The Manual of Ideas: The Superinvestor Issue, September 2011

Value-oriented Equity Investment Ideas for Sophisticated Investors

A Monthly Publication of BeyondProxy LLC Subscribe at manualofideas.com

“If our efforts can further the goals of our members by giving them a discernible edge over other market participants, we have succeeded.”

Copyright Warning: It is a violation of federal copyright law to reproduce all or part of this publication for any purpose without the prior written consent of BeyondProxy LLC. Email [email protected] if you wish to have multiple copies sent to you. © 2008-2011 by BeyondProxy LLC. All rights reserved.

Investing In The Tradition of Graham, Buffett, Klarman

Year IV, Volume IX September 1, 2011

When asked how he became so successful, Buffett answered: “We read hundreds and hundreds of annual reports every year.”

Top Ideas In This Report

Also Inside

Editor’s Commentary ……………….. 5

MOI Model Portfolios ………………. 8

Interview with Lisa Rapuano ……... 10

Portfolios with Signal Value™ …… 18

Screening for Superinvestor Stocks.. 76

20 Superinvestor Holdings ……….. 86

Favorite Value Screens …………… 166

This Month’s Top Web Links …….. 175

About The Manual of Ideas

Our goal is to bring you investment ideas that are compelling on the basis of value versus price. In our quest for value, we analyze the top holdings of top fund managers. We also use a proprietary methodology to identify stocks that are not widely followed by institutional investors.

Our research team has extensive experience in industry and security analysis, equity valuation, and investment management. We bring a “buy side” mindset to the idea generation process, cutting across industries and market capitalization ranges in our search for compelling equity investment opportunities.

THE SUPERINVESTOR ISSUE

► Screening for bargains owned by superinvestors

► Latest holdings of 50+ top investors

► 20 companies profiled by MOI research team

► Proprietary selection of Top 3 candidates for investment

► Plus: Exclusive interview with Lisa Rapuano

► Plus: The Manual of Ideas Model Portfolios NEW!

► Plus: Favorite stock screens for value investors

Superinvestor companies mentioned in this issue include 3M, ABB, Abbott Labs, Accenture, AIG, Altria Group, Amazon.com,

American Express, Amgen, Anadarko Petroleum, Anheuser-Busch, Apache, Apple, AstraZeneca, AT&T, Baidu.com, Banco Santander, Bank of America,

Barrick Gold, Berkshire Hathaway, BP, Bristol Myers Squibb, Brookfield Asset Management, Brookfield Residential Properties,

Canadian Natural, Caterpillar, Cemex, Cisco Systems, Citigroup, Coca-Cola, Colgate Palmolive, Comcast, ConocoPhillips, Costco Wholesale,

CVS Caremark, Diageo, DIRECTV, Dollar General, eBay, Eli Lilly, EMC, Emerson Electric, Enterprise Products, Exxon Mobil, Female Health,

Flextronics, Freeport-McMoRan, Fresh Market, General Electric, General Motors, GlaxoSmithKline, Goldman Sachs, Google, Halliburton,

Hewlett-Packard, Home Depot, HomeAway, Huntington Ingalls Industries, IBM, Intel, Interval Leisure, INTL FCStone, Johnson & Johnson, JPMorgan Chase, Kraft Foods, Loews Corporation, MakeMyTrip,

MasterCard, McDonald’s, Medtronic, Merck, MetLife, Microsoft, Microsoft, Occidental Petroleum, Oracle, Owens Illinois, PepsiCo, Petroleo Brasileiro,

Pfizer, Philip Morris, Potash, Procter & Gamble, Qualcomm, Rockwell Collins, Royal Dutch Shell, Sanofi-Aventis, Santander Brasil,

Sara Lee, Schlumberger, Sealy Corporation, Suncor Energy, Syneron Medical, Target, Telefonica, Teva Pharma, TOTAL, U.S. Bancorp, Union Pacific, UnitedHealth, UPS, Valero Energy, Verizon, Visa, Vodafone,

Walgreen, Wal-Mart, Walt Disney, Wells Fargo, and more.

(analyzed companies are underlined)


© 2008-2011 by BeyondProxy LLC. All rights reserved. SUBSCRIBE TODAY! www.manualofideas.com September 1, 2011 – Page 3 of 177

Table of Contents EDITORIAL COMMENTARY ......................................................................... 5

THE MANUAL OF IDEAS MODEL PORTFOLIOS ........................................ 8

EXCLUSIVE INTERVIEW WITH LISA RAPUANO ...................................... 10

50+ PORTFOLIOS WITH SIGNAL VALUE™ .............................................. 18

AKRE CAPITAL (CHUCK AKRE) ................................................................................................... 19 ALTAI CAPITAL (TOBY SYMONDS)............................................................................................... 20 ANCIENT ART / TETON (QUINCY LEE) ......................................................................................... 21 APPALOOSA (DAVID TEPPER) .................................................................................................... 22 ATLANTIC INVESTMENT (ALEXANDER ROEPERS) ......................................................................... 23 BARES CAPITAL (BRIAN BARES) ................................................................................................. 24 BAUPOST (SETH KLARMAN) ....................................................................................................... 25 BERKSHIRE HATHAWAY (WARREN BUFFETT) .............................................................................. 26 BLUE RIDGE (JOHN GRIFFIN) ..................................................................................................... 27 BP CAPITAL (BOONE PICKENS) .................................................................................................. 28 BRAVE WARRIOR (GLENN GREENBERG) .................................................................................... 29 BREEDEN CAPITAL (RICHARD BREEDEN) .................................................................................... 30 CENTAUR VALUE (ZEKE ASHTON) .............................................................................................. 31 CENTERBRIDGE (JEFFREY ARONSON AND MARK GALLOGLY) ...................................................... 32 CHILDREN’S INVESTMENT (CHRIS HOHN) ................................................................................... 33 CHOU ASSOCIATES (FRANCIS CHOU) ......................................................................................... 34 EAGLE CAPITAL (BOYKIN CURRY) .............................................................................................. 35 EAGLE VALUE (MERYL WITMER) ................................................................................................ 36 EDINBURGH PARTNERS (SANDY NAIRN) ..................................................................................... 37 ESL INVESTMENTS (EDDIE LAMPERT) ........................................................................................ 38 FAIRFAX (PREM WATSA)............................................................................................................ 39 FAIRHOLME (BRUCE BERKOWITZ) .............................................................................................. 40 FORCE CAPITAL (ROBERT JAFFE) .............................................................................................. 41 GATES CAPITAL (JEFF GATES)................................................................................................... 42 GLENVIEW (LARRY ROBBINS) .................................................................................................... 43 GOLDENTREE (STEVE TANANBAUM) .......................................................................................... 44 GREENHAVEN (ED WACHENHEIM) .............................................................................................. 45 GREENLIGHT (DAVID EINHORN) ................................................................................................. 46 H PARTNERS (REHAN JAFFER) .................................................................................................. 47 HARBINGER (PHIL FALCONE) ..................................................................................................... 48 HAWKSHAW (KIAN GHAZI) ......................................................................................................... 49 HOUND PARTNERS (JONATHAN AUERBACH) ............................................................................... 50 ICAHN ENTITIES (CARL ICAHN) ................................................................................................... 51 INTERNATIONAL VALUE ADVISERS (CHARLES DE VAULX) ............................................................ 52 JOHO CAPITAL (ROBERT KARR) ................................................................................................. 53 LANE FIVE (LISA RAPUANO) ....................................................................................................... 54 LEUCADIA (IAN CUMMING AND JOE STEINBERG) ......................................................................... 55 LONE PINE (STEVE MANDEL) ..................................................................................................... 56 MARKEL GAYNER (TOM GAYNER) .............................................................................................. 57 MHR (MARK RACHESKY) .......................................................................................................... 58 MSD CAPITAL (GLENN FUHRMAN AND JOHN PHELAN) ................................................................ 59 PABRAI FUNDS (MOHNISH PABRAI) ............................................................................................ 60 PAULSON & CO. (JOHN PAULSON) ............................................................................................. 61 PENNANT (ALAN FOURNIER) ...................................................................................................... 62 PERSHING SQUARE (BILL ACKMAN) ........................................................................................... 63



