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Tuesday, September 26, 2006

On Forbes List of The 400 Richest Americans

From Gannon On Investing

Forbes is out with its list of The 400 Richest Americans.

Have you ever wondered how Forbes knows who to put on the list (and where)? Here, in the magazine's own words, is Forbes' methodology:

Our estimates of people’s net worth are deliberately conservative and should be considered “at least” figures. We do our best to value everything, from stakes in publicly traded or privately held companies, real estate and investments in natural resources to art, yachts and mansions. We dig through SEC documents and court records; call analysts, employees, competitors and ex-wives; and look at newspaper and magazine articles. We also take a hard look at debt. However, we do not pretend to know everything on a private balance sheet.
All numbers have been rounded to the nearest $100 million. All publicly traded shares were priced Aug. 31. Privately held companies are valued by coupling estimates (or, in some cases, company-provided numbers) of revenues or profits to prevailing price/revenues or price/earnings ratios for similar public companies.
A lot of people have been (and will be) commenting on this list. So, I'd like to do something a little different. I'm simply going to go through the list (in order) picking out those names that might be of interest to readers of this blog and saying a few words about them (and their companies).

(Due to time constraints, I only selected billionaires who made the top 50.)

1 – William Henry Gates III ($53.0 billion)

Bill Gates, chairman of software giant Microsoft (MSFT), once again takes the top spot. Today, more than half of Gates' net worth is invested outside of Microsoft. Despite a recent resurgence in its share price, Microsoft is as cheap as it's been in many years. The stock has even started to catch the attention of some value investors. Microsoft has been buying back shares and has plans to buy back even more.

In June, Gates announced he will give up his day-to-day role at Microsoft; however, he will remain the company's chairman. This transition will be completed in mid 2008.

2 – Warren Edward Buffett ($46.0 billion)

Warren Buffett, chairman of Berkshire Hathaway (BRK.B), finds himself in a familiar spot – right behind his good friend Bill Gates. Unlike Gates, Buffett still keeps the vast majority of his net worth in a single stock. Shares of Berkshire are up over the past twelve months.

As a result, Buffett's net worth increased, despite the beginning of the process that will ultimately lead to Buffett giving tens of billions of dollars to the Bill & Melinda Gates Foundation (and four other charities started by members of his family). The secret to Buffett's success: since 1965, Berkshire's value has compounded at an annual rate of 21.5%.

6 – Jim C. Walton ($15.7 billion)

Jim Walton is the first of several Waltons on the list. Forbes has been incredibly lucky with their top two richest Americans, Gates and Buffett. It's hard to imagine two more memorable men. It's also hard to imagine two more similar men who appear to be so different. Gates is high-tech; Buffet is low-tech. Gates is young (actually, he's 50 now); Buffett is old (at 76, he's nowhere near the oldest on the list). Gates made his money through innovation and entrepreneurship. Buffett (unlike most self-made billionaires) made his fortune by steering clear of both innovation and entrepreneurship, seeking out investments in businesses that don't change.

I recently saw a headline refer to Warren Buffett as an "entrepreneur". Buffett is many things – but, an entrepreneur isn't one of them. Like many on the list, he's an investor and a businessman. Unlike many on the list, he has no appetite for direct entrepreneurship. He has bought many businesses from entrepreneurs – and those entrepreneurs continue to work for him at Berkshire. But, the man at the top is no entrepreneur.

What does all this have to do with the Waltons? The only man that would be as interesting a headliner for Forbes as Gates or Buffett is Sam Walton. Of course, the founder of Wal-Mart (WMT) has been dead for more than a decade now. Still, if the Walton family's wealth is aggregated it easily tops the list. In fact, it would now be close to $80 billion.

9 – Michael Dell ($15.5 billion)

The eponymous founder of computer maker Dell (DELL) saw his net worth decline over the last year as the market cut his company's share price in half. Apparently, Michael Dell only has about a third of his net worth in shares of Dell. Part of that outside wealth is invested in Eddie Lampert's ESL investments.

Like Microsoft, Dell has started to attract the attention of some value investors, as its price-to-earnings multiple has contracted in the face of growing pessimism. The long-term growth outlook for Dell certainly isn't what it used to be; but, then again, the stock's P/E ratio isn't what it used to be either.

