Warren Buffett has bought some great businesses in his career, including Coca-Cola, American Express, and Apple. But his dream business is See’s Candies, the chocolatier from California.
See’s Candies provided Buffett with many of the characteristics he looks for in a company, from great returns on capital, small capital needs, moat, and quality management.
Buffett writes about many of the checklist items over the years in his shareholder letters.
Over the years, Buffett and his sidekick, Charlie Munger, have praised the investment, stating, “we would love to increase our economic interest in See’s but haven’t found a way to add to a 100% holding.”
In today’s post, we will learn:
- Did Warren Buffett Buy See’s Candies?
- How Much Did Warren Buffett Pay for See’s Candies?
- Why Did Warren Buffett Buy See’s Candies?
- What Can We Learn from Buffett Buying See’s Candies?
Okay, let’s dive in and learn more about Warren Buffett buying See’s Candies.
Did Warren Buffett Buy See’s Candies?
In a word, yes.
Here is the story.
In 1972, Warren Buffett learned that See’s Candies was up for sale by the head of Blue Chip Stamp, a Berkshire Hathaway affiliate.
The See family has run the California company, which was established in Pasadena in 1921 by Charles See and his mother, Mary See. However, the most recent owner, Harry See, wanted to sell the company so he could concentrate on his Napa Valley vineyard.
See’s Candies presented the idea to Blue Chip president Bill Ramsey, who then informed Buffett of the opportunity.
Buffett became intrigued right away, and not just because his wife, Susie, loved the sweets so much.
During World War II, candy shops diluted their recipes because of sugar restrictions. See’s maintained its formula and sold its sweets until they were gone. See’s was well known throughout the state and had a long-standing reputation for excellence.
See’s stood out from some of the companies Buffett had invested in before due to its potential for good ongoing operations.
See’s Candies was a high-quality company with the potential for long-term success, not a cigar-butt investment. However, Buffett had previously invested in high-quality growth companies like American Express. The buy of See’s Candies indicated Buffett’s preference for such companies and his practice of engaging in them as buyouts.
Since See’s Candies was a privately held business, potential investors would not have had easy access to its financial data.
Here are the numbers they would have seen if they had access to it, all based on the 48% tax at the time:
- The company’s revenues in 1972 were $31.3 million
- While its after-tax profits were $2.1 million, or almost $4 million, the company has $8 million in net tangible assets
- After that year, the business had 167 open locations and sold 17 million pounds of candy
Bottom line: See’s Candies had built a wonderful business. In the next section, we can dissect what Buffett paid for See’s Candies.
A quick note for those of us who don’t live in California: See’s Candies is a manufacturer of candy and chocolate with headquarters in San Francisco, CA.
See’s Candies is a phenomenon in California and is part of popular culture, with chocolates featured in TV shows and movies. Their chocolates sell out yearly during the holidays, and it has a moat we in the Midwest can’t understand.
The company markets and sells chocolates primarily through retail stores and online stores. The company generates over $500 million in revenue and employs over 1,000 people.
How Much Did Warren Buffett Pay for See’s Candies?
In his 1983 Letter to Shareholders, Buffett explained how much he paid for See’s Candies:
“When we purchased See’s in 1972, it will be recalled, it was earning about $2 million on $8 million of net tangible assets. Let us assume that our hypothetical mundane business then had $2 million of earnings also, but needed $18 million in net tangible assets for normal operations. Earning only 11% on required tangible assets, that mundane business would possess little or no economic Goodwill.
A business like that, therefore, might well have sold for the value of its net tangible assets or for $18 million. In contrast, we paid $25 million for See’s, even though it had no more in earnings and less than half as much in “honest-to-God” assets. Could less really have been more, as our purchase price implied? The answer is “yes” – even if both businesses were expected to have flat unit volume – as long as you anticipated, as we did in 1972, a world of continuous inflation.”
