Monthly Archives: December 2012

Weekly links

Very interesting NYT article about Steve Cohen, Hedge fund mastermind

Jim Grant’s free winter issue of past articles

A new book on quantitative value investing from the guy who runs the Greenbackd Blog

Great post from the Brooklyn Investor about possible lessons from Kodak for Apple

Good analysis of Fortress Group “Wexboy style”

And, of course, Bill Ackman’s Herbalife short presentation and Kid Dynamites answer

Utility companies – The Warren Buffet perspective

In 2012, I sold my two utility stocks EVN and Fortum because I realised that I didn’t really understand the business model. I looked a little bit more general into utilities here, but with no real results. However,at least in Europe, the utility sector looks like one of the few remaining “cheap” sector.

If you don’t know a lot about a sector but need to start somewhere,it is always a good idea to look ifWarren Buffet has something to say about it

Although mostly his well-known consumer good investments like Coca Cola and Gilette are mentioned, Buffet runs a quite sizable utility operation called MidAmerican Energy.

Starting with the Berkshire 2011 annual report, let us look how the “sage” describes the business:

We have two very large businesses, BNSF and MidAmerican Energy, that have important common characteristics distinguishing them from our many other businesses. Consequently, we assign them their own sector in this letter and also split out their combined financial statistics in our GAAP balance sheet and income statement.
A key characteristic of both companies is the huge investment they have in very long-lived, regulated assets, with these partially funded by large amounts of long-term debt that is not guaranteed by Berkshire. Our credit is not needed: Both businesses have earning power that even under terrible business conditions amply covers their interest requirements.

So let’s note here first: Buffet uses “large amounts” of debt for his utility company.

Just below we find the following statement:

At MidAmerican, meanwhile, two key factors ensure its ability to service debt under all circumstances: The stability of earnings that is inherent in our exclusively offering an essential service and a diversity of earnings streams, which shield it from the actions of any single regulatory body.

I would argue he second point is interesting: Diversification in utilities works across regulators, not necessarily geographic location.

What I found extremely interesting is that Buffet is allocating a lot of capital to the utility sector. Out of the 19 bn USD Capex in Berkies operating businesses from 2009-2011, MidAmerican Capex summed up to ~9 bn USD, so almost half of Berkies total Capex.

One can assume that Buffet is not making all share investment decisions nowadays, but I think capital allocation to operating companies will be still made by him personally.

Buffet seems also quite interested in renewable energy, as the following comment from the annual report shows:

MidAmerican will have 3,316 megawatts of wind generation in operation by the end of 2012, far more than any other regulated electric utility in the country. The total amount that we have invested or committed to wind is a staggering $6 billion. We can make this sort of investment because MidAmerican retains all of its earnings, unlike other utilities that generally pay out most of what they earn. In addition, late last year we took on two solar projects – one 100%-owned in California and the other 49%-owned in Arizona – that will cost about $3 billion to construct. Many more wind and solar projects will almost certainly follow.

Here, he also mentions that he doesn’t extract any dividends out of his utility group. He considers it a growth opportunity rather than a cash cow. I think this is also worth keeping in mind, as many investors would judge utility stocks mainly by dividend yield.

From the 2009 report we learn the following:

Our regulated electric utilities, offering monopoly service in most cases, operate in a symbiotic manner with the customers in their service areas, with those users depending on us to provide first-class service and invest for their future needs. Permitting and construction periods for generation and major transmission facilities stretch way out, so it is incumbent on us to be far-sighted. We, in turn, look to our utilities’ regulators (acting on behalf of our customers) to allow us an appropriate return on the huge amounts of capital we must deploy to meet future needs. We shouldn’t expect our regulators to live up to their end of the bargain unless we live up to ours.

This is as clear as it gets. Utilities are a “natural” monopoly. If you play by the rules (at least in the US), you are guaranteed a decent return.

In the same report Buffet once more explains why he is suddenly more interested in utilities:

In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities. Indeed, the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. We are fortunate to own a number of such businesses, and we would love to buy more. Anticipating, however, that Berkshire will generate ever-increasing amounts of cash, we are today quite
willing to enter businesses that regularly require large capital expenditures.

