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from Outstanding Investor Digest's July 31, 2000 Edition

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LONGLEAF PARTNERS FUNDS'
MASON HAWKINS, C.T. FITZPATRICK & STALEY CATES

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Serious undervaluation and buybacks go hand in hand.
    Staley Cates: There are two things that I'd like to discuss today that are unprecedented in the history of our funds: And they are, #1, the degree of undervaluation at present across the board in our portfolios and, #2, the magnitude of share repurchases by almost all of our companies in Longleaf Partners Fund and the great majority of companies across all four funds.
    As you can imagine, these two things go hand in hand - because if you're a CEO and your company's stock is selling at 50¢ on the dollar, it's hard to beat buying your own shares in. I'll get to that math in a second. But the final thing I'd like to go over is what our companies are doing to get these values realized.

Our flagship's price-to-value ratio is unprecedented.
    Cates: As you know, we go to great lengths to appraise our businesses based on their net assets, their discounted free cash flows and comparable transactions. Every month, we then aggregate those appraised values and compute an average price-to-value ratio for the portfolio as a whole....
    Over the long term, our composite [price-to-value] ratio has averaged slightly less than 70%.... That should make intuitive sense - because we buy companies at no more than 60% of value. And usually, we still own a handful that may have risen to, say, 80-90% of value - positions that are still holds. So you can see how our average might tend to be around 70%.
    Right now, we are actually at an average price-to-value of just over 50% ... [which is way] out-of-whack historically. That's a remarkable number because usually we're happy to buy a superior company with great management at 60% of value. And if one comes along at 50%, we're ecstatic. Even to have three or four new ideas per year at 50% of value instead of 60% is something that we've never seen. And usually, three or four new names per year are enough to satisfy a full year of demand. So for the whole portfolio on average to trade at just over 50% of value is simply unprecedented.