12 – Sergey Brin ($14.1 billion)

Despite being only 41, Michael Dell isn't even close to the youngest name on the list. Google (GOOG) co-founders Sergey Brin and Larry Page (both 33), are the youngest on the list. Actually, there are eleven billionaires on the list who are younger than Dell. But, of those eleven, only Brin and Page are in the top twenty-five.

What's the chance Brin and Page will eventually top the list? It's hard to say. But, there are a few factors going against them. The biggest is that they've already sold a lot of stock. Gates, Buffett, and the Waltons demonstrate the importance of keeping a very large stake in a single company (at least during the period of fast growth), thus allowing your wealth to compound at an annual rate far greater than the advance in the general market. Selling this much stocks this early (and planning to give away quite a bit) could keep Page and Brin from topping the list, even if Google continues to grow at its unfathomably fast pace.

Google isn't cheap; so, the company will have to grow very fast just to prevent a sharp decline in the price of its shares. Despite Google's youth, the company is already quite large – perhaps too large to provide the growth needed to lift Brin and Page to the top spots.

With a market cap of $123 billion, Page and Brin's Google is already about half the size of Bill Gates' Microsoft (which has a market cap of $266 billion) and just a tad smaller than Warren Buffett's Berkshire Hathaway (which has a market cap of $144 billion).

On the other hand, Gates and Buffett are both giving away their money as well; so, that should keep them from pulling too far ahead of the pack.

21 – Forrest Edward Mars Jr. ($10.5 billion)

Mars is one of the most valuable private companies in the United States. It also happens to be a truly unique company. As a result, the estimated net worth of the Mars family isn't really comparable to the estimated net worth of billionaires with stakes in public companies. Remember how Forbes described its methodology:

Privately held companies are valued by coupling estimates (or, in some cases, company-provided numbers) of revenues or profits to prevailing price/revenues or price/earnings ratios for similar public companies.
The problem with this approach is that there simply isn't any public company "similar" to Mars. Don't believe me? Below is a list of Mars' major brands.

Snackfood: M&M, Mars, Milky Way, Snickers, and Twix

Petcare: Pedigree, Cesar, Whiskas, and Sheba

Main Meal Food: Uncle Ben's

Let's try to find some companies similar to Mars. There's Hershey (HSY). That company has sales of $5 billion and a market cap of $12 billion. It also happens to average a double-digit return on assets and a consistently high free cash flow margin. Last year, Hershey had a 46.89% return on equity.

Tootsie Roll (TR) has sales of just under $500 million and a market cap of nearly $1.6 billion. That company generally averages a return on assets in the high single digits or low double digits along with a consistent double-digit FCF margin.

Cadbury Schweppes (CSG) has sales of just under $12 billion and a market cap of about $22 billion. However, Cadbury isn't really all that similar to Mars. Cadbury is actually an unusually capital intensive business that even includes some bottling operations; Mars, by all accounts, ties up very little capital in areas outside of the company's core competency.

Many of Cadbury's brands were recently acquired rather than internally developed long ago (as is the case at Mars). As a result, Cadbury Schweppes has some of the most bloated confectionary operations of any confectioner with strong global brands.

This is evident in the company's poor cost comparisons with the likes of Hershey and Tootsie Roll in candies, Wrigley (WWY) in gum, and Coca-Cola (KO) and Pepsi (PEP) in soft drinks. You'll also notice that Cadbury's brands are generally in a weaker position than its world-wide competitors in all of the areas in which it competes. Mars is in exactly the opposite position.

Forbes estimates Mars has annual revenues of $19 billion. In the past, Mars itself stated it had revenues of $18 billion (in 2005); so, really the $19 billion number isn't based on much actual guesswork by Forbes – it's essentially an acknowledged number.

As a public company, Mars would likely have a market cap of at least $50 billion. Forbes doesn't provide an explicit estimate for the value of the company; however, based on the $10.5 billion net worth estimate for the three members of the Mars family who made the list, it looks like Forbes may be using an overly conservative estimate.