SAGEVIEW (ED GILHULY AND SCOTT STUART) ........................................................................... 64 SCOUT (JAMES CRICHTON)........................................................................................................ 65 SECOND CURVE (TOM BROWN) ................................................................................................. 66 SOUTHEASTERN (MASON HAWKINS) .......................................................................................... 67 SPENCER (KEN SHUBIN STEIN) .................................................................................................. 68 THIRD POINT (DAN LOEB) .......................................................................................................... 69 TIGER GLOBAL (CHASE COLEMAN) ............................................................................................ 70 VALUEACT (JEFFREY UBBEN) .................................................................................................... 71 WEITZ FUNDS (WALLY WEITZ) ................................................................................................... 72 WEST COAST (LANCE HELFERT AND PAUL ORFALEA) ................................................................. 73 WINTERGREEN (DAVID WINTERS) .............................................................................................. 74 WL ROSS & CO. (WILBUR ROSS) ............................................................................................... 75

SCREENING 900+ HOLDINGS OF 50+ SUPERINVESTORS .................... 76

TOP 100, BY MARKET VALUE ..................................................................................................... 76 TOP 100, BY THIS FY P/E (CONSENSUS ESTIMATES) .................................................................. 78 TOP 100, BY NEXT FY P/E (CONSENSUS ESTIMATES) ................................................................. 80 TOP 100, BY TRAILING GROSS PROFIT TO ENTERPRISE VALUE ................................................... 82 TOP 100, BY TANGIBLE BOOK VALUE TO MARKET VALUE ............................................................ 84

PROFILING 20 SUPERINVESTOR HOLDINGS ......................................... 86

BP (BP) – BAUPOST , BP CAPITAL , CHOU , GREENLIGHT , THIRD POINT .............. 86 BROOKFIELD RESIDENTIAL (BRP) – MARKEL , PABRAI .................................................. 90 CEMEX (CX) – SOUTHEASTERN ............................................................................................. 94 DOLLAR GENERAL (DG) – BRK , LONE PINE , PENNANT ................................................ 98 FEMALE HEALTH (FHCO) – BARES ..................................................................................... 102 FLEXTRONICS (FLEX) – GLENVIEW ..................................................................................... 106 FRESH MARKET (TFM) – SCOUT ...................................................................................... 110 HOMEAWAY (AWAY) – TIGER GLOBAL ............................................................................. 114 HUNTINGTON INGALLS (HII) – GREENLIGHT ....................................................................... 118 INTERVAL LEISURE (IILG) – BARES , GATES , WEITZ ...................................................... 122 INTL FCSTONE (INTL) – BARES , LEUCADIA ..................................................................... 126 LOEWS (L) – EAGLE , SOUTHEASTERN .............................................................................. 130 MAKEMYTRIP (MMYT) – TIGER GLOBAL ............................................................................. 134 MICROSOFT (MSFT) –BAUPOST , EDINBURGH , GREENLIGHT , IVA , MARKEL … ..... 138 OWENS ILLINOIS (OI) – ATLANTIC INVESTMENT .................................................................... 142 ROCKWELL COLLINS (COL) – GREENHAVEN , PENNANT , VALUEACT ........................... 146 SARA LEE (SLE) – THIRD POINT , VALUEACT .................................................................... 150 SEALY (ZZ) – H PARTNERS ................................................................................................. 154 SYNERON (ELOS) – BAUPOST ............................................................................................. 158 VALERO ENERGY (VLO) – APPALOOSA , PENNANT ............................................................ 162

FAVORITE SCREENS FOR VALUE INVESTORS .................................... 166

“MAGIC FORMULA,” BASED ON TRAILING OPERATING INCOME ................................................... 166 “MAGIC FORMULA,” BASED ON THIS YEAR’S EPS ESTIMATES ................................................... 167 “MAGIC FORMULA,” BASED ON NEXT YEAR’S EPS ESTIMATES .................................................. 168 CONTRARIAN: BIGGEST YTD LOSERS (DELEVERAGED & PROFITABLE) ....................................... 169 VALUE WITH CATALYST: CHEAP REPURCHASERS OF STOCK ..................................................... 170 PROFITABLE DIVIDEND PAYORS WITH DECENT BALANCE SHEETS ............................................. 171 DEEP VALUE: LOTS OF REVENUE, LOW ENTERPRISE VALUE ..................................................... 172 DEEP VALUE: NEGLECTED GROSS PROFITEERS ....................................................................... 173 ACTIVIST TARGETS: POTENTIAL SALES, LIQUIDATIONS OR RECAPS ........................................... 174

THIS MONTH’S TOP 10 WEB LINKS ....................................................... 175



Editorial Commentary The recent market turmoil carries with it echoes of 2008, but relying too heavily on analogies from the last market panic seems misguided. Europe and the U.S. must address serious sovereign debt issues, but the financial system itself appears less vulnerable than in late 2008.

There is now no doubt that Bernanke’s Fed will do everything in its power to alleviate the pain of market participants. The Fed is doing many foolish things and distorting capital allocation decisions, but one thing is clear: Given the central bank’s ability to print dollars, repayment of U.S. government debt in nominal terms is not in doubt. Neither is the Fed’s ability to flood the financial system with cheap liquidity.

While we are sympathetic to the cautious views of superinvestors like George Soros and Seth Klarman, we are equally sympathetic to the view that preferring an asset that is easily printed in unlimited quantities is foolish. Holding cash has little appeal to us following the recent market decline. We would much rather own cheap blue-chip corporations such as Cisco Systems (CSCO), Dell (DELL), Goldman Sachs (GS), Hewlett-Packard (HPQ), Microsoft (MSFT), Pfizer (PFE), and Sony (SNE), to name a few. HP’s Leo Apotheker deserves much criticism for his recent boneheaded allocation of capital (e.g., buying Autonomy instead of HP stock), but this does not mean investors should miss out on the capital appreciation HP shares will likely deliver over several years. Never let anger get in the way of profits.

Researching this superinvestor issue has been quite exciting for us because most recent superinvestor buys have traded down materially on little or no news. For those who are not paralyzed by macro concerns, this presents an opportunity to scrutinize investments favored by some of the smartest value investors around — and to buy at a discount. Probabilistically speaking, this doesn’t sound like a losing proposition.

We find the following three superinvestor holdings particularly noteworthy:

(NYSE: MV $750 million)

$0

$2

$4

$6

$8

$10

$12

$14

$16

Aug 11



The Manual of Ideas Model Portfolios

We are pleased to inaugurate a model portfolio consisting of the following three sub-portfolios:

Downside Protection Model Portfolio: Undervalued equities that, in our judgment, offer strong downside protection and material upside

Deep Value Model Portfolio: Equities that are deeply undervalued on an asset basis, but may have downside risk due to financial leverage

Magic Formula Model Portfolio: Equities that meet Joel Greenblatt’s dual criteria: high returns on capital employed, and high earnings yield

Since launching The Manual of Ideas in 2008, our goal has been to add value to your idea generation process by bringing you compelling equity investment ideas in a format that enables you to quickly sift through a fairly large number of companies meeting certain value-oriented criteria.

In the January 2011 issue, we evaluated the price performance of the ideas highlighted by our team in each monthly issue. We found that those top monthly ideas had materially outperformed the S&P 500 Index. However, in order to make our idea generation process more valuable, we felt we needed a way to provide you with a more consistent view into our best ideas at any given time. This has led us to the creation of The Manual of Ideas Model Portfolios.

The model portfolios will enable you to track our favorite investments in three broad categories. We will track the performance of those ideas in real time on the Internet, enabling you to consume this information in a manner that suits your investment needs and preferences.

In the inaugural portfolios shown on the following page, we establish initial positions in twenty securities profiled in past issues of The Manual of Ideas. For illustrative purposes, we start with a portfolio of $1 million, choosing to allocate this fictional capital equally across the twenty companies.

As the model portfolios evolve over time, we may make greater allocations to certain securities or keep a portion of the model portfolios in “cash.”

Please note that the model portfolios are not buy and sell recommendations. As always, you are solely responsible for your investment decisions. Persons or entities affiliated with The Manual of Ideas and BeyondProxy LLC, our publisher, may buy or sell any securities shown in the model portfolios. We will not inform you of such trades, and we will not necessarily update our thesis on the securities contained in the model portfolios. For more information and disclosures, see our Terms of Use at http://manualofideas.com/terms.html



Exclusive Interview with Lisa Rapuano We recently had the pleasure of interviewing one of the superinvestors we track, Lisa Rapuano of Lane Five Capital Management.

The Manual of Ideas: Tell us about the genesis of Lane Five. What goals did you have at the outset, and what principles have guided you since then?

