Company selection criteria includes:
Financial strength and profitability
- Strong balance sheet
- Low cost structure
- High returns on capital
Competitive advantages
- Non-obsolescent products
- Dominant or growing market share
- Global presence and powerful brands
Experienced management
- Proven track record
- Significant alignment of interests
- Intelligent allocation of capital
Valuation Methodology
Convert GAAP to owner-earnings
- Adjust for one-time items
- Adjust for maintenance capital spending
- Adjust for pension and other expenses
Adjust enterprise value
- Include debt and equity
- Include pension liability
- Review other assets and liabilities
Evaluate capital allocation
- Return of capital through dividends and share repurchases
- Growth capital spending
- Acquisitions
Sell Discipline
- Excessive valuation
- Deteriorating fundamentals
- Detrimental change in management or business focus
- More compelling opportunities
Investment Process
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Company Universe |
We seek to purchase durable, well-managed businesses at value prices and hold them for the long term. |
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Identify Long-Term Trends |
While we research companies on a case-by-case basis, we also attempt to define broader, long-term trends that influence the potential for certain companies to create value over the long term. Thus our method, while predominantly bottom-up, incorporates a top-down element as well. |
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Fundamental Research |
Our investment management team conducts extensive research into company's financial strength and profitability, competitive advantages and management. |
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Interview Company Management |
We interview a company's executive management teams, employees, clients, and competitors. |
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Valuation Process |
Davis applies a proprietary method for calculating the intrinsic value of a business based on a company’s "owner earnings." Owner Earnings are determined by adjusting reported net income to more accurately reflect the true cash profits of a business. Positions are built when companies can be purchased at discounts to their intrinsic value. |
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Sell Discipline |
We consider selling an investment on the basis of excessive valuations, deteriorating fundamentals, or a negative change in management or strategy. |
