A Case Study in Capital AllocationA Case Study in Capital Allocation

AGENDA

•Company A vs. Company B• In Today’s Context

Which Company Do You Prefer?

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Sales ($M)

A

0Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

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Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

Sales ($M)

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Net Profit ($M)

Which Company Do You Prefer?

A

-10 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

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Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

Net Profit ($M)

B

Key Additional Notes

•Both Companies in Comparable Industries

•Both Companies have Great Management

•Both Companies Growing Net Income Faster than Sales Growth

What Else We Need to Know as an Owner?

Which Company Do You Prefer?

A

0.00%

2.00%

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12.00%14.00%

16.00% 10 Year ROE Average 9.8%

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35.00%

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

B

10 Year ROE Average 20.5%

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

0.00%

1.00%

2.00%3.00%

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6.00%

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Which Company Do You Prefer?

A

10 Year ROA Average 4.3%

0.00%Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

0.00%

2.00%

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Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

B

10 Year ROA Average 10.7%

Key Additional Notes

•Both Companies in Comparable Industries

•Both Companies have Great Management

•Both Companies Growing Net Income Faster than Sales Growth

•Average ROE of Company B Twice of Company A•Average ROE of Company B Twice of Company A

•Average ROA of Company B Twice of Company A

•Company A Growing Sales and Net Profit At Least 5 Times Faster

than Company B

What Else We Need to Know as an Owner?

Recap

Key Metric Company A Company B

10 Year Sales Growth CAGR 73.3% 8.9%

10 Year Profit Growth CAGR 98.6% 16.3%

10 Year Average ROE 9.8% 20.5%

10 Year Average ROA 4.3% 10.7%

Can you Pick Your Choice and Note It Down?

Key Metric Company A Company B

5 Year Sales Growth CAGR 33.8% 5.3%

5 Year Profit Growth CAGR 36.8% 6.7%

5 Year Average ROE 12.03% 24.57%

5 Year Average ROA 5.24% 14.00%

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How is the Growth Being Funded?

A

10 Year Shares Outstanding CAGR 65.5%

Sh

are

s in

M

0.00Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

B

10 Year Shares Outstanding CAGR (13.3)%

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Sh

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Adjusted for Stock Splits

How Does It Affect the Metrics

Key Metric Company A Company B

10 Year Sales Growth CAGR 73.3% 8.9%

10 Year Profit Growth CAGR 98.6% 16.3%

10 Year Average ROE 9.8% 20.5%10 Year Average ROE 9.8% 20.5%

10 Year Average ROA 4.3% 10.7%

10 Yr. Sales Growth per Share 4.7% 26.0%

10 Yr. Profit Growth per Share 20.0% 34.6%

10 Year Shares O/S CAGR 65.5% (13.3)%

Remarks Serial Diluter Serial Acquirer

How Does It Affect the Metrics

Key Metric Company A Company B

5 Year Sales Growth CAGR 33.8% 5.3%

5 Year Profit Growth CAGR 36.8% 6.7%

5 Year Average ROE 12.03% 24.57%5 Year Average ROE 12.03% 24.57%

5 Year Average ROA 5.24% 14.00%

5 Yr. Sales Growth per Share 13.9% 10.2%

5 Yr. Profit Growth per Share 16.4% 11.6%

5 Year Shares O/S CAGR 17.5% (4.4)%

Remarks Serial Diluter Serial Acquirer

Both Company A and Company B Created Significant Shareholder Value Over the 10 Years; Company A by Shareholder Value Over the 10 Years; Company A by

Growing Net Income Faster than Shares Issued; Company B by Buying Back Shares Aggressively

Combined – Company A and Company B Would Create Significant Value for Shareholders as Both the Companies Significant Value for Shareholders as Both the Companies

are the Same One Over Different Periods of Time

Welcome Master Capital Allocator Henry Singleton

Founder and Former Chairman of TeledyneCompany A is 1961 to 1971Company A is 1961 to 1971Company B is 1972 to 1982

EPS Growth in First Decade 20% CAGR Building a $1B Sales Firm by Issuing Shares at High PE

EPS Growth in Second Decade 34% Buying Back Shares in a Depressed Environment

Henry Singleton

Teledyne Compounded at 17.9% over 25 Years Starting 1966; 53X over 6.7X over S&P 5001966; 53X over 6.7X over S&P 500

Teledyne Consolidated Financials

Teledyne 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 197110 Year CAGR

5 year CAGR

Sales ($M) 4.50 10.4 31.9 38.2 86.5 256.8 451.1 806.7 1294.8 1216.4 1101.9 73.3% 33.8%