Lisa Rapuano: At the end of 2006, I sat down with a blank sheet of paper to design a firm and product I thought would do three things: (i) optimize the skills I had learned in my fifteen years (at the time) of managing money; (ii) create a vibrant workplace of smart, energetic people with shared values; and (iii) attract clients with a long-term focus and a deep understanding of our values and process.

To optimize my own skills, I looked at my experiences, my temperament, what I had loved to do and what I had not. I love and am good at picking apart companies, finding and evaluating contrarian ideas, gaining deep conviction from thorough research, looking at businesses with a long-term view, ignoring short-term noise, getting to know managements and companies exceedingly well, and working collaboratively with a small team. I’m very patient in my investments. So, Lane Five was designed to invest in a relatively small number of names with a three-to-five-year time horizon with no constraints on market cap or stylistic definitions of value.

We adopted a long-biased approach, where we run 60-100% long. We can hold tons of cash and/or short if we think the opportunities merit that approach, but we’re not running a hedged, volatility constrained portfolio. I think that shorting is appropriate in certain circumstances and the ability to short makes you a better analyst. When I co-managed a traditional long/short low exposure fund at Matador Capital Management, I learned a lot about shorting. I am very good at identifying bad businesses and high valuations, and if you are patient with those two characteristics in place, shorting can be a low-risk, value-added activity. However, if you are running a very long-term value portfolio on the long side, a traditional hedge portfolio is often largely mismatched with your long book and mismatched with your analytical resources. To have a large short book and manage risk, you must have many more positions and you have to be very sensitive to timing. This type of thinking is not the mirror image of the long investment process; it is actually counter to it. I found one could spend an inordinate amount of time on hedge shorts, add very little value and create a massive diversion of resources. So, when I decided to create something new, I decided shorting would be a limited part of the strategy and exposure would run predominately long.

Once I settled on the investment vehicle, I decided to have an innovative fee structure as well. Given the long bias, I did not think it appropriate to charge full hedge fund fees. However, given the specialty, boutique nature of the firm and the desire to have a small, cohesive team with a go anywhere approach, I decided the long-only market structure and fees also weren’t appropriate. I settled on a hybrid approach with a 1.5% management fee and a performance fee of 20%, charged only on positive returns above the S&P 1500 [includes all stocks in S&P 500, S&P 400 and S&P 600]. Initially, I deferred the performance fees for three years in exchange for a three-year lock-up. After the first three-

“To have a large short book and manage risk, you must have many more positions and you have to be very

sensitive to timing. This type of thinking is not the mirror image of the long investment process; it is actually counter to it. I found one could spend an inordinate amount of time

on hedge shorts, add very little value and create a

massive diversion of resources.”



50+ Portfolios With Signal Value™ Revealing the Top Ideas of Top Investors

“Signal value” as opposed to “noise.” We present the

holdings of some of the world’s top investors. We look for

investors who have amassed impressive track records over

long periods of time. We choose these investors carefully

to avoid the noise inherent in most 13F-HR filings.

The following analysis is based on Schedules 13F-HR

(institutional holdings report) filed with the SEC for the most

recent quarter, as well as Schedules 13G or 13D and Forms 3

or 4 filed subsequent to the end of the quarter.

MOI Signal Rank answers the question, “What are

this investor’s top ten ideas right now?” Rather than

simply presenting each investor’s largest holdings as of the

recently filed quarter end, the MOI’s proprietary

methodology ranks the companies in each investor’s

portfolio based on the investor’s current level of conviction

in each holding, as judged by the MOI.

Our proprietary methodology takes into account a

number of variables, including the size of a position in an

investor’s portfolio, the size of a position relative to the

market value of the corresponding company, the most recent

quarterly change in the number of shares owned, and the

change in the stock price of a position since the most recent

quarterly filing date.

For example, an investor might have the most

conviction in a position that is only the tenth-largest

position in such investor’s portfolio. This might be the

case if an investor invests in a small company, resulting in

a holding that is simply too small to rank highly based on

size alone. On the other hand, such a holding might

represent 19.9% of the shares outstanding of the subject

company, suggesting a high level of conviction. Our

estimate of the conviction level would rise further if the

subject company has a 20% poison-pill threshold, thereby

suggesting that the investor has bought as much of the

subject company as is practically feasible.

Bill Ackman, Pershing Square Chuck Akre, Akre Capital Zeke Ashton, Centaur Capital Jonathan Auerbach, Hound Partners Brian Bares, Bares Capital Bruce Berkowitz, Fairholme Richard Breeden, Breeden Capital Tom Brown, Second Curve Warren Buffett, Berkshire Hathaway Francis Chou, Chou Associates Chase Coleman, Tiger Global James Crichton, Scout Ian Cumming and Joe Steinberg, Leucadia Boykin Curry, Eagle Charles de Vaulx, Int’l Value Advisors David Einhorn, Greenlight Phil Falcone, Harbinger Alan Fournier, Pennant Glenn Fuhrman and John Phelan, MSD Capital Jeffrey Gates, Gates Capital Tom Gayner, Markel Gayner Kian Ghazi, Hawkshaw Ed Gilhuly and Scott Stuart, Sageview Glenn Greenberg, Brave Warrior John Griffin, Blue Ridge Andreas Halvorsen, Viking Global Mason Hawkins, Southeastern Lance Helfert and Paul Orfalea, West Coast Chris Hohn, Children’s Investment Fund Carl Icahn, Icahn Robert Jaffe, Force Capital Rehan Jaffer, H Partners NEW Robert Karr, Joho Capital Seth Klarman, Baupost Eddie Lampert, ESL Investments Quincy Lee, Teton Capital Dan Loeb, Third Point Steve Mandel, Lone Pine Sandy Nairn, Edinburgh Partners Mohnish Pabrai, Pabrai Funds John Paulson, Paulson & Co. Boone Pickens, BP Capital Mark Rachesky, MHR Lisa Rapuano, Lane Five Larry Robbins, Glenview Alexander Roepers, Atlantic Investment Wilbur Ross, WL Ross Ken Shubin Stein, Spencer Toby Symonds, Altai Capital David Tepper, Appaloosa Steve Tananbaum, GoldenTree Jeffrey Ubben, ValueAct NEW Ed Wachenheim, Deephaven Prem Watsa, Fairfax Wally Weitz, Weitz Funds David Winters, Wintergreen Meryl Witmer, Eagle Value



Akre Capital (Chuck Akre) Chuck Akre has been in the investment business since 1968. While sometimes viewed as a small cap growth manager, Akre follows a value strategy that focuses on returns on equity, management quality and cash flow-oriented valuation analysis.

MOI Signal Rank™ – Top Current Ideas of Akre Capital

Market Price Shares Owned Holdings P/E (Est.) Price/ Value Recent from Recent from as % of This Next Tang.

Company / Ticker ($mn) ($) Jun. 30 (‘000) Mar. 31 Co. Fund* FY FY Book

1 Enstar Group / ESGR 1,324 91.56 -12% 469 2% 3% 9% 9x 8x 1.2x

2 MasterCard / MA 38,139 300.16 0% 186 17% <1% 11% 17x 14x >9.9x

3 Dollar Tree / DLTR 7,916 64.88 -3% 717 1% <1% 10% 17x 14x 5.6x

4 CarMax / KMX 5,768 25.49 -23% 799 62% <1% 4% 13x 12x 2.4x

5 Lamar Advertising / LAMR 1,712 18.43 -33% 1,590 26% 2% 6% >99x >99x n/m

6 Aeropostale / ARO 865 10.71 -39% 425 >100% <1% 1% 10x 8x 2.4x

7 CSX Corp. / CSX 22,344 20.40 -22% 53 >100% <1% 0% 12x 10x 2.5x

8 O’Reilly Automotive / ORLY 8,302 61.07 -7% 610 21% <1% 8% 17x 15x 3.5x

9 T. Rowe Price / TROW 11,906 46.44 -23% 101 14% <1% 1% 15x 13x 4.3x

10 Assured Guaranty / AGO 2,119 11.50 -29% 200 new <1% 0% 3x 4x .5x

Top Holdings of Akre Capital – By Dollar Value

Market Price Shares Owned Holdings P/E (Est.) Price/ Value Recent from Recent from as % of This Next Tang.