Buffett paid $25 million for See’s Candies. Knowing the profits numbers, one can determine a P/E multiple of 11.9 and an EV/EBIT multiple of 6.3.
The price paid wasn’t inexpensive in the classic sense of a low multiple (5 or lower), unlike some of his earlier investments, notably Berkshire Hathaway. Buffett paid a reasonable sum for the company, which is much more comparable to the case of American Express.
See’s Candies, at 11.9 times earnings, would only have a margin of safety if the company had a greater internal rate of compounding than its rivals, unlike a company bought at a P/E ratio below 5.
In other words, a ten to twelve times earnings multiple would be a fair value for a company that isn’t growing but wouldn’t offer a margin of safety.
Additionally, the value of growth would feel constrained for a company that experiences growth but is unable to expand without paying a cost in extra capital that is significantly smaller than the value of the increase.
Growth and a high ROC are necessary for the business to have a margin of safety. Buffett appears to have taken on and paid for some growth.
Let me use an example to illustrate how growth is “priced into” Buffett’s purchase price. A value investor may determine the value of the discounted future cash flows to determine the price at which an investor is willing to buy a stock.
A corporation must have a 30 percent margin of safety based on its present earnings.
The question becomes, however, how much growth is necessary to satisfy a margin of safety of 30% if this value investor is prepared to pay full price for current earnings instead of demanding a margin of safety based on current earnings?
To put it another way, what profit growth rate is necessary for a company’s intrinsic value to increase by 43% compared to a company with present earnings that are unchanged from year to year? The situation is simple math. We can use the $2.1 million in profits made by See’s Candies in 1972 as a benchmark. One would be willing to spend $14.7 million for the company if one does not pay for growth at all, believes that a fair multiple to pay for such a business is ten times, and needs a 30% margin of safety.
In this case, the business would have a fair value of $21 million, and $14.7 million would represent a discount of 30% off that value.
Why Did Warren Buffett Buy See’s Candies?
Buffett has five reasons he bought See’s Candies and continues to hold today.
- Outsized financial returns
- Modest capital requirements
- Quality management
Let’s unpack each of these.
Outsized Financial Returns
We could infer from his incredible returns the reason for Buffett’s continued love affair with See’s Candies remains the incredible return on his investment, which has increased by almost 8000% since 1972, or 160%+ per year.
Buffett stated at his 2019 Annual Meeting, “We put $25 million into it, and it’s given us over $2 billion of pretax income, well over $2 billion.”
According to the most recent data available, See’s had increased from having $30 million in revenue and less than $5 million in income when Buffett bought it to have more than $500 million in sales and $100 million in profits.
Modest Capital Requirements
Buffett repeatedly lauded See’s Candies for having reasonable capital requirements.
According to his 2007 letter, selling chocolates for cash allows the company to generate income immediately and reduces the amount of cash held in inventory through a quick production and distribution cycle.
See’s Candies has produced upwards of $2 billion in earnings for the conglomerate with just a $40 million investment from Berkshire Hathaway. It has developed into a cash cow that finances Buffett’s other businesses.
In 1972, See’s Candies produced:
- 16 million pounds of candy, worth $30 million, or $1.8 per lb of candy
- Purchase price Buffett paid – $25 million
- After-tax earnings – $2 million
- Invested capital – $8 million
- Return on invested capital – 25%
And then to compare in 2006:
- Sells 33 million pounds of candy, worth $383 million, or $11.6 per lb of candy
- Pretax earnings – $80 million
- After-tax earnings – $60 million
- Invested capital – $40 million
- Reinvested capital – $32 million
- Cumulative profits sent to Berkshire – $1.35 billion
All of this equals Berkshire Hathaway investing $32 million in See’s Candies to earn $1.35 billion over 34 years.
He wrote in his 2014 Letter:
“See’s has thus been able to distribute huge sums that have helped Berkshire buy other businesses that, in turn, have themselves produced large distributable profits. (Envision rabbits breeding).”