NI ($M) 0.06 0.16 0.73 1.44 3.4 12 21.7 40.7 60.1 62 57.4 98.6% 36.8%

Sales per Share 7.50 1.30 2.62 2.65 4.07 6.21 7.90 11.10 14.65 13.54 11.90 4.7% 13.9%

NI per Share 0.10 0.02 0.06 0.10 0.16 0.29 0.38 0.56 0.68 0.69 0.62 20.0% 16.4%

Shares Outstanding (M)

0.60 8.00 12.17 14.40 21.25 41.38 57.11 72.68 88.38 89.86 92.58 65.5% 17.5%

ROE % 2.40% 4.57% 8.49% 10.51% 9.77% 13.30% 14.17% 12.82% 11.90% 10.52% 9.47%ROE % 2.40% 4.57% 8.49% 10.51% 9.77% 13.30% 14.17% 12.82% 11.90% 10.52% 9.47%

ROA % 1.62% 1.48% 3.05% 4.11% 5.11% 7.04% 0.65% 6.74% 6.37% 5.39% 5.26%

Adjusted for Stock Splits – Omega Advisors Presentation

Teledyne 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 198210 Year CAGR

5 year CAGR

Sales ($M) 1216 1455 1700 1715 1937 2209 2441 2705 2926 3237 2863 8.9% 5.3%

NI ($M) 59.3 66 31.5 101.7 136.8 194.8 248.5 372 344 422 269 16.3% 6.7%

Sales per Share 13.74 22.27 29.68 43.34 67.68 85.39 94.59 109.22 132.86 156.71 138.89 26.0% 10.2%

NI per Share 0.67 1.01 0.55 2.57 4.78 7.53 9.63 15.02 15.62 20.43 13.05 34.6% 11.6%

Shares Outstanding (M)

88.5 65.3 57.3 39.6 28.6 25.9 25.8 24.8 22.0 20.7 20.6 -13.6% -4.4%

ROE % 12.25% 12.39% 6.59% 20.78% 26.64% 28.10% 28.39% 29.17% 24.53% 24.48% 12.77%

ROA % 5.26% 5.38% 2.84% 8.95% 11.16% 13.63% 15.86% 18.35% 13.47% 14.52% 8.19%

Issuing Shares at High PE and Buying Back at Low PE -- Teledyne

EPSClosing Stock Price

(normalized for splits)Remarks Implied PE

Share Issue / Buyback

1961 0.10 Not Known Issue1962 0.02 Not Known Issue1963 0.06 Not Known Issue1964 0.1 Not Known Issue1965 0.16 Not Known Issue1966 0.29 32.24 111.17 Issue1967 0.38 50.40 Split; Stock Div. 132.62 Issue1967 0.38 50.40 Split; Stock Div. 132.62 Issue1968 0.56 39.68 Stock Div. 70.86 Issue1969 0.68 14.03 Split; Stock Div. 20.63 Issue1970 0.69 8.94 Stock Div. 12.961971 0.62 9.95 Stock Div. 16.051972 0.67 8.38 Stock Div. 12.50 Buyback1973 1.01 5.94 Stock Div. 5.88 Buyback1974 0.55 4.30 Stock Div. 7.82 Buyback1975 2.57 9.33 Stock Div. 3.63 Buyback1976 4.78 37.33 Stock Div. 7.81 Buyback1977 7.53 64.13 Stock Div. 8.521978 9.63 48.78 Stock Div. 5.071979 15.02 116.15 Stock Div. 7.731980 15.62 221.39 Split 14.17 Buyback1981 20.43 157.75 Split 7.721982 13.05 129.40 9.92

AGENDA

• Company A vs. Company B

•In Today’s Context

Buybacks are the Latest Form of Value Destruction in Corporate AmericaCorporate America

Example One:Cisco Systems

CISCO 2010 2011 2012 2013 2014

Shares O/S (M) 5848 5563 5404 5380 5281 -2.52% -567

Spent on Re-Purchase of Stock ($M)

-7864 -6713 -4560 -2773 -9413 -31,323

Avg. Price to Shareholder for Repurchased Stock ($)

23.6 28.7 115.5 95.1 55.24

Issuance of Stock to Employees ($M)

3278 1831 1372 3338 1907

EPS 1.36 1.17 1.50 1.87 1.50 2.4% CAGR

Market Price ($) 20.23 18.08 19.44 22.02 28.35 28.18

Cisco

•Cisco Bought Back Shares at Market Price and Issued Shares to Employees for

Compensation

•Net Decrease over 5 Years was 567M Shares with Average Price of $55

•Cisco Defends this as Required to Retain Talent

•Cisco Could Show ONLY 2.5% CAGR on EPS for Retaining these Employees that •Cisco Could Show ONLY 2.5% CAGR on EPS for Retaining these Employees that

Cost the Share Holders $55/Share for Every Share

•Buyback or Maintenance Costs of Employees?