Company / Ticker ($mn) ($) Jun. 30 (‘000) Mar. 31 Co. Fund* FY FY Book

1 American Tower / AMT 19,325 48.83 -7% 1,331 -4% <1% 13% 47x 36x n/m

2 MasterCard / MA 38,139 300.16 0% 186 17% <1% 11% 17x 14x >9.9x

3 Dollar Tree / DLTR 7,916 64.88 -3% 717 1% <1% 10% 17x 14x 5.6x

4 Ross Stores / ROST 8,191 70.03 -13% 632 0% <1% 9% 13x 12x 5.7x

5 Enstar Group / ESGR 1,324 91.56 -12% 469 2% 3% 9% 9x 8x 1.2x

6 Markel / MKL 3,655 377.04 -5% 112 0% 1% 9% 29x 24x 1.5x

7 O’Reilly Automotive / ORLY 8,302 61.07 -7% 610 21% <1% 8% 17x 15x 3.5x

8 Lamar Advertising / LAMR 1,712 18.43 -33% 1,590 26% 2% 6% >99x >99x n/m

9 CarMax / KMX 5,768 25.49 -23% 799 62% <1% 4% 13x 12x 2.4x

10 Hartford Financial / HIG 7,893 17.72 -33% 750 0% <1% 3% 6x 4x .4x

New Positions Sold Out Positions

Assured Guaranty / AGO

Diamond Hill Invest. / DHIL

Primo Water / PRMW

Kimberly-Clark / KMB

optionsXpress / OXPS

Portfolio Metrics * Sector Weightings *

Portfolio size $489 million

Top 10 as % of portfolio 81%

Median market value $4.7 billion

Average market value $23 billion

Median P/E (this FY) 14x

Median P/E (next FY) 12x

Median P / tangible book 2.4x

* Based on equity holdings disclosed in 13F-HR filings with the SEC. Excludes portfolio cash, leverage, certain non-U.S. holdings, and non-equity securities.



Screening 900+ Holdings of 50+ Superinvestors

Top 100, by Market Value

Move to Market Enter. Trailing Twelve Months’ P/E (Est.) Tang. 5-Yr. Rev./

Price 52-Week Value Value Rev./ GP/ NI/ FCF This Next Div. Book/ EBIT Empl.

($) Low High ($bn) ($bn) Enter. Value MV Yield Fiscal Year Yield MV Margin ($’000)

Exxon Mobil / XOM 70 -17% 26% 339 346 127% 40% 11% 5% 8x 8x 2.7% 46% 16% 5,263

Apple / AAPL 356 -34% 14% 330 302 33% 13% 7% 9% 13x 11x -- 20% 22% 2,153

Microsoft / MSFT 24 -3% 22% 201 161 44% 34% 11% 9% 8x 8x 2.7% 22% 37% 777

Shell / RDS.A 62 -15% 26% 197 220 192% 43% 14% 0% 7x 6x 5.4% 82% 11% 4,357

IBM / IBM 158 -22% 18% 188 206 51% 24% 8% 6% 12x 11x 1.9% -3% 16% 245

Wal-Mart / WMT 52 -8% 11% 182 231 187% 47% 9% 3% 12x 11x 2.8% 26% 6% 206

Johnson & Johnson / JNJ 63 -10% 8% 173 162 39% 27% 7% 4% 13x 12x 3.6% 16% 26% 551

Petroleo Brasileiro / PBR 27 -10% 57% 171 256 49% 20% 13% -10% n/m n/m 4.6% 85% 23% 1,554

Berkshire Hath. / BRK.A 103K -2% 28% 169 n/m n/m n/m 8% 8% 16x 13x -- 67% 13% 556

Procter & Gamble / PG 61 -6% 11% 168 198 42% 21% 7% 5% 14x 13x 3.4% -14% 20% 650

AT&T / T 28 -6% 14% 166 229 55% 31% 12% 3% 12x 11x 6.1% -12% 13% 486

General Electric / GE 15 -6% 43% 160 541 28% 6% 9% 10% 11x 9x 4.0% 29% 12% 503

Google / GOOG 491 -9% 31% 159 124 27% 18% 6% 5% 14x 12x -- 28% 32% 1,158

Coca-Cola / KO 67 -18% 4% 154 166 25% 16% 8% 1% 17x 16x 2.8% 5% 26% 302

Pfizer / PFE 18 -11% 21% 138 154 44% 34% 6% 11% 8x 8x 4.5% -10% 20% 608

Vodafone / VOD 26 -13% 25% 134 185 41% 13% 10% -3% 9x 8x 5.5% 23% 14% 901

JPMorgan / JPM 34 -2% 41% 134 n/m n/m n/m 15% 5% 7x 6x 2.9% 82% 33% 249

Oracle / ORCL 25 -13% 47% 126 113 32% 24% 7% 8% 10x 9x 1.0% 8% 34% 329

Wells Fargo / WFC 23 -3% 47% 123 n/m n/m n/m 12% 23% 8x 7x 2.1% 60% 45% 191

BP / BP 38 -11% 29% 122 149 236% 41% 17% -10% 6x 5x 4.4% 67% 9% 4,402

Philip Morris / PM 69 -27% 6% 121 136 53% 14% 7% 4% 14x 13x 3.7% -9% 16% 913

TOTAL / TOT 46 -4% 41% 108 136 163% 52% 16% -3% 6x 6x 7.1% 69% 16% 2,373

GlaxoSmithKline / GSK 41 -11% 11% 104 120 38% 28% 5% 0% 11x 10x 5.3% -6% 28% 466

Intel / INTC 19 -8% 25% 101 91 53% 33% 12% 5% 8x 8x 4.4% 33% 22% 502

Schlumberger / SLB 73 -28% 31% 99 103 35% 8% 5% 0% 19x 13x 1.4% 13% 23% 330

Verizon / VZ 35 -16% 12% 98 145 74% 44% 14% 4% 15x 13x 5.6% -64% 13% 548

PepsiCo / PEP 62 -3% 16% 98 121 52% 28% 6% 5% 14x 13x 3.3% -11% 17% 212

Merck / MRK 31 -6% 21% 96 101 47% 30% 5% 4% 8x 8x 4.9% 6% 29% 516

Sanofi-Aventis / SNY 34 -18% 20% 92 111 44% 31% 5% 2% 7x 7x 5.2% -12% 18% 482

McDonald’s / MCD 87 -17% 3% 90 100 25% 10% 6% 2% 17x 15x 2.8% 14% 25% 64

Telefonica / TEF 20 -5% 42% 90 167 54% 37% 15% 3% 8x 8x 10.1% -52% 23% 316

ConocoPhillips / COP 64 -18% 29% 87 102 223% 38% 13% 4% 8x 7x 4.2% 75% 8% 7,625

Anheuser-Busch / BUD 54 -9% 20% 86 126 29% 16% 7% 7% 14x 13x 2.2% -47% 27% 323

Cisco Systems / CSCO 15 -12% 63% 83 55 78% 48% 8% 10% 9x 8x 1.6% 34% 22% 611

Amazon.com / AMZN 179 -32% 27% 81 75 54% 12% 1% 2% 89x 55x -- 7% 4% 932

Qualcomm / QCOM 47 -19% 29% 78 69 20% 14% 6% 3% 15x 13x 1.8% 26% 28% 788

Citigroup / C 27 -2% 92% 78 n/m n/m n/m 13% -2% 7x 5x 0.1% 177% 25% 285

Abbott Labs / ABT 49 -8% 11% 76 86 44% 25% 7% 7% 11x 10x 3.9% -3% 18% 414

Banco Santander / STD 9 -8% 55% 74 n/m n/m n/m 17% -17% n/m n/m 9.9% 57% 40% 229

Bank of America / BAC 7 -9% 120% 71 n/m n/m n/m -22% 134% n/m 5x 0.6% 159% 24% 248

Occidental Petro / OXY 81 -11% 46% 66 68 32% 22% 8% -6% 10x 9x 2.3% 53% 41% 1,960

Visa / V 80 -18% 14% 65 n/m n/m n/m 5% 5% 16x 14x 0.8% 5% 22% 1,312

AstraZeneca / AZN 45 -9% 19% 61 60 55% 45% 13% 8% 6x 7x 6.0% 0% 31% 540

UPS / UPS 62 -2% 25% 61 67 77% 20% 7% 1% 14x 12x 3.4% 9% 9% 128

Walt Disney / DIS 32 -7% 39% 59 69 58% 11% 8% 5% 13x 11x 1.3% 9% 18% 270

Kraft Foods / KFT 33 -14% 9% 59 86 60% 22% 5% -1% 15x 13x 3.5% -45% 12% 410

Goldman Sachs / GS 112 -2% 57% 57 n/m n/m n/m 14% 0% 10x 7x 1.3% 113% -3% 1,156

Comcast / CMCSA 20 -16% 36% 55 92 49% 22% 8% 10% 12x 10x 2.3% -114% 19% 448

3M / MMM 77 0% 28% 55 56 51% 24% 8% 4% 12x 11x 2.9% 15% 23% 357

Altria Group / MO 26 -13% 9% 53 65 37% 14% 6% -1% 13x 12x 5.9% -24% 24% 2,389



Move to Market Enter. Trailing Twelve Months’ P/E (Est.) Tang. 5-Yr. Rev./

Price 52-Week Value Value Rev./ GP/ NI/ FCF This Next Div. Book/ EBIT Empl.

