Warren Buffett’s discussion on See’s Candy - Berkshire Hathaway Annual Report 2007

I felt this was a really interesting part of Warren’s annual shareholder letter this year.

Here are a few of my takeaways with quotes from Warren’s annual report…

1. The best businesses can be found in really slow growing industries (Classic Peter Lynch)

“The boxed-chocolates industry in which (See's) operates is unexciting: Per-capita consumption in the U.S. is extremely low and doesn’t grow”. Since 1972 See’s sales have grown at at “ only 2% annually.”(Warren Buffett – Berkshire Hathaway Annual letter 2007)

2. They have a moat or durable competitive advantage & great management…

“Yet (See’s) durable competitive advantage, built by the See’s family over a 50-year period, and strengthened subsequently by Chuck Huggins and Brad Kinstler, has produced extraordinary results for Berkshire.” (Warren Buffett – Berkshire Hathaway Annual letter 2007)

3. They throw off a lot of cash with little capital reinvestment required.

“We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million….

Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion” (Warren Buffett – Berkshire Hathaway Annual letter 2007)

4. And of course selling a great product & recognized brand that people love. Who doesn’t like chocolate!

Disclosure: I own shares of Berkshire Hathaway (BRK-B)