.621 .2x <1% -/- 14 WellCare WCG 53.11 -27% 5% 1.2x <1% 15 / 11 15 Delek US Holdings DK 29.15x 15x 14x .130 .1% 1.24x 23x 17x .990 1.8% .839 3.1x <1% 11 / 4 29 McKesson MCK 110. 4. Criteria: ► EV to TTM revenue < 0.095 .19x 17x 16x 6.900 . .13x 9x 8x .09x 9x 8x . n/m 18% 4/7 41 Safeway SWY 22. 2.01 -5% 93% 713 141 .15 -40% 25% 992 992 . .12 -33% 16% 1. 1.502 11.544 4.379 .16x 11x 10x .com July 2013 – Page 113 of 117 .9x 3% 3/- 22 * hhgregg HGG 16.564 .75 -37% 1% 732 767 .0x <1% -/- 37 * Bridgepoint Edu.5% 4.97 -9% 46% 1.8x <1% -/- 31 Avnet AVT 33.9x 2% 8 / 10 2 World Fuel Services INT 39.6% .8% 5.71 -20% 5% 2.915 .0% .924 .05 -23% 12% 4.4x 2% 13 / 6 13 Celestica CLS 9.352 .999 .972 . >9. n/m <1% -/-  Company website SEC Y! Price Charts Proxy Y! * New additions are highlighted.24x 12x 22x .4% 3.5% 1.25x .828 18.504 993 .361 .23x 14x 12x .788 .23x 12x 11x 2. 1.13 -27% 9% 1.1x <1% 19 / 9 21 Susser Petroleum SUSP 28.1x 1% 10 / 9 33 Insperity NSP 30.3% 1.18x 13x 13x 2. 2.25x 19x 14x .19x 20x 18x .5x 25% 14 / 1 10 Office Depot ODP 3.388 .6x 3% 12 / 6 34 Susser Holdings SUSS 49.519 .7x <1% -/- 43 * Marathon Petroleum MPC 72.08 -42% 5% 2.16x .4% 2.24x .121 1. 1.638 5.5% 2.325 .99 -72% 19% 1. n/m 24% 2/4 25 Tesoro TSO 54.22x 7x 8x 2.1% 2.77 -58% 6% 9.747 1. 1.723 .84 -44% 8% 4.018 . 2.84 -2% 71% 2.9x 3% 10 / 2 35 Owens & Minor OMI 33.8x 5% 11 / 11 39 China Yuchai CYD 17.5% 2.1% >9.876 .8% 3.308 1.45 -27% 6% 4.385 .286 .68 -51% 35% 983 1.128 .478 .25 -47% 19% 36.4x <1% 7/6 28 Phillips 66 PSX 59.18x 7x 6x 2.352 6.530 5.16 -44% 42% 1.14x n/m 38x 4. .34 -32% 5% 12.97 -10% 16% 1.9% 2.629 . P/E Annual Price to Insiders Price 52-Week MV EV EV/ This Next Dividend Tangible % Buys/ Company Ticker ($) Low High ($mn) ($mn) Sales FY FY Yield Book Own.98 -62% 53% 1.504 .26x 22x 14x .936 8. .1x 2% 16 / 8 11 AmerisourceBergen ABC 54.26x 45x 15x 1.38 -53% 15% 20.83 -32% 4% 664 578 .0x 3% 16 / 10 4 Ingram Micro IM 18.23x 20x 17x 2.1x 1% 9 / 10 16 Alon USA Energy ALJ 15. 1.16x 11x 10x .0x 1% 23 / 16 5 Kelly Services KELYA 17.82 -35% 25% 5. 1. 1.

Value-oriented Equity Investment Ideas for Sophisticated Investors

Deep Value: Neglected Gross Profiteers
Companies that trade at low multiples of gross profit