($) Low High ($bn) ($bn) Enter. Value MV Yield Fiscal Year Yield MV Margin ($’000)

American Express / AXP 44 -16% 21% 53 n/m n/m n/m 9% 14% 11x 11x 1.6% 34% 16% 499

Caterpillar / CAT 80 -21% 46% 52 75 68% 18% 8% 4% 12x 9x 2.3% 19% 9% 473

Barrick Gold / ABX 51 -16% 10% 51 61 20% 12% 8% -1% n/m n/m 0.9% 23% 12% 611

Home Depot / HD 32 -15% 24% 51 59 117% 40% 7% 6% 14x 12x 3.1% 34% 9% 363

Novo Nordisk / NVO 106 -24% 25% 51 48 26% 20% 6% 4% 19x 17x 1.8% 13% 27% 389

Hewlett-Packard / HPQ 24 -4% 109% 49 62 208% 51% 19% 16% 5x 4x 2.0% -14% 9% 396

Amgen / AMGN 52 -8% 18% 48 43 36% 30% 9% 11% 10x 9x 2.2% 23% 33% 896

Bristol Myers / BMY 28 -10% 7% 48 45 45% 33% 10% 4% 12x 14x 4.7% 17% 23% 754

UnitedHealth / UNH 43 -29% 23% 47 n/m n/m n/m 11% 12% 10x 9x 1.5% 2% 9% 1,131

Suncor Energy / SU 30 -1% 64% 46 54 69% 36% 8% 2% 10x 8x 1.6% 74% 15% 3,129

Diageo / DEO 73 -11% 17% 46 58 28% 16% 7% 1% 14x 13x 3.4% -6% 28% 692

ABB / ABB 19 -5% 42% 45 44 80% 24% 7% 1% 12x 10x 3.5% 16% 13% 302

Baidu.com / BIDU 127 -40% 31% 44 43 4% 3% 2% 0% 44x 29x -- 4% 37% 152

CVS Caremark / CVS 32 -17% 22% 44 52 193% 39% 8% 8% 12x 10x 1.5% 4% 6% 503

Potash / POT 51 -13% 26% 43 48 17% 8% 6% 2% n/m n/m 0.6% 18% 34% 1,443

AIG / AIG 22 -2% 138% 42 n/m n/m n/m 24% 225% 6x 7x -- 220% 1,189

EMC / EMC 20 -12% 42% 42 40 46% 28% 5% 7% 14x 12x -- 10% 12% 383

Union Pacific / UNP 86 -18% 26% 42 50 37% 27% 7% 4% 13x 11x 2.2% 44% 23% 404

Colgate Palmolive / CL 85 -14% 5% 41 46 35% 21% 6% 3% 17x 15x 2.7% -3% 21% 411

News Corp. / NWSA 16 -23% 18% 41 44 76% 28% 8% 7% 12x 9x 1.2% 15% 7% 655

Eli Lilly / LLY 35 -4% 14% 41 41 58% 47% 12% 10% 8x 9x 5.6% 23% 18% 629

Freeport-McMoRan / FCX 42 -22% 46% 40 39 57% 31% 18% 10% 7x 7x 2.4% 36% 21% 750

U.S. Bancorp / USB 21 -1% 41% 39 n/m n/m n/m 10% 24% 9x 8x 2.4% 45% 40% 204

Apache / APA 97 -12% 38% 39 47 32% 26% 10% 6% 8x 8x 0.6% 63% 30% 3,306

MasterCard / MA 300 -36% 13% 38 n/m n/m n/m 6% 5% 17x 14x 0.2% 10% 23% 1,078

Teva Pharma / TEVA 39 -7% 47% 37 42 40% 22% 9% 11% 8x 7x 2.2% 5% 17% 404

Nike / NKE 79 -13% 20% 37 33 64% 29% 6% 2% 16x 14x 1.6% 25% 13% 549

Canadian Natural / CNQ 33 -10% 56% 37 45 28% 16% 3% -1% 14x 9x 1.1% 59% 29% 2,740

Monsanto / MON 66 -29% 17% 35 36 32% 16% 5% 5% 23x 19x 1.8% 20% 20% 537

eBay / EBAY 27 -18% 30% 35 33 30% 22% 5% 7% 14x 12x -- 19% 19% 568

Halliburton / HAL 38 -28% 52% 35 37 57% 11% 7% 0% 11x 8x 0.9% 29% 20% 351

Santander Brasil / BSBR 9 -7% 79% 35 n/m n/m n/m 14% -95% 9x 7x 7.8% 77% 565

Target / TGT 50 -9% 22% 34 51 134% 41% 9% 4% 12x 11x 2.4% 44% 7% 193

Brookfield Asset / BAM 28 -14% 21% 34 67 22% 6% 13% -1% n/m n/m 1.8% 27% 9% 830

Accenture / ACN 47 -23% 34% 34 28 92% 28% 7% 6% 14x 12x 1.9% 8% 12% 117

Enterprise Products / EPD 39 -29% 12% 34 48 82% 5% 5% -17% 20x 19x 6.1% 22% 6% 7,702

General Motors / GM 22 -2% 78% 33 23 640% 79% 21% 7% 5x 5x -- -31% 704

Medtronic / MDT 31 -4% 38% 33 41 39% 30% 9% 7% 9x 8x 3.1% 11% 23% 354

MetLife / MET 31 0% 57% 33 n/m n/m n/m 8% 28% 6x 5x 2.4% 125% 6% 884

Anadarko Petroleum / APC 66 -32% 29% 33 43 28% 24% 3% 0% 19x 15x 0.5% 48% 29% 2,766

Costco Wholesale / COST 74 -27% 13% 33 28 298% 38% 5% 4% 22x 19x 1.3% 37% 3% 1,035

Emerson Electric / EMR 42 -3% 47% 32 35 67% 27% 7% 5% 13x 11x 3.3% -1% 14% 184

Walgreen / WAG 34 -22% 32% 31 31 230% 65% 8% 8% 13x 11x 2.6% 41% 6% 402

DIRECTV / DTV 42 -12% 27% 31 42 61% 30% 8% 7% 12x 10x -- -22% 14% 1,102

Morgan Stanley / MS 16 -4% 94% 31 n/m n/m n/m 14% 20% 14x 6x 1.3% 152% -192% 617

Barclays / BCS 10 0% 119% 30 n/m n/m n/m 20% 169% 6x 3x 3.5% 233% 27% 230

BCE / BCE 39 -21% 5% 30 48 39% 22% 8% 0% 12x 12x 5.5% -14% 19% 375

Baxter International / BAX 52 -18% 21% 29 32 43% 21% 7% 4% 12x 11x 2.4% 14% 19% 282

Texas Instruments / TXN 25 -8% 48% 29 26 55% 29% 11% 6% 11x 10x 2.1% 34% 24% 497

Mosaic Company / MOS 63 -14% 42% 28 25 40% 12% 9% 4% 11x 10x 0.3% 35% 22% 1,325

Abbreviations: MV = market value, EV = enterprise value, Rev. = revenue, GP = gross profit, NI = net income, FCF = free cash flow.



