Berkshire Gets Green Light on Oxy & Finding FIGS
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Berkshire Gets Green Light on Oxy & Finding FIGS
Will Warren Buffett add Occidental Petroleum to the Berkshire stable?
Happy Monday and welcome to our new subscribers!
Absolutely chuffed, as always, to appear in the latest Weekly Digest over at Rational Reflections — and that so many people enjoyed my recent piece on Warren Buffett’s Dexter Shoe Co. misadventure.
And, while I heartily recommend reading the whole Weekly Digest, make sure not to miss Rob Henderson’s article on the (not-so) surprising connection between moral character and happiness.
Berkshire Hathaway & Occidental Petroleum
On Friday afternoon, Warren Buffett and co. received official approval from the Federal Energy Regulatory Commission to buy up to 50% of Occidental Petroleum.
Berkshire already owns 188 million shares of the Houston oiler — and this latest news sparked a new round of speculation over whether Buffett intends to buy Oxy as a whole or just prefers to opportunistically snap up undervalued shares at his price.
I hate to disappoint everyone, but I don’t have any answers on this one. I don’t know Buffett’s ultimate aim for his Oxy investment and I don’t think the FERC approval provides much proof one way or the other.
What this does mean, though, is that Buffett likes to keep his options open.
And his options now include buying up to 50% of Oxy.
The analyst class, meanwhile, feels quite a bit more confident in its predictive abilities. I’ve included two of the more interesting comments below.
Bill Smead (Smead Capital Management):
“No question Buffett goes to 50% from here. This is looking more and more like the Burlington [Northern Santa Fe] transaction where he ended up buying the whole shooting match.”
David Kass (University of Maryland):
“I think it is likely that Buffett will buy the whole thing eventually. The 50% limit may have been set to receive FERC approval for a non-controlling stake. He clearly plans to purchase additional shares. So far his maximum purchase price has been $60.37 per share.”
While it seems a bit premature to be throwing around words like “no question” and “clearly” in regards to Buffett’s intentions, I tend to agree with Smead about this deal’s eerie resemblance to the BNSF acquisition in 2009.
In the case of BNSF, Berkshire steadily bought shares of the railroad on the open market — amassing an ownership stake over 20% — before negotiating a deal to buy the whole thing.
Sound familiar?
Until now, Buffett has proven very price conscious with his Oxy purchases — stopping abruptly any time shares creep over $60. If that’s still his limit, then Friday’s FERC approval did him no favors. Oxy shares jumped almost 10% on the news.
No clue where this saga goes from here, but I can’t wait to find out.
Finding FIGS
One of my favorite parts of Moneyball is when Oakland A’s general manager Billy Beane blasts his scouts for “dreaming” of what a player might one day become, rather than making a frank assessment of his actual, on-field production.
It doesn’t take a huge leap in logic to see how this principle applies to up-and-coming companies. In a frantic effort to unearth the next big thing, investors pour their hard-earned money into startups with no track record of success. Some are even pre-profit (or, shudder, pre-revenue).
It’s akin to how Beane’s scouts would drool over a muscle-bound prospect who hit tape-measure home runs in batting practice, but couldn’t hit a curve ball to save his life. He’s not gonna make it — no matter how good he looks in a baseball uniform.
When investors make the same mistake, the stock market turns into a casino. Bets are placed based on nothing more than hazy dreams and gut feelings. Not exactly the surest route to long-term wealth.
But, every once in a while, a smaller company pops up with a performance record to match the hype.
And FIGS definitely fits that bill.
Trina Spear and Heather Hasson created the health care apparel brand in 2013 with the mission to create better and more comfortable scrubs for our health care heroes.
Aside from that pretty cool raison d’être, FIGS stands out from the startup crowd in two key ways:
Positive free cash flow
Insane margins
In Q2 2022, the company recorded a gross margin of 70.6% — which, incredibly, was actually lower than a year ago (73.3%).
Even the drop in margin has an admirable backstory. In order to keep its scrubs in stock and available to hard-working customers, FIGS switched to more costly air freight in 2022 to avoid the supply chain disruptions of shipping via ocean routes.
No surprise, then, that FIGS has earned itself a fiercely loyal fanbase. First order retention rate stands at an impressive 50% and the company’s “closet share” of customers’ scrubs rose from 55% to 70%.
Last week, Alan Soclof of The Crossover posed an interesting question: Can FIGS become the next Lululemon?
The opportunity in the healthcare space is so massive they might never need to leave it.
There are over 20M healthcare professionals in the US & 120M in the world. Interestingly, 92% of the company’s revenues are from the US while 8% is from overseas.
The company is just starting to shift their focus to international.
Before this quarter, they were in Australia, UK, and Canada. In Q2, the company did a soft launch in 7 countries in the EU and were “extremely pleased” with the early results even with “minimal” marketing efforts.
International sales will be a key growth lever and something to watch closely.
It’s a bold call — a bit like projecting a pitching prospect to become the next Shane Bieber — but FIGS has the kind of story that makes you dream.
With the financial results (and leadership) to back it up.
I think Billy Beane would approve.
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Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.