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Home My WebLink About2011 02 08 Awards and Presentations 300 - Lateef Investment Management - Ms. Jennifer L. Lavin, CIMA Managing Director Date: February 8, 2011 The attached document was provided to the Board Of Trustees and discussed during the Awards and Presentations Agenda Item "300" by Ms. Jennifer L. Lavin, CIMA, Managing Director, Lateef Investment Management at the February 8, 2011 Regular Meeting. . . LATEEF I N V E S T M E N T M A N A G E M E N T City of Winter Springs Defined Benefit Plan Portfolio Review Jennifer L. Lavin, CIMA, Managing Director February 8, 2011 II LATEEF Discussion topics • Performance • 2010 Buys and Sells • Portfolio Highlights • Outlook 2 . . I LATE E F Winter Springs Performance Recap Net of fees Winter Springs Russell 1000 Inception Date 10/01/07 Growth S &P 500 10/01/07 — 12/31/10 (Cumulative) 1.48% -3.36% - 12.54% 10/01/07 —12/31 /10 (Annualized) 0.45% -1.05% -4.04% 2010 14.72% 16.71% 15.06% 10/01/07 —1/31/11 (Cumulative) 4.53% -0.90% - 10.47% YTD 2011 (1/1/11 - 2/4/11)* 4.91% 4.23% 4.38% Market Value (2/4/11) $6,067,863.84 - - *Preliminary Performance 3 . . LATEEF Portfolio Holdings as of January 31, 2010 CONSUMER DISCRETIONARY FINANCIALS • Scripps Networks Interactive • Affiliated Managers Group • AFLAC INDUSTRIALS • Berkshire Hathaway • CH Robinson • State Street • Expeditors • Robert Half TECHNOLOGY • Rockwell Collins • Accenture • EMC CONSUMER STAPLES MasterCard • • Colgate • Qualcomm ENERGY • Teradata • Suncor • Visa HEALTHCARE • Express Scripts 4 I LATEEF 2010 Purchases and Sales Purchases Sales 1) State Street (STT) 1) Fastenal (FAST) 2) Robert Half (RHI) 2) Ecolab (ECL) 3) Express Scripts (ESRX) 3) ITT Educational (ESI) 5 1 LATEEF Purchase — State Street (STT) State Street is a custody bank that provides outsourcing services ( -85% revenue) to asset managers and provides low cost asset management services (^-15% revenue) through their State Street Global Advisors platform (index & ETF). Competitive Advantages - 1) Scale in both businesses $18 trillion in assets under custody and $1.9 trillion in assets under management 2) Technology investments State Street spends 20 -25% of operating expenses on technology. Business Highlights: Recurring revenue - over 80% recurring revenue, top 100 customers use 13.5 products, historically 5% of their revenue growth is from cross - selling. Long term goals: Revenue 8 -12 %, EPS 10 -15 %, ROE 14 -17% Valuation - At $44, STT is selling at 11x earnings 6 . . LATEEF Purchase — Robert Half International (RHI) Robert Half International — Founded in 1948, RHI provides temporary and permanent staffing services. Approximately 30% of their revenues are generated outside of the U.S. Competitive Advantages Business Highlights — 1) Strong value proposition — RHI is a professional services company that should benefit in an economic recovery. 2) Demographics tailwind — as Boomers retire and current unemployed seek jobs, RHI is there to help expedite the process. Valuation — $23.50, RHI is selling at a 6% FCF yield on 2009 results and has a 2.2% dividend yield, no debt and $350mm cash or 10% of RHI's market cap We believe RHI earnings and free cash flow will accelerate over the next 2 -3 years. LATEEF Purchase - Express Scripts (ESRX) Express Scripts — Founded in 1986, Express Scripts is a leading pharmacy benefit manager (PBM) in North America providing network- pharmacy claims processing, home delivery services, specialty benefit management, benefit- design consultation, drug - utilization review, formulary management and drug data analysis services. Business Highlights — 1) Aims to lower healthcare costs — through formulary management and mail delivery. 2) Beneficiary of generic wave— from 2010 -2015 branded drugs with annual sales of $80B+ will lost their patent protection and switch to generic (such as Lipitor and other drugs treating chronic conditions). These drugs have higher mail penetration and are the most profitable product for ESRX. Valuation — At the time of our buy decision, ESRX was 16x 2011 consensus EPS of $3.21 representing growth of about 30% over 2010. FCF yield of 9% at time of purchase, its median historical PE is 24x, and ROIC over 30 %. ESRX's market cap is $28B. 8 . . III LATEEF 2010 Sales Fastenal (FAST) Valuation — At our point of sale, FAST is selling at 30x '10 estimates and we believe the stock is selling above its intrinsic value. Slowing growth — FAST has indicated that they plan to further delay unit store growth of 7 -10% until the second half of 2010. Store growth was suspended during 2009 due to the slowing economy. Fastenal has about 2,400 stores with a market opportunity in the U.S. of 3,500 stores which implies 4 -5 years of store expansion. We believe the current valuation does not adequately reflect the eventual slowing growth as Fastenal reaches U.S. store saturation and will lead to multiple contraction. Ecolab (ECL) Sold to raise funds for Robert Half (RHI) purchase We feel the business model is still very attractive and still undervalued. However, we believe that as employment trends improve, RHI has more upside potential 9 . . LATEEF 2010 - Sales ITT Educational Services (ESI) Notice of Proposed Rulemaking (NPRM) is released with specific gainful employment (GE) metrics to determine whether schools are eligible for Title IV funds. We assessed the impact of the gainful employment legislation on ITT's earnings, including three conversations with ITT's CEO We sold our ESI position as we believe that ESI will have to effectively reduce tuition to meet the proposed debt/income metrics which will lower earnings and future growth. We also believe that the risk of further adverse legislation is high enough that ITT doesn't warrant a position in our concentrated portfolio of high conviction companies. 