Huntington Ingalls (HII) – Greenlight Transportation: Water Transportation, Member of S&P MidCap 400 Newport News, VA, 757-380-2000 www.huntingtoningalls.com

Trading Data Consensus EPS Estimates Valuation

Price: $28.63 (as of 8/19/11) Month # of P/E FYE 12/31/10 10x

52-week range: $26.49 - $42.74 Latest Ago Ests P/E FYE 12/31/11 8x

Market value: $1.4 billion This quarter $0.84 $0.87 8 P/E FYE 12/30/12 8x

Enterprise value: $2.9 billion Next quarter 0.90 0.94 8 P/E FYE 12/30/13 6x

Shares out: 48.8 million FYE 12/31/11 3.52 3.57 11 EV/ LTM revenue 0.4x

Ownership Data FYE 12/30/12 3.79 4.03 10 EV/ LTM EBIT 12x

Insider ownership: <1% FYE 12/30/13 4.63 4.88 8 P / tangible book n/m

Insider buys (last six months): 19 LT growth 22.7% 22.7% 6 Greenblatt Criteria

Insider sales (last six months): 2 EPS Surprise Actual Estimate LTM EBIT yield 8%

Institutional ownership: 96% 8/11/11 $0.80 $0.82 LTM pre-tax ROC 20%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended LTME FQE

per share data) 12/31/08 12/31/09 12/31/10 6/30/11 6/30/11

Revenue 6,189 6,292 6,723 6,569 1,563

Gross profit 700 850 911 876 260

Operating income (2,354) 211 248 243 91

Net income (2,420) 124 135 115 40

Diluted EPS (49.62) 2.54 2.77 2.34 0.81

Shares out (avg) 49 49 49 49 49

Cash from operations 339 (88) 359 (200) 186

Capex 218 181 191 143 20

Free cash flow 121 (269) 168 (343) 166

Cash & investments 0 0 381 381

Total current assets 1,171 1,313 1,994 1,994

Intangible assets 1,744 1,721 1,711 1,711

Total assets 5,036 5,203 5,937 5,937

Short-term debt 537 715 29 29

Total current liabilities 1,954 2,226 1,184 1,184

Long-term debt 283 105 1,844 1,844

Total liabilities 3,599 3,785 4,526 4,526

Preferred stock 0 0 0 0

Common equity 1,437 1,418 1,411 1,411

EBIT/capital employed 24% 14% 20% n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

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Jul 11



BUSINESS OVERVIEW Huntington Ingalls designs, builds, and maintains ships for the U.S. Navy and Coast Guard in two segments: Newport News (55% of revenue) and Ingalls (45%). The company was spun off from Northrop Grumman in March 2011. INVESTMENT HIGHLIGHTS

Newport News is sole U.S. producer and refueler of nuclear-powered aircraft carriers and one of two U.S. shipyards that build nuclear submarines. Backlog of $11.2 billion (59% funded*) and stable margins provide long-range earnings visibility.

Ingalls produces non-nuclear surface warships for the Navy, Coast Guard, Marines. Backlog of $5.6 billion is 94% funded but EBIT margins have been negative in recent years, leading to inconsistent results. Shift from “lead ship” to serial production should result in margin improvement.**

U.S. Navy’s 30-year plan calls for purchase of 275 ships between 2012-2041. The fleet size should rise to 328 active ships from 286 ships in 2011. Plans include maintenance of the 11-ship fleet of nuclear aircraft carriers, including one newbuild every five years. The Navy expects new ship procurement to average $15.5 billion per year.***

Carrier refueling and maintenance provides predictable revenue. Nuclear carriers must be refueled after 23 years and decommissioned after 50 years. CBO accounts for the refueling of nuclear-powered aircraft carriers at $1.2 billion per year.***

Meets David Einhorn’s criteria for attractive spinoffs. The company’s market value is only ~10% of the former parent’s value. In addition, margin improvement in the Ingalls segment seems likely.

INVESTMENT RISKS & CONCERNS Ingalls segment has unproven earnings potential.

A combination of the move to serial production and consolidation of operations at Pascagoula may achieve the goal of segment EBIT margin rising to the level of Newport, but execution risks remain.

Military spending is under pressure. The debt ceiling increase legislation calls for $350 billion in defense cuts over ten years but does not specify the cuts. Additional cuts may be triggered if a bipartisan commission fails to agree on deficit reduction plans.

Debt of $1.8 billion and net retirement liabilities of $1.2 billion. The company could face difficulty in the event of severe procurement cuts and a failure to achieve consistent profitability at Ingalls.

SELECTED OPERATING DATA

FYE December 31 2008 2009 2010 1H11 revenue 7% 2% 7% -2% backlog 65% -9% -15% -3% DoD procurement budget 1 18% 10% 3% n/a Backlog ($mn) 2 22,353 20,365 17,337 16,828 Revenue ($mn) 6,189 6,292 6,723 3,247 % of revenue by type: Products 84% 80% 86% 87% Services 16% 20% 14% 13% % of revenue by segment: Newport News 55% 55% 56% 55% Ingalls (Gulf Coast) 45% 45% 45% 45% Revenue growth by segment: 3

Newport News n/a 3% 7% 0% Ingalls (Gulf Coast) n/a 1% 6% -5% EBIT margin by segment:4 Newport News 9% 9% 9% 8% Ingalls (Gulf Coast) -5% -1% -2% 2% Gross margin by type: Product 10% 13% 13% 11% Service 17% 18% 17% 16% Selected items as % of revenue: EBIT 2% 3% 4% 6% Net income 5 1% 2% 2% 3% D&A 3% 3% 3% 2% Capex 4% 3% 3% 3%

1 Dept. of Defense fiscal year ends 9/30. See White House OMB Data: National Defense Outlays for Major Public Direct Physical Capital Investment 1940-2012: http://1.usa.gov/pkjiuQ (Excel). Est. 2011: 14%, 2012: -12%. 2 Backlog as of 6/30/11 by segment: 67% Newport News; 33% Ingalls. 3 Segment breakdown between Newport News and Ingalls provided since ‘08. 4 We adjust 2008 EBIT margin to exclude $1.3 billion goodwill impairment for Gulf Coast/Ingalls and $1.2 billion goodwill impairment for Newport News. 5 2008 net margin eliminates impact of $2.5 billion goodwill impairment charge.

MAJOR HOLDERS Insiders <1% | State Street 11% | Capital World 8 % | BlackRock 8%| AllianceBernstein 7% | Greenlight 5% RATINGS VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends? * Funded backlog consists of firm orders for which funding is contractually obligated by the customer. However, programs remain subject to annual Congressional appropriations. While the company is reimbursed for actual costs on cancelled funded contracts, anticipated profits may be unrealized. ** Lead ship development involves building the first ship of a new design and is prone to cost overruns. As production moves into serial production, or “copies” of the initial design, productivity improves. Management hopes to bring margins at Ingalls closer to levels achieved by Newport. These dynamics are discussed in a presentation on June 15: http://bit.ly/pXaAiS *** CBO Analysis of Navy’s 30-year plan: http://1.usa.gov/k9ECGK We thank Ravi Nagarajan for his research and analysis of the company.

THE BOTTOM LINE Huntington Ingalls is well positioned as a builder and servicer of nuclear aircraft carriers and submarines and a manufacturer of non-nuclear warships. While defense cuts may pressure the long-term backlog, key platforms for the projection of naval power, such as aircraft carriers, are likely to receive funding. Non-discretionary services such as nuclear refueling and decommissioning also provide steady revenue. However, execution risks at the Ingalls segment, coupled with significant long-term debt and pension liabilities, elevate the risk profile, reducing downside protection for equity holders.



HUNTINGTON INGALLS – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS

Conservative Base Case Aggressive

Valuation Methodology

The Newport News and Ingalls segments are valued separately based on the historical characteristics of the businesses and management forecasts regarding operating margins. We assign multiples of operating income to each segment to arrive at an estimate of enterprise value. Debt and net pension liabilities are deducted to arrive at an estimate of equity value.

Our revenue estimate for the conservative case assumes 95% of 2010 segment revenue, the base case assumes 100% of 2010 segment revenue, and the aggressive case assumes 105% of 2010 segment revenue.

