Markel More Berkshire-like Than Ever

I've often noted that I think of Markel (MKL), the specialty line insurer, as having the potential to become a junior version of Warren Buffett's Berkshire Hathaway (BRKB). And now, the similarities have gotten just a little bit stronger.

The last time I made this argument, it was based not only on the fact that Thomas Gayner, who runs the investments for Markel, invests in a very Buffett-like fashion, or on the fact that Markel actually owns a big chunk of Berkshire shares (among other value-oriented holdings, listed here on Stockpickr), or on the fact that Markel has begun cautiously diversifying away from straight stock market investing with their investments in First Market Bank and a bakery equipment business.

No, perhaps as importantly, it was based on the fact that Markel's releases read like Berkshire Hathaway releases - or put differently, the Markels and Thomas Gayner sound a bit like Warren Buffett.

And now, they're following in his footsteps in another small way, too. Thomas Gayner was just last week appointed to the board (and the audit committee) of the Washington Post Co. (WPO), one of the bedrock holdings of Berkshire Hathaway and a company in which Warren Buffett has served as a board member for more than 20 years (albeit not sequentially). It's an interesting board and a great company, though I've unfortunately been too timid about their local TV and newspaper holdings to ever invest and reap the rewards of their Kaplan division and the surprisingly strong performance of the washingtonpost.com division (the rest of the board is listed here, FYI).

So does this add fuel to the fire for speculation that Markel will turn out to be as great an investment as Berkshire Hathaway was a couple decades ago? Well, maybe a little, but it's just a board seat. I consider it just another tiny indication that Gayner is moving in the right company, but that's really all.

To Buy or Not to Buy
More importantly, Markel releases their earnings report this morning. For someone who's been waiting a long time for the shares to dip so I could buy some more, I'm having trouble making a decision about what to do. Should I buy additional shares before the earnings report, or wait until after they report and hope the shares will dip then?

It's a tough call; Markel has solidly beaten the estimates several times in the past year (and missed them once), but their earnings are notoriously hard for analysts to estimate. One thing everyone agrees on is that this past year was exceptional for Markel, thanks largely to the lack of any big insured losses (as they had with the hurricane season of 2005), combined with the higher rates they were able to charge following those hurricanes, and some great investment returns. So all the estimates have Markel's sales increasing slightly for the coming year, but earnings dipping a bit from 2006 levels.

Will the company downplay future performance on the conference call, and emphasize that the huge upswing in 2006 really was a bit of a fluke ... or will they seem optimistic about 2007? It's pretty impossible to tell, and they usually keep their cards pretty close to their vest.

But with the company's ability to grow book value consistently over time, I'm sorely tempted to buy more - whether I do so before or after the earnings release, or both, I'll let you know.

Update
I did end up buying a little bit more MKL yesterday, I purchased additional shares with a limit order that was executed at $490.68 right before the market close. Ideally, I'd like to own a few more shares and may make an additional purchase if we see a dip following the earnings ... otherwise, I'll wait.

Disclosure: I own shares of Berkshire Hathaway and Markel and may purchase more Markel in the near future. I also partner with the Washington Post/Newsweek Interactive Blogroll for advertising purposes.

MKL 1-yr chart

Comments

[FIG trader_:]

One ought to be more cautious when writing about one's stock recommendations publicly without doing a bit more due dilligence. And readers should also be cautious when the bullish tone surfacing from every corner of the investment scene gets so effusive about MKL, especially after having already risen so extraordinarily (10 to 15 fold over 20 years). Besides thes exceptional performance, stock picking abilities, and "insurance exposure" , its similarities to BRKA end pretty much there, not withstanding the moniker "Baby Berkshire" (otherwise just say its a good insurance underwriter). As the author should make himself aware of, the company doesn't have any "private equity" (i,e, it doesn't own non-insurance businesses that provide cash to the parent). Since Berkshire owns so much of it, where do you find comparability? I'm confdent Gaynor and Markel brothers would agree with WEB when he says "I wouldn' buy our own stock at this price (check for buybacks going forward, doubt you'll see many)

2007 Jan 26 10:01 AM

[Travis Johnson:]

And that's how a market is made ... thanks for the comments.

Markel doesn't techically have private equity investments, perhaps, I'm not the judge for what to call them, but has acquired interest in non-publicly-traded companies, both of which are local to their VA offices. It may end there, or it may not (my guess is that they will continue to explore this area, but I have no inside knowledge).

It is of course partly tongue in cheek that I refer to any company as "the next Berkshire" -- there is unlikely to be another one of those, nor another Warren Buffett, but I think Markel has enough of the right traits to make it an excellent investment for the long term. Whether today's price is too high is a matter for judgement and personal interpretation, but for my time horizon and outlook for the company, I consider it a fair price (I don't think it's hugely undervalued). Though they have exhibited spectacular performance in the past, I don't believe they've reached their maximum density -- they remain a fairly small company with, I believe, plenty of growth potential both in the US and overseas.

2007 Jan 26 01:35 PM

[FIG trader_:]

It still doesn't make it "More Berkshhire like than ever"

2007 Jan 26 01:52 PM

[Travis Johnson:]

My argument that the similarities have gotten "just a little bit stronger" refers to the fact (as I noted above) that Gayner, like Buffett before him, recently joined the Washington Post board. As I said in the note, it's just a small thing that I found interesting ... but I suppose the headline by itself is a bit of hyperbole. That's not why I bought shares most recently. I like Markel's specialty focus, their commitment to only selling profitable policies, and their use of long term growth in book value as a measure of success (and the fact that bonuses for management are based on 5-year book value growth, not on share price appreciation or reported earnings). The relationship between the book value and the share price has fluctuated significantly over the years, from priced under book to priced well above the current roughly 2X book, but as long as their underwriting performance and investment strategy continue to add to the book value I'm reasonably confident this investment will work out for me over the next ten to twenty years.

2007 Jan 26 02:06 PM

[Buffettwise:]

I think this company out of the 18,000 publicly traded is the most like baby Berkshire than any other I have seen. The other second place would be Leucadia National, but the managers there are aging as well.

Because Gayner is young, he should get wiser and better as he ages. His performance on the portfolio side is good, but not stellar. There are several professional value managers that can trounce his record. YOU ARE NOT BUYING THIS COMPANY FOR THE PORTFOLIO MANAGER. You are buying this company because of the "free and growing float" of the cash that keeps coming in.

If they even averaged an 11% S&P style return, add to the float along with organic growth of the business, you get a "leveraged" 11% to be more in line with 17%.

Buffett's stock picks on balance have not been home runs. Most people don't get that. They have been nice (don't get me wrong), but it's been the growth in internal cash flow that allows Buffett to invest the excess capital and a nice compounded rate! That is the magic here folks.

You get the same with MKL. Most of the Re-insurance companies invest heavy in bonds, and that is why their excess float growth has not translated to growth in book value as well.

This company is bullish long-term, and that my friends is the real reason that they should continue to earn excess returns.

2008 Jan 11 02:13 AM