See’s Candies well known brand and devoted client base give them two significant competitive advantages. These advantages make it simple to charge more and challenge competitors to steal business.
In 1998, he educated the University of Florida students on See’s Candies moat. Here is what he said:
“Every person in California has something in mind about See’s Candies and overwhelmingly it was favorable; they had taken a box on Valentine’s Day to some girl and she had kissed him; See’s Candies means getting kissed, if we can get that in the minds of people, we can raise prices.”
He continued, “The corporation can base its selling pricing on the value of the product to the client, not the cost of manufacturing it, thanks to the appealing brand image.”
It is not surprising that See’s pricing has increased from less than $2 per pound in 1972 to more than $22.50. The increase is almost double since 1972, accounting for inflation.
Now that is pricing power.
Buffett has, many times, praised management and store employees.
In 1988 he wrote in his letter:
“Charlie and I put Chuck Huggins in charge of See’s about five minutes after we bought the company. Upon reviewing his record, you may wonder what took us so long.”
Huggins, who ran the company for 34 years, saw a 10x increase in profits during his time. As important as Huggins was to the growth of See’s Candies, his retirement in 2006 didn’t spell the company’s end, as new CEO Brad Kinstler continued the roll.
Buffett’s continued appetite for See’s chocolates also impacts his continued investment. Berkshire has featured See’s products for years at their annual meetings, having sold over 13,400 pounds in 2013 of their products.
Not an annual meeting goes by without Charlie and Warren snacking on See’s Peanut Brittle while chugging Cherry Cokes.
Needless to say, diabetics and health nuts need not apply. But it is a testimony to their continued support and belief in the company and its products.
What Can We Learn from Buffett Buying See’s Candies?
In 2007, Buffett wrote, “price is what you pay, value is what you get.”
Of all of Buffett’s investments, from Apple to Coca-Cola, the one he refers to as his “dream investment” is See’s Candies. The small candy company he bought 50 years ago is the gift that keeps giving.
With $500 million in annual revenue, See’s Candies only represents 0.1% of Berkshire’s portfolio. But See’s Candies remains the one company he repeatedly returns to in his writing.
He brings the company up in interviews, his writings, and keeps a box of See’s fudge on display at the annual meetings.
In today’s era of flashy, exciting investments, See’s Candies reminds us that a company’s true value can extend beyond the balance sheet.
When we analyze the investment, we can observe that See’s encompasses all of Buffett’s main investing tenets. For example, we see his focus on the following:
- Capital-light businesses
- Strong moat
- Great returns on capital over time
- Fantastic management
- Wonderful product
If we apply those filters to any company we analyze, I suspect we will do well. The challenge remains to stick to those guidelines and stay the course. One of Buffett’s many strengths is his patience and willingness to let the company do the work.
These ideas are all on display if you look at the length of holdings:
- See’s Candies – 50 years
- Coca-Cola – 34 years
- American Express – 32 years
- Moody’s – 20 years
Holding tight and letting the companies do the work remains one of the keys to Buffett’s success, and an admirable quality to emulate.
One of the characteristics I admire most about Buffett is his willingness to share his wisdom and knowledge.
Over the years, he has provided all investors with a mountain of information and knowledge. He dispenses a ton of wisdom through his Letters to Shareholders, a must-read, and his annual meetings.
His main goal is to teach us how to fish instead of giving us the fish.
As a parent, this is invaluable as it teaches us how to think for ourselves. See’s Candies provides a fantastic illustration of the Buffett investment style.
Find a wonderful company, pay a fair price for the investment, and do nothing.
That’s it; investing is simple but not easy.
And with that, we will wrap up our discussion on Buffett’s investment in See’s Candies.
Thank you for reading today’s post; I hope you find something of value. If I can be of any further assistance, please don’t hesitate to reach out.
Until next time, take care and be safe out there,