Newport News Segment:

Normalized revenue estimate $3.6 billion $3.8 billion $4.0 billion

Projected normalized segment operating margin 7% 8% 9%

Operating income estimate $251 million $302 million $357 million

Valuation multiple 8x 9x 10x

Estimated value of Newport News Segment $2.0 billion $2.7 billion $3.6 billion

Ingalls (Gulf Coast) Segment:

Normalized revenue estimate $2.9 billion $3.0 billion $3.2 billion

Projected normalized segment operating margin 3% 5% 7%

Operating income estimate $86 million $151 million $222 million

Valuation multiple 7x 8x 9x

Estimated value of Ingalls (Gulf Coast) Segment $0.6 billion $1.2 billion $2.0 billion

Cash on balance sheet, as of 6/30/2011 $381 million $381 million $381 million

Total value of business operations plus cash $3.0 billion $4.3 billion $6.0 billion

Less outstanding long-term debt at 6/30/2011 ($1.8 billion) ($1.8 billion) ($1.8 billion)

Less net pension/retirement/workers comp liability at 6/30/11 ($1.2 billion) ($1.2 billion) ($1.2 billion)

Estimated fair value of the equity of Huntington Ingalls ~ zero $1.3 billion $2.9 billion

$26 per share $60 per share

Shares outstanding 49 million 49 million 49 million

Additional background and comments on valuation approach:

During a presentation on June 15, 2011 at a Deutsche Bank conference, management indicated that the game plan for Huntington Ingalls was to leverage efficiencies and process improvements at Ingalls to achieve operating margins comparable to historic margins at Newport News. Overall revenues are expected to be relatively stable, although we have introduced small variances to reflect risk of budget cuts arising from the debt ceiling legislation and subsequent cuts that may occur in the “trigger” mechanism that will come into force if the 12 member bipartisan Congressional “super committee” cannot agree on a longer term deficit reduction plan. At this time, the composition of defense cuts is not known. However, an examination of the Navy’s current 30 year plan as analyzed by the CBO does not leave much (if any) room for cuts to naval programs that would not result in reductions in fleet size in the long run. Although assessment of the risk of defense cuts is inherently subjective at this point, it appears that the Newport News operations are particularly well positioned due to it’s monopoly position refueling and servicing nuclear aircraft carriers and its position as the only manufacturer currently capable of producing new aircraft carriers, with a new carrier scheduled for production every five year s during the 30 year plan. Additionally, Newport News works in conjunction with General Dynamics Electric Boat division (as a subcontractor) as one of only two suppliers and servicers of nuclear submarines.

Newport News has enjoyed higher margins than Ingalls which ran into difficulty in recent years due to high costs associated with “lead ship” development for non-nuclear ships entering production. Lead ship development involves building the first ship in a new design. Subsequent “copies” of the ship using the same design can benefit from efficiencies and management intends to use serial production methods at Ingalls to improve performance. It is not clear whether the hoped for margin improvements will materialize but recent results show some improvement. We use a range of operating margins of 7-9% for Newport News based on recent margin history. For Ingalls, we use a more conservative 3-7% range that implicitly assumes at least partial success of management initiatives to improve the segment’s performance. Based on 1H 2011 results, management has had initial success improving Ingalls margins.

For valuation multiples, we use estimates recognizing the superior “moat” enjoyed by the Newport News operations which has the only facility able to build and service certain nuclear powered ships (including all of the 11 aircraft carriers currently in the naval fleet as well as their future replacements). A slightly lower multiple is used for Ingalls.

We subtract long term debt and the underfunded pension liability (net) from the total segment valuation to arrive at fair value of the equity. Under the conservative scenario, the equity has marginal (if any) value. This result is brought about by a combination of conservative revenue, margin, and multiple assumptions as well as the heavy debt load carried by the company.

Under the “base case” scenario, equity value approximates the current market capitalization while the aggressive scenario yields a result roughly twice the current market valuation. Assuming bi-partisan agreement on a budget in Washington, the most likely scenario may be between the base and aggressive scenarios leaving moderate upside potential. However, the prospect of partisan gridlock in Washington leading to catastrophic cuts in defense spending combined with the company’s debt level and pension liabilities does not provide much downside protection for equity holders.

Source: Company filings, analysis, assumptions and estimates by Ravi Nagarajan, The Manual of Ideas.



HUNTINGTON INGALLS – BACKLOG BY SEGMENT, 2009-2011

($ in millions) June 30, 2011 March 31, 2011 December 31, 2010 December 31, 2009

Funded Un-

funded Total Funded

Un-funded

Total Funded Un-

funded Total Funded

Un-funded

Total

Ingalls (Gulf Coast)

5,304 309 5,613 5,123 373 5,496 4,317 581 4,898 6,070 38 6,108

Newport News 6,565 4,650 11,215 5,304 6,560 11,864 5,248 7,191 12,439 5,141 9,116 14,257

Total 11,869 4,959 16,828 10,427 6,933 17,360 9,565 7,772 17,337 11,211 9,154 20,365

YTD backlog -3% 0% -15% -9%

Additional background on issues related to backlog:

From information statement: “Backlog is converted into the following years’ sales as costs are incurred or deliveries are made. Approximately 31% of the $17 billion total backlog at December 31, 2010 is expected to be converted into sales in 2011.”

“Funded” backlog is made up of firm orders for which funding is contractually obligated by the customer. Unfunded backlog are firm orders for which funding is not currently contractually obligated by the customer (how “firm” can this be?). My interpretation is that funded backlog involves congressionally approved and committed funds while unfunded backlog includes contracts signed based on naval planning but not appropriated by Congress. This needs to be confirmed.

Risks associated with monetizing backlog: (emphasis added)

Annual appropriation risk: “We are directly dependent upon allocation of defense monies to the U.S. Navy and the U.S. Coast Guard. The funding of U.S. Government programs is subject to congressional budget authorization and appropriation processes. For certain programs, Congress appropriates funds on a fiscal year basis even though a program may be performed over several fiscal years. Consequently, programs may be partially funded initially and additional funds are committed only as Congress makes further appropriations. We cannot predict the extent to which total funding and/or funding for individual programs will be included, increased or reduced as part of the 2011 and subsequent budgets ultimately approved by Congress or will be included in... supplemental appropriations.”

Potential cancellation of committed contracts: “The U.S. Government generally has the ability to terminate contracts, in whole or in part, with little to no prior notice, for convenience or for default based on performance. In the event of termination for the U.S. Government’s convenience, contractors are normally protected by provisions covering reimbursement for costs incurred on the contracts and profit related to those costs but not the anticipated profit that would have been earned had the contract been completed.”

Source: Company filings, analysis by Ravi Nagarajan, The Manual of Ideas. HUNTINGTON INGALLS – SHIPBUILDING SEGMENT DATA, 2001-2010

(in millions) 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001

Sales and service revenues 6,719 6,213 6,145 5,788 5,321 5,786 6,252 5,451 4,712 1,880

Operating expenses 6,394 5,914 5,962 5,250 4,928 5,537 5,857 5,156 4,406 1,861

Goodwill impairment 0 0 2,490 0 0 0 0 0 0 0

Operating income 325 299 (2,307) 538 393 249 395 295 306 19

Operating margin 4.8% 4.8% -37.5% 9.3% 7.4% 4.3% 6.3% 5.4% 6.5% 1.0%

Operating margin w/o impairment losses 4.8% 4.8% 3.0% 9.3% 7.4% 4.3% 6.3% 5.4% 6.5% 1.0% Total segment assets 4,768 4,585 4,427 6,874 6,946 6,756 6,521 6,482 6,532 6,040

Segment goodwill 1,141 1,141 1,141 3,614 3,584 3,616 3,630 3,635 3,635 3,308 Capital expenditures 191 181 218 247 287 266 220 136 76 44

Depreciation and amortization 183 186 193 170 153 155 148 142 147 82 Capex as % of depreciation 104% 97% 113% 145% 188% 172% 149% 96% 52% 54%

Capex as % of revenues 2.8% 2.9% 3.5% 4.3% 5.4% 4.6% 3.5% 2.5% 1.6% 2.3% Backlog at year-end

Funded 9,569 11,294 14,205 10,348 10,854 6,130 9,165 9,749 10,361 9,772

Unfunded 7,772 9,151 8,148 3,230 2,566 5,379 3,841 5,622 not provided in 10-K

Total backlog 17,341 20,445 22,353 13,578 13,420 11,509 13,006 15,371 10,361 9,772

Change in total backlog -15% -9% 65% 1% 17% -12% -15% 48% 6% n/a

Northrop Grumman acquired Litton Industries in 2001, a majority interest in Newport News Shipbuilding in 2001 and the remaining minority interest in Newport News in early 2002. Newport News and the shipbuilding operations of Litton Industries became Northrop Grumman’s shipbuilding segment. Litton also had an advanced electronics business and an information systems business which were incorporated into other Northrop Grumman segments for reporting purposes. The Litton purchase (paid for in stock and cash) was valued at $5.2 billion including net debt of $1.3 billion. The Newport News acquisition, paid for in stock and cash, was valued at $2.6 billion including assumption of $400 million of net debt.

The Ingalls (Pascagoula, MS) and Avondale, LA shipyards were part of Litton Industries. Ingalls Shipbuilding was founded in 1938 by Robert Ingalls. Newport News Shipbuilding which was founded by Collis P. Huntington in 1886. The new company is named after the founders of the company’s two main shipyards in Newport News and Pascagoula. The Avondale shipyard is scheduled for closure in 2013.