Mars is a private company (and not a very public one at that); so, it's nearly impossible to estimate the value of the company with any accuracy. However, based solely on the estimated sales number and the brands the company owns, I would say it is considerably more likely that Mars would have a public market value in the $45 - $60 billion range than in the $30 - $35 billion range. So, the members of the Mars family may actually be a lot closer to the top five or ten names on the list than their twenty-first place ranking suggests.

24 – Carl Icahn ($9.7 billion)

Today, Icahn is probably best known for his investment in Time Warner (TWX). But, during the past year, he's actually been involved in several major dust-ups that aren't as high-profile as the Time Warner saga. His investments in Korean cigarette maker KT&G and biotech company ImClone (IMCL) have made headlines. Icahn also makes investments (particularly in smaller companies) that get little or no attention. For example, during the last year, Icahn purchased shares of Take-Two Interactive (TTWO) and BJ's Wholesale Club (BJ) among others.

Whether he's called a "shareholder activist" or a "corporate raider", the implication is clear. Carl Icahn is rarely friendly to the existing management at the companies he invests in. In fact, he's often unabashedly hostile – as he was in his Sepetember 20th letter to ImClone Chairman David Kies. This is how Icahn concluded that letter:

You should recognize that your leadership of ImClone should come to an immediate end. The time has come for you to peacefully pass the baton to a successor who will be able to bring strong leadership back to ImClone. If you fail to do so, you will have thrown down the gauntlet and we will have to react accordingly.
Not exactly poetry – but, it gets the point across.

26 – Kirk Kerkorian ($9.0 billion)

There's been more than enough written about General Motors (GM) over the past year; so, I won't add anything here. I will, however, mention that one point made by some blogs (and even some "mainstream" media sources) is nonsensical. It's been written (presumably with a straight face) that Kerkorian can't possibly be making a long-term investment in GM, because (at 89) he simply doesn't have enough time left to see such an investment through.

The strongest argument against this line of reasoning is that making investment decisions based on your anticipation of imminent death is akin to making life choices based on the belief that you don't have free will and all future events are predestined. In both cases, if your assumption is correct, you gain little or nothing. If your assumption is incorrect, you lose a lot.

Besides, all of this assumes you have no interest in leaving greater wealth behind (whether to charity or your family), which seems rather absurd. Kerkorian isn't exactly forgoing his own enjoyment; he already has far more money than he could ever spend on himself (that would be true even if he were 29 instead of 89).

Also, it's worth noting that Phil Carret lived to be 101. I don't mean to suggest Kerkorian may live just as long; rather, I mean to suggest even at 89, you could be hanging up your cleats twelve years too early. To put that in perspective, if the average American male expected to die twelve years before he actually did, he would be planning to die around the time he would start collecting Social Security.

As a rule, investors who are as passionate as Kerkorian usually die long before they retire.

30 – Philip H. Knight ($7.9 billion)

Phil Knight, chairman of athletic footwear and apparel giant Nike (NKE), no longer serves as CEO of the company he founded; but, as the departure of Bill Perez demonstrated, Knight still runs the show.

Former SC Johnson executive Bill Perez only lasted a little over a year in the top job, before being replaced by long-time Nike employee Mark Parker. Mr. Parker has spent most of his career at Nike. The fifty year-old CEO has been with Nike for more than a quarter century. He was given the CEO job (and a directorship) in January of this year.

31 – Philip F. Anschutz ($7.8 billion)

Phil Anschutz keeps appearing in the strangest places. His Walden Media production company produced the mega-hit movie The Lion, The Witch, and The Wardrobe, an adaptation of the first of C.S. Lewis' seven Chronicles of Narnia books.

Lately, most of what has been written about Anschutz has focused on his politics – which is unfortunate, because the man is one of the most fascinating investors around.

Anschutz has made several interesting (and often contrarian) investments in his lifetime. His past investments in publicly traded Union Pacific (UNP) and Qwest (Q) are well-known (Anschutz is Qwest's founder).

Through his private holding company, Anschutz has made investments in energy, media, professional sports, and real estate. Lately, he has been withdrawing from his role in these investments to focus on his entertainment ventures (including Walden Media).