From the 2008 report, this sentence is reinforcing Buffets strategy:

Indeed, MidAmerican has not paid a dividend since Berkshire bought into the company in early 2000. Its earnings have instead been reinvested to develop the utility systems our customers require and deserve. In exchange, we have been allowed to earn a fair return on the huge sums we have invested. It’s a great partnership for all concerned.

On acquisition of utilities, we can also find his thoughts in that report:

In the regulated utility field there are no large family owned businesses. Here, Berkshire hopes to be the “buyer of choice” of regulators. It is they, rather than selling shareholders, who judge the fitness of purchasers when transactions are proposed.

There is no hiding your history when you stand before these regulators. They can – and do – call their counterparts in other states where you operate and ask how you have behaved in respect to all aspects of the business, including a willingness to commit adequate equity capital.

When MidAmerican proposed its purchase of PacifiCorp in 2005, regulators in the six new states we would be serving immediately checked our record in Iowa. They also carefully evaluated our financing plans and capabilities. We passed this examination, just as we expect to pass future ones.

So being nice and trustworthy to the regulator is what counts in this business.

Finally let’s look at some “hard numbers” from MidAmerican, in order to be able to compare this to other utilities. I will use the MidAmerican 2011 annual report for this.

  2011 2010 2009 2008
Total Assets   47.7 45.7 44.7 41.4
Shareholders Equity   14.1 13.2 12.6 10.2
total financial debt   17.8 18.2 19.3 18.2
Sales   11.2 11.1 11.2 12.7
EBIT   2.684 2.502 2.465 2.828
Net Income   1.331 1.238 1.157 1.85
Int. Exp   1.196 1.225 1.257 1.333
Op. CF   3.220 2.759 3.572 2.587
Capex   2.684 2.593 3.413 3.937
ROE   9.8% 9.6% 10.2%  
NI margin   11.9% 11.2% 10.3% 14.6%
EBIT Margin   24.0% 22.5% 22.0% 22.3%
Debt/equity   126.2% 137.9% 153.5% 178.4%
EBIT/Int exp   2.24 2.04 1.96 2.12
ROA   2.9% 2.7% 2.7%

We can clearly see that this is low ROA business. Only the significant leverage allows Buffet to have ~10% ROE on average. Additionally, he seems to provide some “contingent” capital to MidAmercian, i.e. to promise a capital contribution of 2 bn USD if required. I think this keeps down the cost of debt without explicitly guaranteeing it. MidAmerican has a credit rating of “only” A- against Berkshire’s AA+. Also one can see that he reduced leverage over the last few years since taking over MidAmerican.

Nevertheless he seems to prefer this vs. returning cash to shareholders. Interesting.

So let’s quickly summarize Warren Buffet’s perspective on utilities as far as I understood it:

– he only started to invest into utilities relatively lately because he needs something where to invest his growing cashflows from the other operations
– he prefers regulated utility business, diversified over different regulators
– he invests a lot of money into renewable energy
– he uses significant leverage to achieve 10% ROE
– he is not looking at the busienss as a cash cow but a long term growth business and therefore does not extract any dividends

My 22 investments for 2013

Many bloggers and other market pundits are currently touting their 2013 picks.

Mcturra for instance names 5 of them, Nate at Oddball selected his 13 stocks for 2013, red has pulished 3 full portfolios for 2013 (UK portfolio, Euro portfolio, US portfolio).

So in order to contribute something here, I will show my 22 favourite investments for 2012, which by total coincidence, are similar to my blog portfolio. As an added value for the readers (and for me), I try to add 2 or 3 sentences for each investment in order to summarize the investment case.

1. Hornbach Baumarkt
Solid long-term compounder. 2012 was weaker than 2011 but Hornbach has a solid long-term strategy and is increasing market share steadily. Potential upside catalyst if main competitor Praktiker will not manage turn around.

2. AS Creation
German market leader for wallpaper. Hit by anticompetitive issues, but recovered quite nicely. Upside catalyst: Start of Russian JV in 2013. Russian JV partner has bought already 10% of AS Creation.

