Partners Value Fund : Commentary

Portfolio Managers: Wallace Weitz, Bradley P. Hinton

As of 3/31/2016

Investment Style: Multi-Cap Value

Fiscal Year Contributors

Martin Marietta Materials is a producer of sand, gravel, aggregates and cement (products for the construction industry). During the trailing twelve months, Martin’s aggregates volumes, pricing, and incremental margins exceeded investor expectations, as non-residential and public construction showed broad-based strength. The outlook for public volumes over the next several years improved with the passing of the 5-year federal highway bill, dubbed Fixing America’s Surface Transportation (FAST) Act, and with state Department of Transportation budgets expanding. Martin also increased, for the third time, its synergy cost-savings target for the 2014 Texas Industries acquisition from the original $70 million to $120 million. They sold their California Oro Grande cement operation for $420 million, the proceeds of which will be used towards their 20 million share repurchase program. The culmination of these positive events pushed Martin Marietta’s stock price above our estimate of intrinsic value, and we exited our position during the third quarter of 2015. 
Alphabet is a multinational technology company generally specializing in Internet related services and products. Alphabet’s core search business (Google) delivered strong operating results which eased investor fears that the company’s primary search advertising products would not be as relevant on mobile phones as on desktops. Alphabet’s shares rose, as investors priced in a higher rate of long-term growth, renewed operating expense discipline and the announcement of the company’s first capital return program. We opportunistically trimmed our position, as the stock price approached our estimate of business value.
Motorola Solutions is a global leader in commercial radio systems and public safety communication infrastructure products and services. Motorola Solutions’ shares benefited from board membership and capital infusion by respected technology private equity firm SilverLake Partners, and reduced fears that the company’s core public safety radio products were becoming obsolete. Furthermore, Motorola’s aggressive share repurchase throughout the last 12 months increased per share value. We believe Motorola Solutions will continue to repurchase shares as long as the stock price remains at attractive levels. 

Fiscal Year Detractors

Endo International is a specialty healthcare company engaged in developing, manufacturing, marketing and distributing branded and generic pharmaceutical products and medical devices. Several developments contributed to a difficult 12-month period for Endo’s stock. Growth in the company’s branded drug division has been disappointing, owing in part to poor results from several drugs Endo inherited from its acquisition of Auxilium Pharmaceuticals roughly a year ago. In addition, pricing pressure in the company’s legacy Qualitest generics business increased, muting the segment’s near-term (and potentially long-term) growth trajectory.  Finally, liabilities relating to the company’s legacy vaginal mesh products increased, following an influx of claims late in 2015.  While our business value estimate for Endo has come down, the stock price has declined far more significantly.  Using conservative assumptions for the company’s business over the next several years, we believe Endo has significant upside potential if management can execute on its growth plans for XIAFLEX (attractive injectible franchise) and BELBUCA (pain patch).          
Valeant Pharmaceuticals is a multi-national, specialty pharmaceutical and medical device company that develops, manufactures and markets a broad range of brand name, generic and over-the-counter products in over 100 countries.  We closed our position in Valeant toward the end of October last year.  The stock came under heavy selling pressure as a result of increased political scrutiny around drug pricing and possible wrongdoing at one of its “alternative fulfillment” pharmacy partners.  Our decision to sell was ultimately based on a combination of important questions we had difficulty answering regarding potential long-term reputational damage to Valeant’s business, the likelihood of difficult payer negotiations, future business model uncertainty and financial leverage.  While our investment in Valeant ended on a disappointing note, it was a healthy multi-year contributor to Fund performance.   
Iconix Brand Group is a brand management company and owner of a diversified portfolio of global consumer brands across entertainment, home segments and fashion for men and women. Over the trailing 12 months, Iconix’s share price fell in response to a change in senior management, an accounting restatement, an SEC review and disappointing operating results resulting in a reduction of revenue and cash flow guidance. These events led to additional worries over the ability to refinance near-term debt maturities. As a result, we exited the position. 