•Magnitude of Value Destruction to Shareholders ??

Example Two:Microsoft

Microsoft 2010 2011 2012 2013 2014

Shares O/S (M) 8927 8593 8506 8470 8399 -1.51% -528

Spent on Re-Purchase of Stock ($M)

-11269 -11255 -5029 -5360 -7316 -40229

Avg. Price to Shareholder for Repurchased Stock ($)

33.7 57.8 148.9 103.0 76.19

Issuance of Stock ($M) 2311 2422 1913 931 607

EPS 2.13 2.73 2.02 2.61 2.66 5.7%

Market Price ($) 27.91 25.96 26.55 37.29 47.88 46.62

Microsoft

•Microsoft Bought Back Shares at Market Price and Issued Shares to Employees for

Compensation

•Net Decrease over 5 Years was 528M Shares with Average Price of $76

•Microsoft Defends this as Required to Retain Talent

•Microsoft Could Show ONLY 6% CAGR on EPS for Retaining these Employees that •Microsoft Could Show ONLY 6% CAGR on EPS for Retaining these Employees that

Cost the Share Holders $76/Share for Every Share

•Buyback or Maintenance Costs of Employees?

•Magnitude of Value Destruction to Shareholders ??

Example Three:Intel

Intel 2010 2011 2012 2013 2014

Shares O/S (M) 5696 5411 5160 5097 5056 -2.94% -640

Spent on Re-Purchase of Stock ($M)

-1736 -14340 -5110 -2440 -11124 -34750

Avg. Price to Shareholder for Repurchased Stock ($)

50.3 20.4 38.7 271.3 54.30

Issuance of Stock ($M) 587 2045 2111 1588 1660

EPS 2.06 2.46 2.2 1.94 2.39 3.8%

Market Price ($) 21.03 24.25 20.23 25.6 37.55 29.47

Intel

• Intel Bought Back Shares at Market Price and Issued Shared to Employees for

Compensation

•Net Decrease over 5 Years was 640M Shares with Average Price of $55

• Intel Could Show ONLY 4% CAGR on EPS for Retaining these Employees that Cost

the Share Holders $55/Share for Every Sharethe Share Holders $55/Share for Every Share

•Buyback or Maintenance Costs of Employees?

•Magnitude of Value Destruction to Shareholders ??

Example Four:Auto Zone

Intel 2010 2011 2012 2013 2014

Shares O/S (M) 49.3 43.6 39.6 36.6 33.6 -9.14% -15.7

Spent on Re-Purchase of Stock ($M)

-1124 -1467 -1363 -1387 -1099 -6440

Avg. Price to Shareholder for Repurchased Stock ($)

257.4 340.8 462.3 366.3 410.19

Issuance of Stock ($M) 53 0 0 0 0

EPS 14.97 19.47 23.48 27.79 31.57 20.5%

Market Price ($) 272.59 324.97 360.85 476.83 618.76 677.13

Autozone

•Net Decrease over 5 Years was 16M Shares with Average Price of $410 against

Current Price of $677

•Autozone Increased EPS at 20% CAGR over the Same Period

•Autozone has Created More Shareholder Value Compared to S&P 500 (+234%

versus +97%)versus +97%)

Share Buybacks

•Share Buybacks are a Way to Return Money to Shareholders

•Creating Value for the Remaining Shareholders is Possible Only When Executing

Buybacks Way Below Intrinsic Value and Mr. Market is Giving You an Opportunity

like Teledyne Did in 1960’s and 1970’s

•Share Issuance and Buybacks can Both be Used as Shareholder Value Creation •Share Issuance and Buybacks can Both be Used as Shareholder Value Creation

Tools like Teledyne but Opportunity Comes Very Rarely

•Very Few Buybacks We have Evaluated Create Shareholder Value

• Autozone is One

• Berkshire has Announced Buyback only Thrice in 50 Years During 1999, 2011 when

Trading Near Book Value and Once at 1.2 Times Book

•Not All Buybacks are Created Equal; Caveat Emptor

• If Everyone is Doing It, Something Must Definitely be Wrong