Move To Enterprise Value / Est. P/E Price/ Insiders
Price 52-Week MV EV Gross This Next Tang. % Buys/
Company Ticker ($) Low High ($mn) ($mn) Sales Profit EBIT FY FY Book Own. Sells
1 RealNetworks RNWK 7.40 -9% 19% 262 4 .0x .0x n/m - - .8x <1% 5/5
2 TeleNav TNAV 5.13 -4% 64% 204 16 .1x .1x .9x 13x n/m 1.1x 6% 5/9
3 Stewart Information STC 25.90 -49% 16% 581 440 .2x .2x 4.0x 11x 9x 1.5x 3% 15 / 4
4 Five Star Quality FVE 5.17 -42% 33% 249 280 .2x .2x 13.8x 22x 16x .9x 1% 7/-
5 TravelCenters TA 10.50 -60% 19% 310 368 .0x .3x 8.3x 9x 7x 1.0x 5% 5/-
6 Tellabs TLAB 2.01 -5% 93% 713 141 .1x .4x n/m n/m 38x .8x <1% 18 / 7
7 Telecom Argentina TEO 13.62 -33% 24% 2,077 1,329 .3x .4x 1.7x 5x 5x 1.2x <1% -/-
8 RadioShack RSH 3.17 -40% 36% 316 593 .1x .4x n/m n/m n/m .6x 2% 11 / 4
9 Kindred Healthcare KND 12.91 -32% 12% 698 2,244 .4x .4x 9.4x 10x 10x n/m 4% 22 / 14
10 Bridgepoint Edu. BPI 12.07 -33% 84% 653 225 .2x .4x 1.2x 12x 22x 1.3x <1% -/-
11 Blyth BTH 13.76 -8% 235% 220 320 .3x .4x 4.5x - - 6.0x 33% 9/2
12 Systemax SYX 9.40 -11% 38% 345 218 .1x .5x n/m - 8x .8x <1% 3/-
13 American Equity AEL 16.01 -36% 4% 1,025 702 .4x .5x 2.1x 8x 7x .6x 4% 17 / 7
14 ArcelorMittal MT 11.53 -3% 56% 19,242 37,244 .5x .5x 15.5x 32x 9x .5x <1% -/-
15 Office Depot ODP 3.98 -62% 53% 1,139 1,629 .2x .5x 8.0x >99x 45x 2.1x 2% 16 / 8
16 Avid Technology AVID 6.30 -7% 59% 245 174 .3x .5x n/m n/m 22x 2.4x 1% 4/6
17 Heidrick & Struggles HSII 16.76 -34% 10% 303 257 .6x .6x 14.9x 38x 23x 3.2x 1% 8/2
18 * AEGON AEG 6.69 -40% 6% 14,073 18,285 .3x .6x 4.0x 9x 8x .7x <1% -/-
19 Apollo Group APOL 19.24 -17% 99% 2,167 1,405 .4x .6x 2.2x 7x 9x 2.7x 3% 2/5
20 Nature’s Sunshine NATR 16.31 -21% 13% 259 179 .5x .6x 5.6x 12x 11x 2.2x <1% 5/-
21 First American FAF 21.33 -24% 28% 2,308 1,810 .4x .6x 3.7x 10x 11x 1.6x 2% 15 / 6
22 Citi Trends CTRN 14.31 -32% 15% 221 141 .2x .6x n/m n/m 39x 1.1x 4% 10 / 6
23 hhgregg HGG 16.26 -64% 9% 512 463 .2x .6x 10.5x 20x 18x 1.5x 9% 5/5
24 Barnes & Noble BKS 18.97 -41% 25% 1,121 1,228 .2x .7x n/m n/m n/m n/m 23% 14 / 11
25 ITT Educational ESI 23.54 -50% 180% 550 490 .4x .7x 1.7x 6x 9x 3.5x 2% 16 / 7
26 Cbeyond CBEY 8.00 -26% 27% 243 230 .5x .7x 32.9x n/m n/m 1.6x 5% 13 / 7
27 Kelly Services KELYA 17.44 -35% 9% 649 637 .1x .7x 8.9x 12x 11x 1.0x 12% 9/3
28 * Pacific Sunwear PSUN 2.96 -54% 22% 203 265 .3x .7x 2.0x n/m n/m 5.0x 3% 6/7
29 Steel Partners SPLP 13.57 -25% 5% 406 185 .2x .7x 2.7x - - 1.2x <1% 5/-
30 Sony SNE 20.38 -53% 15% 20,828 18,018 .3x .7x 8.0x 45x 15x 2.7x <1% -/-
31 Zale ZLC 8.56 -72% 15% 278 719 .4x .7x 24.0x 50x 22x 2.8x 10% 2/3
32 American Greetings AM 18.38 -32% 1% 583 784 .4x .7x 7.5x 10x - .9x 2% 15 / 10
33 Amedisys AMED 12.76 -31% 25% 402 473 .3x .7x 11.4x 26x 24x 2.0x 2% 8/6
34 * OfficeMax OMX 10.40 -60% 43% 905 1,325 .2x .8x 13.2x 18x 15x .9x 2% 12 / 10
35 Vanguard Health VHS 12.37 -38% 43% 963 3,435 .6x .8x 11.5x 16x 15x n/m <1% -/2
36 * Nevsun Resources NSU 2.92 -8% 71% 592 257 .5x .8x .8x 10x 4x .9x <1% -/-
37 Nokia NOK 3.93 -59% 25% 14,936 8,519 .2x .8x n/m >99x 28x 4.8x <1% -/-
38 * Korn/Ferry KFY 17.54 -28% 10% 854 610 .7x .8x 9.1x 13x 12x 2.4x <1% 1/3
39 * Sears Holdings SHLD 44.01 -13% 56% 4,683 7,967 .2x .8x n/m n/m n/m n/m 24% 2/4
40 Humana HUM 84.91 -29% 1% 13,374 6,733 .2x .8x 2.8x 10x 10x 2.8x <1% 10 / 11
41 Gordmans Stores GMAN 13.17 -16% 60% 256 206 .3x .8x 6.8x 16x 12x 2.9x <1% 1/-
42 Unisys UIS 20.31 -27% 22% 896 728 .2x .8x 2.6x 12x 7x n/m 1% 20 / 12
43 SkyWest SKYW 13.61 -54% 20% 706 1,705 .5x .8x 10.6x 11x 9x .5x 2% 11 / 5
44 Ladenburg Thalmann LTS 1.70 -33% 2% 312 473 .7x .8x 23.4x n/m n/m n/m 1% 8/-
45 * US Airways LCC 16.34 -40% 21% 2,676 5,042 .4x .8x 5.2x 6x 5x 8.7x 1% 8/6
 Company website SEC Y! Price Charts Proxy Y!