Quarterly Contributors

Range Resources is an independent producer of natural gas and natural gas liquids (NGLs) based in Fort Worth, Texas.  Range shares rallied during the quarter, as the company reduced its debt load by roughly $1.0 billion following the divestiture of two non-core assets (Nora and Bradford County).  The company is continuing to pursue a sale of its central-Oklahoma oil properties, which will likely be used to retire additional long-term debt. Other positives included improving natural gas price sentiment (for 2017) and a general thawing in the high yield debt markets. Falling drilling activity in the Marcellus and Utica shales (collective rig counts are down from 170 at peak to 40 at present) and the continued drop in domestic oil production, in time, should bring both oil and natural gas prices up closer to their marginal costs of production.  In the interim, Range has 80% of its 2016 gas production hedged at $3.24/MMBtu and is locking in additional 2017 production with the current gas strip close to $2.85.  We continue to believe Range will emerge from the downturn a significantly more efficient–and more valuable–company.           
Fossil Group is the fourth largest producer of watches and the largest licenser of watches and jewelry globally. Fossil outperformed during the quarter, as the company reported a rebound in same-store-sales, which grew 1% during the fourth quarter, including positive growth in watches. This calmed some fears of secular decline in the category, including headwinds from the Apple Watch and other wearables. Moreover, Fossil guided to flat revenue in 2016 excluding foreign currency translation, which was well ahead of consensus forecasts.  Management reported good reception of their connected accessories product launch and announced a broad product offering across brands which will incorporate Misfit technology and design, in time for the holidays in 2016. 
Liberty Broadband holds a 26% ownership interest in Charter Communications in addition to a minority equity interest in Time Warner Cable. Charter shares have risen as continued improvement in operating results, including net subscriber additions in its legacy video business, demonstrate that management’s operating plan is generating positive momentum.  Investors are also gaining confidence that the Federal Communications Commission (FCC) is leaning toward approving Charter’s proposed acquisitions of Time Warner Cable and Bright House Networks.  We believe Charter’s operating momentum is sustainable and that the proposed deals are likely to be approved, representing additional upside to our business value estimate for Charter on a stand-alone basis.  

Quarterly Detractors

Express Scripts is the largest stand-alone pharmacy benefits manager (PBM) in the United States, helping health benefit providers improve access to (and the affordability of) prescription drugs.  Negotiations with Anthem, Express Scripts’ largest customer, hit an impasse early in the quarter.  Anthem elected to bring the details of the disagreement public at a widely attended industry conference in January, providing the investment community a lens into how far the two companies were apart on the economics of their existing contract.  Since then, Anthem has also filed a lawsuit against Express Scripts.  While we hope a mutually agreeable solution will eventually be achieved, it remains possible (some believe likely) that Anthem will choose not to renew its contract with Express in 2019. We have run scenarios encompassing a range of different outcomes, and we believe Express Scripts’ shares are undervalued in all but the most dire.  We continue to monitor contract-related developments and are otherwise heartened by improved execution across the other 84% of Express Scripts’ enterprise.      
Endo International Please refer to the Fiscal year synopsis.  
Liberty Global is the largest international cable company, with operations in 14 countries providing video, broadband Internet, fixed-line telephone and mobile services to its customers. Its share price fell early in the quarter after an influential Wall Street analyst downgraded his outlook for the stock, principally due to concerns over continued competitive struggles in Holland (one of Liberty’s largest markets).  Since that time, Liberty announced it would move its Dutch operations into a 50/50 joint venture with Vodafone.  The joint venture structure allows Liberty to combine its strong cable and broadband businesses with Vodafone’s mobile offering to create a more competitive, “converged” offering.  Liberty also provided Wall Street with an attractive three-year growth outlook during its fourth quarter earnings call, helping shares recover some of the earlier declines.  We remain confident of continued growth for Liberty’s cable offerings and management’s abilities to deliver on their outlook. 

New Holdings

MasterCard is the world’s second-largest payment network and one of the best known global brands. MasterCard is among the most attractive businesses we own. Its network is well entrenched within the plumbing of payment systems across the global. The transition from cash to digital forms of payment provides growth opportunities over and above underlying economic expansion, and its core business produces healthy doses of excess cash flow with modest reinvestment requirements. 

Eliminated Holdings

ADT Corp – We sold ADT at a gain after a private equity group agreed to acquire the company for a price near our business value estimate.
Precision Castparts – We sold Precision Castparts at a gain when Berkshire Hathaway completed its acquisition of the company.
XO Group – We sold our small position in XO Group at a significant gain when the stock reached a fair price.  
Iconix Brand Group – We sold Iconix Brand Group at a loss, as the company’s risk profile deteriorated due to a combination of soft business results, high financial leverage and increased funding costs.

As of 3/31/2016: Liberty Global plc-CL C comprised 6.2% of the Weitz Partners Value Fund’s net assets; Liberty Broadband Corp.-Series C 3.0%; Express Scripts Holding Co. 2.6%; Range Resources Corp. 2.5%; Fossil Group, Inc. 2.4%; Alphabet, Inc.-CL C 2.4%; Motorola Solutions, Inc. 2.3%; Liberty Broadband Corp.-Series A 1.2%; MasterCard Inc.-CL A 1.0% and Endo International plc 1.0%. 

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 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.