Hello,

In my most recent e-mail, I spoke about why I didn't see the markets being particularly high, despite the ever-present possibility of a correction, on a macro level. However after rereading said e-mail on Friday at the very end of the afternoon, I decided that I prefer concrete stories rather than macro reflections. With that, today I will write about companies that we know well.

Keeping in mind that a stock market investment is, above all, the future profits of a company today, let us look at two cases currently in the news.Tesla (TSLA) and Berkshire Hathaway (BRK). 

Tesla is the well-known electric car manufacturer. It is a remarkable company because of:

-           their product (the cars),

-           their technology (their batteries),

-           their business practice (no dealers and car improvement done by automatic download),

-           their results (in many markets, Tesla is the best-selling luxury car, ahead of Mercedes, BMW, etc.)

-           and their visionary founder, Elon Musk.

For those who have driven a Tesla, you know that driving one is often the revelation.

Berkshire Hathaway is Warren Buffett's iconic conglomerate. Based on a property and casualty insurance company, where premiums received but claims not yet paid out (the float as it’s called) and profits earned over the years, have allowed a unique company to emerge. I spoke about it in a recent memo (Happy Birthday Mr. Buffett! August 30, 2020). In short, it is a huge company in terms of sales, profits and assets.

On the stock market, Tesla is worth $ 568 billion USD. Berkshire Hathaway is worth $ 542 billion USD.

In terms of sales growth, Tesla has increased its sales by 50.36% per year over the past five years. Conversely, Berkshire Hathaway has grown its sales by 5.52% per year over the past five years.

It’s a little different though in terms of sales and profits.

Tesla achieved sales of $24.6 billion USD for the last full year and $ 28.1 billion USD when taking into account the last four quarters. Let's say, that with the coronavirus, two of the last four quarters have been negatively affected. Accommodating this, let's take the best quarter in Tesla's history and annualize it, giving us $35.2 billion in sales.

In the case of Berkshire Hathaway, they achieved $255 billion in revenue in 2019. Like Tesla, 2020 has been difficult. Regardless, their revenue for 9 months in 2020 is $ 181 billion USD and there are still 3 months left to go in their fiscal year.

If we look at profitability, it's a bit more complicated in both cases.

Historically, Tesla had always been losing money. In recent quarters (in fact the last 18 months) they have been profitable. They are being covered extensively by specialized media and brokers. But beware! Tesla sells green credits to other manufacturers within the framework of antipollution laws (Automotive regulatory credits, described on page 73 of the last shareholders' report). Without this additional income, Tesla is not profitable. During the first 3 quarters of 2020 (so as of September 30th) they had received $1.18 billion USD for these credits. Their profit declared for the same nine months? $420 million USD. The problem with this source of additional income is that it has nothing to do with Tesla, but rather depends on various government programs around the world. It is not Tesla's excellence that drives this but the programs and policies adopted by governments. Therefore it would be hard to predict if these green credits will be around in the same shape and form in the next three years.

For Berkshire Hathaway, the complication is that the accounting laws changed a few years ago (against the advice of Warren Buffett). With these changes, unrealized gains on Berkshire Hathaway's huge stock portfolio are now added profits or losses, depending on market fluctuations. Buffett, and I agree with him, points out that it is not a real profit for the company until the stock market gain is realized. Fundamentally, a company's profit is calculated as income minus expenses. In other words, your annual income (yes, yes, yours dear reader) does not include the increase in value of your home. Consequently, some years Berkshire Hathaway seems to be making a lot more or a lot less money than it actually is. Fortunately, real Berkshire Hathaway income and profits are easy to find. In 2019, the real profit was $23.548 billion USD (not $ 81.417 billion USD which includes the rise in unrealized stock values in the portfolio). In fact, I went back all the way to 1978, before I got tired, and every year BRK made a profit ($39 million on sales of 453 million in 1978 for instance). In short, it’s a very profitable company.