3. Buzzi Unichem pref
Italian based cement company, however with large international operations. Comparably low leverage, long-term strategy. Company announced a few weeks ago to squeeze out minority shareholders of German subsidiary Dyckerhoff. In my opinion a sign for increased financial flexibility and long-term thinking.

4. WMF AG pref
KKR bought majority from previous PE owner Capvis. Underlying business, esp. Coffee makers still going strong. Interesting to see if KKR will try to take WMF off the stock market or spin-off the coffee maker division. No reason to sell, downside well protected.

5. Tonnelerie Francois Freres
French “hidden champion” for oak wine barrels. Acquired major competitor Radoux in 2012, issued very good results just a few days ago. Very long term oriented company.

6. Vetropack
Swiss based producer of glass bottles, however production locally in central and eastern Europe, so no FX issues. Ultra solid company, lately no big growth because of stagnating eastern European markets. Looks like owner family will try to increase stake directly and indirectly via share repurchases. ultimately, they might want to take company private.

7. Total Produce
Ireland based fruit and produce wholesale company. Good stock price momentum at the moment. Business relatively independent from overall economy. However, a large number of smaller acquisitions in the last months, so one must scrutinze closely if this pays off.

8. SIAS Spa
Italian toll road operator. Despite overall weakness in Italy, holding up very well as tariff increases almost fully compensated traffic decreases. Has a lot of excess cash because of sale of LatAm operations. Large special dividend expected.

9. Installux SA
Unspectacular french company specialised on aluminium related products. No special story here, but ultra cheap and safe as well very profitable.

10. Poujoulat
Similar to Installux, cheap and profitable French company. 2012 might not look so good from P&L as French building activity is very low, but company invested a lot into wood pellet production. If this works out, earnings could increase significantly.

11. Dart Group
UK based operator of ground transportation and budget airline. Spectacular growth in packaged holidays. Still cheap despite share price having doubled in 2012

12. Cranswick
Very unspectacular UK based pork specialist. Very consistent, in my opinion with a certain kind of moat. Current share price does not reflect quality of business and balance sheet.

13. April SA
French based Insurance broker and specialist insurance company. Still owner managed, generates incredible high free cashflow without real capital requirements.

14. Bouygues SA
Sum-of-part undervaluation story. Bad headline news for mobile subsidiary overshadows ultra solid road and construction business. Company is very shareholder friendly for a French company.

15. KAS bank
Specialist Dutch depository bank. Currently valued at single p/E at bottom of the cycle margins. Very good mean reversion potential over 3-5 years.

16. Gronlandsbanken
Major bank in Greenland with very good margins. Will benefit greatly if any of the energy projects in Greenland will be realised. Management bought shares until recently.

17. Draegerwerk Genuesse
Special situation /capital structure arbitrage. Theoretically, the “Genuesse” should be worth 10 times the pref shares (theoretical price ~700 EUR against current price of 300 EUR). Management has already tried to buy back the Genuesse but got only back a part of them.

18. IVG convertible
Convertible bond with a 2014 put option for the bond holders. Although IVG is still struggling with some legacy real estate, very good risk/return relationship based on the short time to put exercise date.

19. Depfa LT2 bond
Special situation bond with good risk/return potential despite issuing company Having been bailed out by the Government.

20. HT1 Funding
Special situation Commerzbank deeply subordinated bond with coupon guarantee. Has profited from repeated equity raisings as more and more equity is now below the bond. At current prices stilla very solid “hold”.

21. EMAK
Italian special situation. Manufacturer of garden tools etc. Currently hit by Italian recession but with increasing international exposure. Significant reversion to mean potential.

22. Rhoen klinikum
Special situation investment, following the unsuccessful take over attempt from Fresenius. Only available “target” in the German hospital sector. I expect further take over attempts going forward. Standalone solid company, relatively low downside risks.

Weekly links

With a little delay, some hoepfully interesting links:

MUST READ: Damodaran with a three part series on acquisitions: Acquisition accounting part I and part II and success factors for acquisitions.

Good paper about investing under uncertainty

Interesting interview with Jean-Marie Eveillard with comments about accounting across time and countries (good comments about British accounting and securities…).