32 – Keith Rupert Murdoch ($7.7 billion)

The past year has been an unusual one for News Corp (NWS) chairman Rupert Murdoch in that much of what was written about him didn't focus on his politics (or his personal life). MySpace is now the favorite subject for those writing about Murdoch.

News Corp's $580 million acquisition of online social network MySpace has been written about extensively. MySpace seems to come up in nearly every discussion of large media companies. For example, the firing of Tom Freston, CEO of Viacom (VIA), was perceived as being due in part to his failure to acquire MySpace.

News Corp's stock price has risen considerably over the past year. Right now, the biggest story surrounding the stock is continued speculation that Murdoch and Malone will work out a deal involving the disposition of Liberty Media's 16% stake in News Corp.

34 – Charles Ergen ($7.6 billion)

Charles Ergen, founder of satellite TV company EchoStar (DISH), is generally well respected on Wall Street. However, the Street's view of his company has dimmed considerably over the last year.

The problem isn't specific to his company. The outlook is simply a lot more pessimistic for both of the big satellite TV operators, DirecTV (DTV) and EchoStar. The "triple play" threat from cable companies who can bundle phone, internet, and television services at a reduced monthly rate has slowed subscriber growth at EchoStar and DirectTV. There's also some fear that phone companies will be able to compete effectively with the other television service providers.

Fairholme, a highly concentrated mutual fund, currently has about 10% of its assets invested in EchoStar, making it one of the fund's big positions along with Berkshire Hathaway (BRK.B) and Canadian Natural Resources (CNQ).

Fairholme's manager, Bruce Berkowitz, gave his opinion of Charles Ergen in an interview with Value Investor Insight:

"We think Charlie Ergen is a great jockey who has done an unbelievable job, who clearly has skin in the game…"

35 – Sumner M. Redstone ($7.5 billion)

The 83 year-old Redstone now serves as chairman of two separate public companies, CBS (CBS) and Viacom (VIA). Of the two, Viacom was supposed to be the fast grower; CBS was the stodgy old media stock. Since the split: CBS is up, Viacom is down, and Freston is out. Sumner Redstone fired Tom Freston, CEO of Viacom, earlier this month.

38 – Donald Edward Newhouse ($7.3 billion)

Donald Newhouse runs privately held media company Advance Publications with his brother, Samuel Newhouse. Donald and Samuel's father (also named Samuel) began purchasing stakes in newspapers during the 1920s.

Many of those early investments were forgettable. For instance, Samuel's first purchase, The Fitchburg Daily News, went out of business within a year of his investment. Two of Samuel's purchases proved to be critical to the company's success. In 1934, Newhouse purchased a majority stake in the Newark Ledger. Five years later, he bought the Newark Star-Eagle and combined his two Newark properties to create The Star-Ledger.

Today, The Star-Ledger is New Jersey's largest daily newspaper by far. In fact, it has a daily circulation greater than that of its next three New Jersey competitors combined. The Star-Ledger is one of the top twelve American dailies by circulation, with a weekday circulation of approximately 400,000 and a Sunday circulation of over 600,000. The paper has one of America's lowest staff to circulation ratios and manages to generate more advertising revenue than some other papers with slightly higher circulation numbers.

Advance Publications (named for the Staten Island Advance, a paper acquired by Newhouse in 1922) probably has annual sales of over $6 billion. The company is the second largest magazine publisher in the U.S. – only Time Warner (TWX) is larger. The company's magazine properties include such high-profile names as The New Yorker, Vanity Fair, and Vogue. However, Advance's low-profile newspaper properties are responsible for much of the value Forbes sees in the media company.

Advance also has stakes in cable properties and has substantial online operations.

49 – Steven Paul Jobs ($4.9 billion)

Steve Jobs, CEO of Apple Computer (AAPL), actually has most of his wealth in Disney (DIS). As a result of the merger between Disney and Pixar, Jobs now has a 15% stake in Disney, making him that company's largest shareholder. Approximately $4 billion of Jobs' estimated $4.9 billion net worth is attributable to his stake in Disney.

Jobs' ego may be invested in Apple; but, his wealth is invested in Disney.

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