* New additions are highlighted. Criteria: ► EV < TTM gross profit ► MV < 2x gross profit ► MV > $200 million ► China RTOs excluded

© 2008-2013 by BeyondProxy LLC. All rights reserved. JOIN TODAY! www.manualofideas.com July 2013 – Page 114 of 117

Value-oriented Equity Investment Ideas for Sophisticated Investors

Activist Targets: Potential Sales, Liquidations or Recaps
Companies that may unlock value through a corporate event

Move To Price to Next Insiders
Price 52-Week MV EV Tangible Net Cash NCAV EV/ FY % Buys/
Company Ticker ($) Low High ($mn) ($mn) Book (% of MV) (% of MV) Sales P/E Own. Sells
1 Trans World TWMC 4.92 -40% 0% 163 54 .9x 67% 104% .1x - 45% 5/4
2 Asanko Gold AKG 2.10 -6% 109% 171 (26) .7x 115% 104% n/m - <1% -/-
3 PennyMac Mortgage PMT 20.09 -4% 44% 1,185 (1,550) 1.0x 231% 103% n/m 6x 2% 17 / 9
4 Xyratex XRTX 10.45 -33% 32% 288 171 .8x 41% 103% .1x 48x <1% -/-
5 Richardson Electron. RELL 11.49 -8% 12% 173 32 .9x 81% 101% .2x - <1% -/-
6 STEC STEC 3.59 -8% 134% 168 35 .9x 79% 95% .3x n/m <1% -/-
7 Systemax SYX 9.40 -11% 38% 345 218 .8x 37% 95% .1x 8x <1% 3/-
8 AVEO Pharma AVEO 2.58 -13% 446% 134 (32) .9x 124% 93% n/m n/m 2% 13 / 7
9 Imation IMN 4.19 -21% 45% 174 96 .7x 45% 89% .1x 16x 4% 12 / 6
10 EXFO Electro-Optical EXFO 4.10 -3% 45% 117 61 .6x 48% 89% .3x - <1% -/-
11 Westell Technologies WSTL 2.37 -27% 6% 140 27 1.1x 80% 87% .7x 28x 4% 9/5
12 RealNetworks RNWK 7.40 -9% 19% 262 4 .8x 98% 85% .0x - <1% 5/5
13 Tellabs TLAB 2.01 -5% 93% 713 141 .8x 80% 84% .1x 38x <1% 18 / 7
14 TeleNav TNAV 5.13 -4% 64% 204 16 1.1x 92% 83% .1x n/m 6% 5/9
15 QLT QLTI 8.33 -24% 9% 423 125 1.1x 71% 81% n/m - <1% 3/-
16 STR Holdings STRI 2.55 -29% 89% 106 28 .9x 74% 80% .4x n/m 1% 7/-
17 Benchmark Electron. BHE 19.92 -37% 2% 1,083 677 1.0x 38% 79% .3x 15x <1% 10 / 5
18 Rigel Pharma RIGL 3.75 -11% 205% 327 54 1.2x 83% 79% 36.2x n/m <1% 1/-
19 West Marine WMAR 11.08 -16% 19% 268 245 1.0x 8% 76% .4x 12x 21% 4/5
20 ModusLink MLNK 2.89 -27% 37% 149 78 .9x 48% 74% .1x - 1% 11 / 1
21 Aviat Networks AVNW 2.82 -28% 38% 173 90 1.1x 48% 73% .2x 12x <1% 7/-