Stableman with an interesting quote from Seth Klarmann about complex securities as investment opportunities

Wilbur Ross warms up to Spanish Banks

Chovanec on the crackdown of the SEC against Chinese auditors

Viel et Cie (ISIN FR FR0000050049) – “sum-of-parts” or long/short opportunity ?

Viel et Compagnie SAis one of the many French companies with a good Boss score. According to Bloomberg they are active in the following areas:

Viel et Compagnie is a broker of financial products for the French interbank market. The Company deals in money market instruments, and offers clients a range of derivatives.

Traditional valuation metrics look OK but not extremely exciting:

Market Cap: 194 mn EUR
P/B: 0.62
Div. Yield 6.0%
Trailing P/E 12

However looking into the companies’ annual report, one can easily see that the Bloomberg description in this case is actually not very good.

The company describes itself the following way:

VIEL & Cie comprises three core businesses in the financial sector: Compagnie Financière Tradition SA, an interdealer broker with a presence in 27 countries, Bourse Direct, a major player in the online trading sector in France, and a 40% equity accounted stake in SwissLife Banque, present in the private banking sector in France.

Now it gets interesting, Compagnie Financiere Tradition SA itself is a Swiss listed company (ISIN CH0014345117) with a market cap of currently 320 mn CHF or 267 mn EUR. Viel & Cie owns 63.54% of the company, so that should be worth 170 mn EUR.

So again, we have here a holding company, which seems to become one of my specialties…

According to the annual report (pages 85 and following), the holding company had 70 mn in cash and 25 mn liquid securities and 150 mn in debt, leaving net debt of ~65 mn EUR.

The holding company owns on top of the participations:

– 29 mn EUR “other” securities
– 89 mn receivables

If we assume a “haircut” of 50% on those assets, we are left with around 55 mn EUR “extra assets” at holding level which I would net out against the debt.

So a first sum of parts analysis would get us.

Market cap: 194 mn EUR
+ net debt 65 mn EUR
– own shares (9.4%) 20 mn EUR
= EV 239 mn EUR


63.5% of Cie Fin. Tradition : 167 mn EUR
+ other holding assets at 50%: 55 mn EUR
= 225 mn EUR

So we have 27 mn EUR left which should cover

a) 100% in the French online broker “Bourse en ligne”
b) 40% in Swiss Life Banque Privee

According to Viel’s annual report, the online broker earned 3.5 mn EUR in 2011, so with a 10 P/E, this company would be worth 35 mn EUR

The 40% Stake in the French Swiss Life Banque Privee seems to be the result of a 2007 transaction with Swiss Life.

However, this 40% stake only generates “at Equity” profits of 2 mn EUR, even optimistically I would not attach more than 25 mn EUR valuation for this minority stake.

So bringing it together, the Sum of Parts looks as follows:

a) Cie Fin tradition 167 mn
b) holding assets 55 mn
c) Online broking 35 mn
d) 40% Banque 25 mn

Sum 282 mn EUR

Against an “EV” of 239 mn EUR, so only a slight 16% “discount”. So not really something to follow up and let’s move on with some other stock ?

Not so fast: It is quite interesting to look at the relative performance of Viel &Cie against its main participation over the past 2 years:

For some reason which I don’t understand, the two stocks completely “decoupled” in January 2011. Since then, Viel & Cie remained constant and Compagnie Financiere tradition lost ~54%. Or put it another way: In January 2011, Viel was trading at a very large discount (50% or more) to sum of parts whereas now it trades almost without any discount.

I found this very strange. Most of the value of Viel comes from its stake in the Swiss company and for some reason, Viel shareholders do not care that the major stake looses 55% ?

I don’t know if one could short Viel, but a “long CFT / short VIL” trade might be a very interesting market neutral opportunity.

Another potential idea out of this is Compagnie Financier Tradition. This could be a very interesting situation in its own.

Edit: I had originally written this post 2 weeks ago, since then Viel already lost 10% relative to Compagnie Tradition

2 years of – Thank you very much !!!

Exactly 2 years ago, Valuematze and I got our first post online, the German version of our investment philosophy.

Since then a lot of things happened, among others, Valuematze went “professional” after a few months. I then started to write mostly english language posts from November 2011.

