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March 31, 2015
Investment Style: Large-Cap Value

Top Quarterly Contributors

Endo International is a specialty healthcare company engaged in developing, manufacturing, marketing and distributing branded pharmaceutical and generic products as well as medical devices. In late January, management completed its previously announced $2.6 billion acquisition of Auxilium Pharmaceuticals. Auxilium strengthens Endo’s branded pharmaceutical platform, provides immediate scale in an attractive niche market (urology), and is roughly 10% accretive to our base case estimate of intrinsic value. Roughly a month later, the company agreed to sell the men’s health portion of its integrated medical systems surgical business to Boston Scientific for $1.6 billion. We anticipate the proceeds supporting future business development initiatives.
Martin Marietta Materials is a producer of granite, limestone, sand, gravel and aggregates products for the construction industry. In February, management reported strong aggregates volume growth and price increases across each of its geographic markets and issued robust 2015 guidance. In addition, Martin increased its synergy target for the Texas Industries acquisition from $70 million to $100 million annually and announced a new share buyback plan. If the plan is completed it would represent approximately 30% of the company’s outstanding shares.

Top Quarterly Detractors

Twenty-First Century Fox is a diversified media and entertainment company. Shares declined during the first quarter as management reduced 2016 earnings guidance. Reported ratings across the industry have been consistently negative as viewers transition to additional, unmeasured distribution methods and alternative content. Furthermore, Fox’s international channel is pressured on a reporting basis by headwinds from the strengthening of the U.S. dollar. We increased our position size as the stock price declined.
United Parcel Service is a package delivery organization and a provider of supply chain management solutions. Despite significant investment during 2014 in anticipation of strong holiday e-commerce volumes, UPS’s peak shopping season struggles continued as e-commerce parcels once again crowded into a tight shipping window. We believe the company’s efforts toward a more streamlined holiday shopping experience will bear fruit in time, and we expect the company’s stock price will eventually reflect this stepped up commitment to its customers.

Top Fiscal Year Contributors

Valeant Pharmaceuticals International is a specialty pharmaceutical and medical device company that develops, manufactures, and markets a range of generic and branded generic pharmaceuticals, over-the-counter products and medical devices. During an eventful fiscal year, Valeant’s strong underlying business performance carried the day as the company battled Allergan’s aggressive negative public relations campaign. Valeant’s dermatology business performed well ahead of our expectations, driven by broad-based strength across its portfolio as well as the successful launch of fungal treatment Jublia. In February, Valeant announced a definitive agreement to acquire Salix Pharmaceuticals for slightly over $15 billion. We anticipate Salix earning attractive high teens returns for Valeant over time. The combination of healthy double-digit organic sales growth and falling acquisition-related cash restructuring expenditures drove a noticeable increase in excess cash generation, creating the capacity for the company’s transaction with Salix.
Liberty Global through its subsidiaries provides video, broadband internet, fixed-line telephone and mobile services across 14 countries. Liberty Global announced solid operational results in the Big 5 geographies: UK, Germany, Switzerland, Belgium and The Netherlands; and successfully closed the acquisition of their largest cable competitor in Holland, Ziggo. Additionally, Virgin Media in the UK (a subsidiary of Liberty Global as of June 2013) announced “Project Lightning.” Virgin intends to invest 3 billion pounds to connect four million additional homes to its network resulting in broadband speeds substantially faster than telco-based competitors. We believe the project represents a very good use of capital and should generate attractive future returns.
Endo International Fiscal year results were driven by first quarter contributions as described above.

Top Fiscal Year Detractors

Range Resources is a Texas-based independent natural gas, natural liquids, and oil company engaged in the exploration, development and acquisition of primarily gas properties. Falling domestic natural gas and natural gas liquids (NGL) prices in addition to regional oversupply in the northeast portion of the United States continue to be stiff headwinds for Range Resources in the near-term. Absent a demand shock from a worsening U.S. economy, we expect the present supply/demand imbalance will work itself out over the next 18-24 months. In the interim, we believe Range will continue to grow per share production and reserves in a highly capital efficient manner.
Discovery Communications is a world-class provider of non-fiction, global pay-tv programming. Weakness in U.S. television advertising, foreign currency headwinds and increased investments in niche European sports rights muted the company’s 2015 outlook and pressured Discovery’s shares during the quarter. We think the company’s investments are strategically sound and should earn solid returns over the next several years. We also believe that the core business will prove more resilient than many investors fear, especially overseas.
Apache Corporation is an independent energy company that explores, develops and produces natural gas, crude oil and natural gas liquids. Apache shares suffered alongside most of the energy sector as oil and natural gas prices fell sharply. We sold our stake in Apache during the fourth quarter to focus our capital in two higher conviction producers, Range Resources and Pioneer Natural Resources, with better assets trading at similar discounts to our calculated intrinsic value.

New Positions This Quarter

No new positions were added in the first quarter of 2015.

Positions Eliminated This Quarter

Texas Instruments Our sale of Texas Instruments was bittersweet, bringing to a close a very successful investment for the Fund. With a holding period just shy of five years, Texas Instruments generated an annualized internal rate of return of approximately 25% thanks in part to its “best in sector” capital allocation prowess. We continue to think favorably of its business, the company’s future prospects and its able management team, but sold when Texas Instruments shares rose above our estimate of intrinsic value.
DIRECTV We have trimmed our DIRECTV position several times since the acquisition by AT&T was announced last May. We sold our remaining shares as the stock price approached our estimate of business value.
As of 3/31/2015, Endo International comprised 3.1% of the Weitz Value Fund's net assets; Martin Marietta Materials 1.9%; Twenty-First Century Fox 4.4%; United Parcel Service 1.8%; Valeant Pharmaceuticals International 5.9%; Liberty Global 6.7%; Range Resources 3.7%; Discovery Communications 3.0%; Apache Corporation 0.0%; Texas Instruments 0.0%; DIRECTV 0.0%.
Investors should consider carefully the investment objectives, risks, and charges and expenses of the Fund before investing. The Fund's Prospectus contains this and other information about the Fund and should be read carefully before investing. Portfolio composition is subject to change at any time and references to specific securities, industries, and sectors referenced in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk.
Weitz Securities, Inc. is the distributor of the Weitz Funds.