22 Hurco HURC 27.10 -29% 13% 175 135 1.2x 23% 72% .7x 11x <1% 7/-
23 Symmetricom SYMM 4.51 -4% 57% 185 115 1.0x 38% 72% .5x 16x 1% 10 / 5
24 Bel Fuse BELFA 13.37 -5% 49% 156 103 .9x 34% 72% .4x - <1% -/-
25 CSS Industries CSS 25.33 -29% 24% 240 153 1.2x 36% 71% .4x - 1% 4/4
26 Axcelis Technologies ACLS 1.70 -58% 9% 184 142 1.0x 23% 71% .7x - <1% 2/4
27 Silver Standard SSRI 6.33 -3% 167% 503 187 .4x 63% 69% .7x n/m <1% -/-
28 Kulicke and Soffa KLIC 10.88 -26% 19% 818 320 1.4x 61% 69% .4x 7x <1% 8/7
29 Orbotech ORBK 12.11 -47% 6% 526 335 1.2x 36% 68% .9x 16x <1% -/-
30 Enstar Group ESGR 127.58 -29% 9% 2,121 (3,759) 1.4x 277% 68% n/m 11x <1% -/2
31 * Cutera CUTR 8.64 -27% 64% 127 41 1.5x 67% 67% .5x 45x 5% 3/4
32 Aware AWRE 5.06 -11% 36% 114 41 1.3x 64% 67% 2.0x - 2% 1/-
33 * Targacept TRGT 4.60 -16% 25% 155 47 .9x 70% 66% 1.2x n/m 3% 5/-
34 AVX Corp. AVX 11.85 -23% 4% 1,998 951 1.2x 52% 66% .7x 14x <1% 9/5
35 Alpha & Omega Semi AOSL 7.64 -13% 37% 195 110 .7x 43% 66% .3x - 18% 6/6
36 Skullcandy SKUL 5.37 -11% 212% 149 115 1.4x 23% 65% .4x 18x 3% 6/1
37 Miller Industries MLR 15.60 -10% 10% 175 128 1.2x 27% 65% .4x - 1% 5/-
38 Intevac IVAC 5.10 -20% 57% 121 54 .9x 56% 64% .7x n/m <1% 5/4
39 Flexsteel Industries FLXS 23.37 -21% 12% 166 154 1.1x 7% 61% .4x - 6% 4/3
40 Pericom Semi PSEM 7.18 -15% 28% 165 72 .8x 56% 60% .5x 30x 4% 5/3
41 Rubicon Technology RBCN 7.69 -37% 50% 174 138 .8x 21% 60% 2.1x >99x 22% 5/2
42 Kimball KBALB 10.16 -26% 30% 304 215 .8x 29% 59% .2x 18x <1% 1/1
43 Oplink Comms OPLK 18.35 -35% 2% 349 176 1.3x 50% 59% 1.0x 19x <1% -/1
44 * Electro Scientific ESIO 10.78 -14% 29% 321 176 1.3x 45% 59% .8x 13x 4% 12 / 5
45 * Key Tronic KTCC 10.85 -34% 13% 114 111 1.2x 2% 59% .3x - <1% 1/-
 Company website SEC Y! Price Charts Proxy Y!

* New additions are highlighted. Criteria: ► TBV > 50% of MV ► ST assets - liabilities > 50% of MV ► MV > $100mn ► China RTOs excl.

© 2008-2013 by BeyondProxy LLC. All rights reserved. JOIN TODAY! www.manualofideas.com July 2013 – Page 115 of 117