So after 680 posts and 2000 comments it is a good time to have a quick look back as well as forward

Some numbers:

– 680 posts or ~ 0.8 per day
– in the first month, December 2010, the blog had 309 views in total for the month
– since then, the blog had around 260 k visits, currently around 500-800 views per day
– on a typical day, ~30-50% of the readers are still German readers, followed by US, UK, France and Switzerland

The Top 10 posts over the last 2 years are:

1. WFG Anleihen-interessant oder lieber finger weg
2. “Risk free” rates and discount rates for DCF models
3. Kurzanalyse Prokon Genußrechte
4. Exotic securities-detachable GDP linked Greek warrant – valuation-approach
5. Piquadro SpA – Competitors, market analysis and strategies
6. (Hard Core) Opportunity Investments: WestLB 2011er Genußscheine
7. Exotic securities: “Detachable GDP linked Greek warant” (ISIN GRR000000010)
8. Operating Leases – Bewertung und anstehende Änderungen (IFRS 17)
9. Praktiker Anleiheprospekt – “Poison Pill” gegen potentielle Übernehmer
10. Quick check: Vivendi SA – Seth Klarman “Cigar butt”

Interestingly, only one of my successful investment ideas (WestLB) made it into the top 10. People seem to be more interested in popular “grey market” investments (WGF, Prokon), high profile cases (Praktiker, Greek GDPs, Vivendi/Klarman) and general issues (risk free rates, leasing).

As I am not a financial journalist, I will still focus on (long) investment ideas. Looking at bad investments (and frauds) is also some kind of hobby of mine, but usually one gets a lot of negative comments and from time to time even “not so nice” emails from lawyers. Nevertheless, I think this is some kind of “community service” to the investment community I will try to provide in the future.

Why I blog

For me, the main purpose of this blog is to have a kind of journal which helps structuring my thinking and provide some immediate feedback.

It is a very different thing to just have a half baked idea and trade compared to writing it down, publishing it and defending it against critical comments. Also with books for instance, I found it extremely helpful after reading them, to summarize the content in a “book review” post.

So one of the big benefits of writing this blog is that I approach my investments much more structured way than I did before and trade less than ever. On the other hand, the blog motivates me to continuously search for new ideas.

The icing on the cake however are the many valuable comments I got from the readers.This kind of immediate feedback is really really helpful and very motivating.

Portfolio performance

I personally see the portfolio performance more like a side-effect, especially over such a relatively short time period like 2 years. Since running th blog, I was very very lucky. Basically almost every “opportunity” idea really had a catalyst event, most notably Draegerwerke and AIRe. Also, the “window of opportunity” of interesting situations with good risk/return relationships which opened up following the financial crisis is closing pretty quickly.

Of course, a good performance also motivates me to write in the blog, but I am pretty sure that I would still enjoy blogging with a benchmark (or worse) performance.

Portfolio composition /turnover

As most of you have already found out, this blog is not about market timing or quick trading tips. After 2 years, ~50% of the portfolio are still the original constituents.

Two of the original constituents (AIRE and Depfa) were taken over or matured. So Portfolio turnover was something like 20-30% p.a. which corresponds nicely with my target investment horizon of around 3-5 years.

Targets for the future

For the next year, I have set myself the target to review hopefully 1 new stock/bond per week. I know that’s quite ambitious but on the other hand, looking at companies for me is the most effective way of improving my investment skills. Reading books etc. is nice, but nothing beats the experience of researching a stock and make an investment decision.

Further, I try to further develop my Boss Score database. I am currently at ~2500 stocks covered and I have some ideas to improve the model. So far Ia m extremely happy how it works.

I will also try to interact more with other financial bloggers. I think this one of the great aspects of blogging against just scribbling down one’s notes on a piece of paper. The exchange about HoldCos with Geoff Gannon for instance was quite funny and yielded some interesting thoughts on this topic.

So finally, many thanks again to all readers and especially to those who have commented and/or sent me Emails or even contributed write ups for the blog. Blogging is much more fun with feedback and I think I have learned quite a lot of things over the last 2 years.

By the way, I am always open for contributions to the blog. Let me know if you have something that I should put on the log.

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