Therefore, one of these two companies is growing rapidly, however if we look at revenue and profitability, the other is well ahead. For a prudent investor, who doesn't want to wake up with a bad surprise, the choice is quite easy. BRK has several sources of income, tangible assets that it could be sold if something goes wrong and, above all, diversification that protects them. Tesla really does really make great cars and their technology is the best in the field. But then again, Porsche, Polestar, GM, BYD, Nissan, BMW, VW (just to name a few) also making good/great electric cars. Can it be possible that one day buyers will decide in significant numbers that they want to stray from Tesla? After all, its cars do kind of all look alike and sometimes the quality of their finishing is slightly sub-par for a car of that price, compared to a Mercedes or a BMW for instance. To ask the question, is to answer it...

This brings me to dividends, neither Tesla nor Berkshire pay one. This is one of the most important components for an investor.

Let’s take a company that we previously owned in the portfolio, Novartis. They are a major pharmaceutical company based in Switzerland. 

In December 2010, their share price on the New York Stock Exchange was $54.11 USD. Say you bought 500 shares, for a total of $27,055. Ten years later, so this week, they are trading at $90.72 USD, an increase of 67.66%. Frankly, in a decade, this is weak in terms of growth. In comparison, if you include the dividend, which has been increasing annually for 23 years in a row, the return if you had reinvested the dividend would be 487.91%. In dollar terms, 500 shares this week were worth $45,360, but by reinvesting the dividend as soon as it was received (rather than spending it!) you would have $113,698.65 more. In total, $ 159,058.65 or 1,753 shares. The difference is incredible (and it makes me regret having sold them!).

The last company we will discuss is Alimentation Couche-Tard. 

For those of you in Quebec, it is almost unconceivable that a chain of convenience stores has become the most important Canadian company in terms of sales revenue. I would never have predicted this with the image of I had of convenience stores when I was growing up (Perrette anyone ?). In summary, last year, in terms of revenue, Couche-Tard from Laval (QC) no less, was the largest company in Canada. With more than 14,200 stores worldwide, Couche-Tard is present in 47 of the 50 American states (70% of sales and profits), all Canadian provinces, 9 European countries and now Asia.

What's fascinating about Couche-Tard is just how strategic their direction has been. Take gasoline and electric cars for instance.

Gasoline sales are very important for Couche-Tard. Not only is it profitable, but it brings the customer into the Couche-Tard and consequently they may be enticed to buy something else. After all, last year they served 274 million cups of coffee, sold 179 million hot dogs and washed 47 million cars. And they also sell 155 million liters of gasoline every day! Long term, the trend and political will to ban gasoline cars in favor of electric cars is a threat to Couche-Tard. This is why their investment in Norway is interesting. You see, Norway is the country in the world that buys more electric cars per capita. In Canada, for example, +/- 2.4% of new car purchases are electric. In the USA, the number is similar. In China, it is 4.5%. But in Norway, it's over 50%. Now in Norway, Couche-Tard has a team dedicated to studying the convenience store and electric car market and what that means in the long term. The company has over 500 fast charging stations just in Norway. Across Quebec, according to the government, we find 225 of these fast terminals. This gives you an idea of the scale of the data that Norway provides for Couche-Tard. For 2 years, they have also offered to install terminals for Norwegians at their home or workplace. (+/-2700 have been installed as of today).

Another strategic initiative is their entry into Asia. It is true that the population in Asia is large and therefore growth is better than in North America. However, what fascinates me the most is not simply an acquisition in Asia (this has been done before with varying levels of success by Manulife, National Bank and Power Corp, to name a few) it is their angle which we uncover when listening to the CEO (Brian Hannasch) and the founder (Alain Bouchard) . I have discovered, through their various interviews, strategically lacing a convenience store in a small, hyper urban, location in Asia compared to the suburban locations in United States and Canada, allows them to learn and gain insight on the consumers in a megalopolis. They have realized that a Couche-Tard store in the suburbs or on the side of the highway takes two years of planning, permits and construction. A store in Hong Kong, opened at existing premises, takes a few months for the same process. Time is money and profit!

Hannasch and Bouchard want to double the size of the company by 2023. This is a huge challenge but the company and their team of leaders are playing chess, strategically and methodically. It goes without saying that we are happy to be co-shareholders alongside them.

The stock market, as I told you last week, no longer provides us the bargains of March 2020. Nonetheless, for a patient investor, there are still a lot of very good companies with very good future returns and we'll be there to take advantage of them!

In the meantime, thank you for your confidence and we look forward to hearing from you again soon,