Source: Company data, analysis by Ravi Nagarajan, The Manual of Ideas.



Favorite Screens for Value Investors “Magic Formula,” Based on Trailing Operating Income Companies with high returns on capital employed, trading at high trailing EBIT-to-enterprise value yield

▼ ▼

Move To Trailing EBIT/ Price/ Insiders

Price 52-Week MV EV EV/ EBIT/ Capital Tax Tangible % Buys/ Company Ticker ($) Low High ($mn) ($mn) Sales EV Employed Rate Book Own. Sells

1 Unisys UIS 15.83 0% 161% 683 506 .1x 59% 1011% 40% n/m <1% 8 / 3

2 ITT Educational ESI 69.96 -29% 37% 1,891 1,735 1.1x 34% infinite 39% >9.9x <1% 9 / 3

3 Bridgepoint Edu. BPI 21.02 -39% 46% 1,104 816 1.0x 34% infinite 39% 3.7x <1% 6 / 6

4 DepoMed DEPO 5.00 -32% 108% 277 163 1.1x 34% infinite n/m 2.2x <1% 6 / 3

5 PDL BioPharma PDLI 5.78 -19% 16% 808 1,094 3.0x 31% infinite 36% n/m <1% 9 / -

6 Amerigroup AGP 43.78 -17% 73% 2,174 1,570 .3x 29% infinite 37% 2.2x 2% 19 / 14

7 Argan AGX 9.27 -20% 35% 126 47 .3x 31% 1108% 42% 1.6x 2% - / -

8 Tessera Technologies TSRA 13.01 -2% 78% 667 140 .5x 86% 339% 41% 1.2x <1% 6 / 2

9 Nova Measuring NVMI 6.26 -28% 88% 146 68 .6x 46% 363% n/m 1.6x <1% - / -

10 ePlus PLUS 23.31 -23% 30% 199 162 .2x 25% infinite 42% 1.0x 11% 8 / 6

11 Capella Education CPLA 30.29 -2% 174% 461 288 .7x 34% 335% 37% 2.4x 6% 10 / 1

12 Apollo Group APOL 44.93 -25% 21% 6,189 4,958 1.0x 26% 887% 58% 5.5x 3% 20 / 12

13 Career Education CECO 14.77 -2% 87% 1,127 739 .4x 45% 236% 34% 2.5x 2% 13 / 10

14 Dell DELL 14.00 -19% 26% 26,403 19,534 .3x 23% infinite 20% >9.9x 13% 20 / 12

15 * Ambassadors Group EPAX 6.37 0% 93% 113 23 .3x 23% infinite 26% 1.6x <1% 8 / 2

16 Cray CRAY 5.14 -4% 63% 187 55 .1x 60% 204% 6% 1.3x 5% 7 / 9

17 * General Motors GM 22.16 -2% 78% 33,253 22,896 .2x 26% 616% n/m n/m 3% 18 / 15

18 Veeco Instruments VECO 34.46 -12% 67% 1,415 839 .8x 37% 257% 10% 1.9x <1% 12 / 9

19 SuperGen SUPG 2.18 -10% 54% 202 77 1.3x 22% 8350% 1% 1.6x <1% 1 / -

20 Metropolitan Health MDF 4.77 -29% 27% 196 148 .4x 29% 286% 38% 2.6x 4% 10 / 5

21 * Korn/Ferry KFY 14.47 -12% 71% 681 414 .5x 21% infinite 36% 1.8x 1% 4 / 5

22 * Spirit Airlines SAVE 10.55 -3% 37% 765 516 .6x 21% infinite n/m 1.8x 2% 6 / 2

23 Power-One PWER 6.62 -1% 95% 687 601 .5x 54% 162% 37% 2.0x 3% 12 / 5

24 Global Sources GSOL 8.06 -19% 59% 272 138 .7x 20% infinite 5% 2.8x <1% - / -

25 H&R Block HRB 13.26 -24% 36% 4,053 3,453 .9x 20% infinite 38% >9.9x <1% 5 / 3

26 ViroPharma VPHM 17.51 -31% 27% 1,330 961 1.9x 23% 296% 38% 4.5x <1% 4 / 4

27 SanDisk SNDK 32.50 0% 65% 7,775 6,840 1.3x 22% 353% 13% 1.3x <1% 12 / 7

28 Almost Family AFAM 17.83 -5% 129% 167 113 .3x 38% 137% 40% 2.2x 10% 10 / 3

29 Forest Labs FRX 32.83 -17% 23% 9,014 6,669 1.5x 23% 265% 22% 3.2x <1% 1 / 6

30 United Online UNTD 4.92 -3% 52% 436 587 .6x 19% infinite 34% n/m 3% - / 6

31 Kulicke and Soffa KLIC 7.86 -33% 62% 571 339 .4x 62% 124% 7% 1.4x 2% 10 / 10

32 Smart Technologies SMT 4.42 -3% 236% 196 416 .5x 30% 145% 34% n/m <1% - / -

33 * Vista Gold Corp. VGZ 3.14 -43% 36% 224 189 n/m 34% 128% 37% 1.7x <1% 1 / 2

34 * Blue Coat Systems BCSI 12.54 -2% 157% 544 281 .6x 18% infinite 29% 3.1x <1% 6 / 4

35 Research In Motion RIMM 26.69 -19% 164% 13,994 11,605 .6x 39% 116% 26% 2.0x <1% - / -

36 * DeVry DV 39.46 -8% 69% 2,714 2,265 1.0x 22% 181% 33% 4.0x 2% 6 / 5

37 * USANA Health USNA 23.60 -2% 93% 372 372 .7x 20% 272% 34% >9.9x 52% 1 / 4

38 * Meredith MDP 23.63 0% 59% 868 1,036 .7x 22% 170% 38% n/m <1% 7 / 4

39 * LTX-Credence LTXC 5.72 -13% 72% 283 136 .5x 37% 111% n/m 1.6x 3% 3 / 7

40 * KLA-Tencor KLAC 33.67 -18% 54% 5,623 4,331 1.4x 27% 130% 28% 2.3x <1% 5 / 5

41 Teradyne TER 10.90 -19% 76% 2,029 1,277 .8x 31% 120% 4% 1.7x <1% 8 / 3

42 AmSurg AMSG 19.92 -18% 41% 623 891 1.2x 26% 127% 15% n/m 2% 11 / 6

43 * MIPS Technologies MIPS 4.32 -10% 321% 227 118 1.4x 17% infinite 18% 2.2x <1% 7 / 3

44 * Columbia Labs CBRX 2.18 -54% 98% 190 169 2.8x 17% infinite n/m >9.9x <1% 4 / 3

45 * Lam Research LRCX 35.99 -3% 64% 4,480 3,097 1.0x 26% 124% 10% 2.0x <1% 11 / 9

Company website SEC Y! Price Charts Proxy Y!

* New additions are highlighted. Screening criteria: ► Market value > $100 million ► ADRs and banks excluded ► China RTOs excluded



This Month’s Top 10 Web Links A Selection of Our Favorite Freely Accessible Internet Resources

Warren Buffett Interview with Charlie Rose Plus: Buffett’s op-ed in The New York Times, http://nyti.ms/qiWT7h

http://bit.ly/oYsmau

Fairholme Funds Semi-Annual Report Plus: Berkowitz’s conference call with Bank of America CEO, http://bit.ly/q9iIHL Plus: Morningstar analysts discuss recent performance, http://bit.ly/n0Y24c

http://bit.ly/dFm3fv

Longleaf Partners Semi-Annual Report http://bit.ly/o0z6RU

Tweedy Browne Comment on Recent Market Turmoil http://bit.ly/q2v1J9

David Swensen Opinion on Mutual Fund Industry http://nyti.ms/pHsuBo

George Soros Interview with SPIEGEL Plus: Charts on the global debt crisis, http://bit.ly/oiCQAT Plus: Kleiner Perkins report on U.S. financial state, http://bit.ly/oFIWCy

http://bit.ly/nj0GKM

Jim Grant Interview with CNBC http://bit.ly/otnKw2

Tom Russo, David Nadel Interview with Consuelo Mack http://bit.ly/r0rgrr

Jeffrey Gundlach Conference Call on Market Turmoil http://bit.ly/pR9NVX

Farnam Street: “What does Bill Gates Read for Fun?” http://bit.ly/p1Tr3h



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Documents

The Manual of Ideas: The Superinvestor Issue, September 2011