Hiddeninflation is an insidious devourer ofprofit . Forget
what the Consumer PriceIndex is telling us -- higher costs don't
always get passed on to the consumer. Sometimes quality is
Whether it's the bag of potato chips that's half-filled with
air, the controversy of "pink slime," or the shrinking amounts of
cake mix in packages that used to hold more -- whether we admit
it or not, the inflation we've been worried about is already
It's the kind of environment where we see "
" shine. These are companies that have businesses built to last
throughbear markets, rising interest rates and, yes,
This "Forever Stock " has anoperating margin of 44%, which
gives it plenty of wiggle room to withstand economic hardships.
Expectedearnings growth is 11.8%, and itsbusiness model has
started to turn the heads of some of the biggest players onWall
Street . The company has been referred to as a "Baby Berkshire "
since it's an insurer with a largeinvestment arm similar to
Berkshire Hathaway (NYSE: BRK)
But why buy the baby version instead ofWarren Buffett 's
eponymous brain child? As Buffett explains: "Our future rates
ofgain will fall far short of those achieved in the past.
Berkshire'scapital base is now simply too large to allow us to
earn truly outsized returns." Berkshire is too big to generate
the enormous returns it did when it was smaller and more
The "Forever Stock" I'm talking about is insurer
. Markel specializes in insuring niche markets such as summer
camps, antique motorcycles, auto races and amusement parks. It
faces little competition in these markets, which gives Markel the
ability to adjust rates as economic conditions change without
losing its client base.
The specialty insurance company recently reported mixed
results on second-quarter earnings, mainly due to its $3.3
billionbuyout of competitor Alterra. But that should hardly be
taken as bad news. Theacquisition increased Markel'sbook value by
12% to $452 per share, giving thestock a very attractive 1.17
price-to-book (P/B ) ratio. Compare that with Berkshire's 1.45,
and we start to see how Markel is the better value.
The size difference between the two companies reveals why
Markel has the ability to invest in ways Berkshire cannot.
Markel'smarket cap is just over $5 billion, less than 2% of the
Merkel's total operatingrevenues have increased 30% from
lastyear , to $1.9 billion. This is attributed to a 27% gain in
insurance operations as well as a 64% profit from Markel
Ventures, the company's non-insurance businesses. Perhaps the
most significant number is the change incash andcash equivalents
, up from $863 million last December to $1.7 billion as of June,
which gives it even more flexibility in difficult economic
While Markel is still more of an insurance company than
Berkshire, it has been seeing tremendous success with the
businessinvestments that make up Markel Ventures. A number of
diverse companies are held in this segment such as AMF Bakery
Systems, a designer and manufacturer of high-speed bakery
equipment, and Diamond Healthcare, a leader in behavioral health
And it's not justprivate equity that's driving returns, but
investments in Buffett-approved companies like
Costco (Nasdaq: COST)
American Express (
and a large stake in Berkshire Hathaway itself. All in all,
Markel is a triple threat that has staying power and the
maneuverability to snag attractive companies that the cumbersome
A telling sign that Wall Street is a believer in the company
can be found by looking at institutional transactions. In the
last quarter, 592,550shares were purchased representing 6.7%
ofshares outstanding . Management has slowly been adding to its
holdings as well and currently owns 14% of Markel's totalmarket
Risks to Consider:
Markel is a property and casualty insurance company and has
the standard risks of higher than expected losses on claims as
well as being subject to interest-rate risk andmarket risk from
its investment operations.
Action to Take -->
Markel is a value buy based on its current P/B ratio of 1.17.
Expected earnings growth of 11.8% gives us aprice target of
around $575 within the next 12 months.
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