Value-oriented Equity Investment Ideas for Sophisticated Investors

distributed for informational purposes only and should not
About THE MANUAL OF IDEAS be construed as investment advice or a recommendation
to sell or buy any security or other investment, or
undertake any investment strategy. It does not constitute a
© 2008-’13 by BeyondProxy LLC. All rights reserved.
general or personal recommendation or take into account
All content is protected by U.S. and international
the particular investment objectives, financial situations,
copyright laws and is the property of BeyondProxy and
or needs of individual investors. The price and value of
any third-party providers of such content. The U.S.
securities referred to in this newsletter will fluctuate. Past
Copyright Act imposes liability of up to $150,000 for
performance is not a guide to future performance, future
each act of willful infringement of a copyright.
returns are not guaranteed, and a loss of all of the original
capital invested in a security discussed in this newsletter
THE MANUAL OF IDEAS is published monthly by
may occur. Certain transactions, including those involving
BeyondProxy. Subscribers may download content to their
futures, options, and other derivatives, give rise to
computer and store and print materials for their individual
substantial risk and are not suitable for all investors.
use only. Any other reproduction, transmission, display or
editing of the content by any means, mechanical or
Disclaimers
electronic, without the prior written permission of
There are no warranties, expressed or implied, as to the
BeyondProxy is strictly prohibited.
accuracy, completeness, or results obtained from any
information set forth in this newsletter. BeyondProxy will
Terms of use: Use of this newsletter and its content is
not be liable to you or anyone else for any loss or injury
governed by the Terms of Use described in detail at
resulting directly or indirectly from the use of the
www.manualofideas.com. See a summary of key terms
information contained in this newsletter, caused in whole
below.
or in part by its negligence in compiling, interpreting,
reporting or delivering the content in this newsletter.
Contact information: For all customer service,
subscription or other inquiries, please visit
Related Persons
www.manualofideas.com, or contact us at BeyondProxy,
BeyondProxy’s officers, directors, employees and/or
427 N Tatnall St #27878, Wilmington, DE 19801-2230;
principals (collectively “Related Persons”) may have
telephone: 415-412-8059.
positions in and may, from time to time, make purchases
or sales of the securities or other investments discussed or
Editor-in-chief: John Mihaljevic, CFA.
evaluated in this newsletter.
Annual subscription price: varies by type of
John Mihaljevic, Chairman of BeyondProxy, is also a
subscription; visit www.manualofideas.com
principal of Mihaljevic Capital Management LLC
(“MCM”), which serves as the general partner of a private
To subscribe, visit www.manualofideas.com
investment partnership. MCM may purchase or sell
securities and financial instruments discussed in this
newsletter on behalf of the investment partnership or
other accounts it manages.
General Publication Information and Terms of
Use It is the policy of MCM and all Related Persons to allow a
full trading day to elapse after the publication of this
THE MANUAL OF IDEAS is published by BeyondProxy. Use newsletter before purchases or sales of any securities or
of this newsletter and its content is governed by the Terms financial instruments discussed herein are made.
of Use described in detail at
www.manualofideas.com/terms.html. For your Compensation
convenience, a summary of certain key policies, BeyondProxy receives compensation in connection with
disclosures and disclaimers is reproduced below. This the publication of this newsletter only in the form of
summary is meant in no way to limit or otherwise subscription fees charged to subscribers and reproduction
circumscribe the full scope and effect of the complete or re-dissemination fees charged to subscribers or others
Terms of Use. interested in the newsletter content.
No Investment Advice
This newsletter is not an offer to sell or the solicitation of
an offer to buy any security in any jurisdiction where such
an offer or solicitation would be illegal. This newsletter is

© 2008-2013 by BeyondProxy LLC. All rights reserved. JOIN TODAY! www.manualofideas.com July 2013 – Page 116 of 117

INVESTOPEDIA. SOROS FUND MANAGEMENT “Very impressive.” —JONATHAN HELLER.COM . CHEAP STOCKS “Very useful.” —MOHNISH PABRAI. DARDASHTI CAPITAL MANAGEMENT “The best institutional-quality equity research to come along in a long time. MANAGING PARTNER.” —TIM DAVIS.” —THOMAS S. AQUAMARINE CAPITAL MANAGEMENT “You are quickly becoming one of my must-read sources. “I highly recommend MOI — the thoroughness of the product coupled with the quality of the content makes it an invaluable tool for the serious investor. BLUESTEM ASSET MANAGEMENT “Wonderful. MARKEL CORPORATION “We do similar work ourselves. PABRAI INVESTMENT FUNDS “Outstanding. THE WHARTON SCHOOL “An extremely valuable resource. FOUNDER.” —GUY SPIER. MANAGING PARTNER. ASSISTANT PROFESSOR OF FINANCE. MANAGING DIRECTOR. CHIEF INVESTMENT OFFICER.” —GLENN GREENBERG. MANAGING DIRECTOR. BRAVE WARRIOR CAPITAL “The Manual of Ideas is a tremendous effort and very well put together.COM FIND OUT WHAT THE BUZZ IS ABOUT.The Manual of Ideas research team is gratified to have won high praise for our investment idea generation process and analytical work.” —SHAI DARDASHTI.” —MURAT OZBAYDAR.” —CORY JANSSEN. CFA.” —PAVEL SAVOR. GAYNER. WWW.MANUALOFIDEAS. EDITOR.