10 . . LATEEF Update - Visa / MasterCard Fed's December announcement would materially reduce debit interchange fees • Interchange fees directly impact card - issuing banks — V/MA have separately negotiated payment contracts with the banks for processing services • U.S. debit business account for —20% of Visa's and —15% of MA's revenues • If V/MA does nothing, then both are trading —16x '11 EPS • Both companies have strategies to mitigate the potential impact, including: — Supporting alternative products, such as pre -paid cards — Investing in markets outside the U.S. to increase acceptance of plastic. 85% of global transactions still occur with cash and check — Reducing more discretionary operating expenses, including promotions for debit — Unbundling pricing to be paid for all of the services provided — Adjusting the terms of the rebates with banks I I I LATEEF Moving back to stock picking? % of S&P 500 Stocks Moving in Same Direction (6-Month Moving Average) 90% - 85% - 80 %- 75 - ,11 IA ii 1., 65° - I!! 7 ' [ 7 1 7 lr 60% 55% I 50° 1 1 1 I 1 1 t 1 1 1 1 I 1 1 1 1 I 1 72 74 '76 78 '80 '82 '85 '87 '89 '91 '93 '95 '97 `99 1)1. '03 05 07 '10 Source: Strategas 12 I LATEEF Pick up in acquisitions • Qualcomm — Atheros • Teradata — Aprimo • Affiliated Managers Group — Trilogy, Pantheon • Berkshire Hathaway — Wesco Financial • EMC — Isilon Systems, Greenplum • MasterCard — Travelex Holdings, Datacash • State Street — Bank of Ireland Asset Management 13 . . LATEEF Portfolio Highlights/ 2011 Trends • All Lateef Portfolio companies met or exceeded Q3 consensus EPS estimates. • Accenture noted that book to bill (future revenue) continues to be positive with clients beginning to move from cost cutting projects to those that generate revenue. Guided FY11 revenue growth to high end of 8-11%. • Qualcomm expects double digit revenue and EPS growth for the next five years driven by smart phone penetration, migration to 3G, emerging countries, non - handset devices and 4G launches. • Affiliated Managers Group had over $5 billion in inflows in Q3'10, the highest in three years, and is well positioned for "re- risking" as 70% of earnings come from global, emerging markets and alternative strategies. • Teradata reported the highest quarterly revenue growth ( +15 %) and product revenue growth ( +27 %) in the last 10 years and new account wins were the highest in 6 years. FY' 10 revenue guidance was increased to 12% from 8 -10 %. • MasterCard saw an acceleration in cross - border transactions in November 2010 growth of 19% from 15% in Q3'10 which augers well for discretionary travel. 14 . . L AT E E F Lateef Earnings Growth vs. S &P 500 projected 250% %;' 200% !: /;;i7; %'� -" 77rr, 4% -. 7 ::: 7 7 . ./- 7' , %i` /�f:' ., Z%' / , / /: %/,- 150% — . r % /' / %,, ; r,• 100% - , „<;; / . ; ; : r:: E is !'; %% 50% % . " l : %% is 0% %, -/ is -50% — 0 O O O 0 O O d 'c' �e� Oe. sec Oe. Oe � oe � (jz Oe c ; Oe. Lateef EPS Growth (Compounded) —S &P 500 EPS Growth (Compounded) 15 1_ . . L ATEEF Lateef E Growth vs. Composite P projected 250% « z 2§§ ' ; : > 20 #- �f�� / , �7 _ / . . y m . � y , 150% > // , _ > yf ®'» \r\ / : A . . f 100% »' g a� m f 50% - 0% O O O co O O O N, O � O ° C. C. C. C. C. C. C. —Late E SGrowth (Compounded) --Late All Ca p Comp AePerformance (Cumulative) |6 LATEEF Lateef Portfolio • Strong Top Line - -80% of our portfolio's 2010 revenues surpassed their prior peak in 2007/2008 • Strong EPS -75% of our portfolio's 2010 EPS surpassed their prior peak level • International Exposure - over 50% of our revenues are from outside the United States • Attractive Valuation: 2011 median PE 16x - Trailing free cash flow yield of 6% — Over 30% upside to our estimate of fair value 17 • . LATEEF Disclaimer The information in this presentation was prepared by Lateef Investment Management, L.P.( "Lateef "). The information is believed by Lateef to be reliable and has been obtained from both public and private sources believed to be reliable. Lateef makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this presentation constitute the current judgment of Lateef and are subject to change without notice. Lateef has no obligation to update, modify or amend this presentation, or to otherwise notify a reader thereof, in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Past performance is not necessarily indicative of future results. This presentation is provided for informational purposes only. 18