Monthly Archives: April 2016

Good or Bad Capital Allocation: Example SAP SE (ISIN DE0007164600)

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In my previous post on capital allocation, I had mentioned SAP as a company which might have overpaid for an acquisition. A reader commented that SAP is a good capital allocator because they increased EPS over the last 10 years.

Increasing EPS itself in my opinion is not a “proof” for good capital allocation. Actually, this itself says nothing at all. If you have a stable business, just retaining earnings and doing nothing will increase EPS as long as interest rates are positive. Good capital allocation is when you create value from retained profits.

The best way to find out if value is created is to look at how returns on equity and return on capital develop over time.

Let’s take a look at SAP over the past 17 years with some per share numbers:

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Deutsche Pfandbriefbank (ISIN DE0008019001) update

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In July last year I introduced Pfandbriefbank as a “forced IPO” special situation. That’s what I wrote at the end of the post:

As I have said in the beginning, PBB is a simple case: I do think that the “forced IPO” of PBB from the German Government has created a typical special situation with good upside potential. This is clearly no “shooting out the lights” grand slam home run. In golf terms I would say that this is a “solid 6 or 7 iron” shot.

Looking at the perfomance of the stock since then, it looks like in Golf language that my “solid 6 or 7 iron” nevertheless “landed in the rough” with the stock being down -23% vs. -9% in the CDAX.

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Capital Allocation & Capital Management – What is good and what is bad

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Everyone who has read Thorndikes book “The Outsiders” clearly knows that capital allocation& capital management is one of the most important factors in creating long term shareholder value. After I watched Thorndike give a briliant talk at Google on this topic, I decided to write down my own thoughts on the topic.

What is CAPITAL ALLOCATION & CAPITAL MANAGEMENT anyway ?

CAPITAL ALLOCATION is simply what you do with your profits/cash inflows once they are in your account. You can do a lot of things with it. Thorndike in the talk above uses 5 uses, I would add another 2 (in bold)

1. Reinvest: Maintain your existing assets/infrastructure/operations
2. Grow organically: Expand your business by buying more machines/outlets/opening stores etc.
3. Expand your business by M&A
4. Pay back liabilities (debt, payables, pension liabilities etc.)
5. pay dividends
6. buy back shares
7. just leave the cash on your account and wait for better opportunities

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Some links

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Tough year: Leucadia’s 2015 shareholder letter

Though year, too: Loews 2015 shareholder letter and  annual report

Kerrisdale Q4 letter with a snapshot of insurance broker Brown & Brown

Great Ted interview with Linus Torvald (creator of Linux)

Former coal giant Peanody filed for bancruptcy protection

Swiss watch makers are still waiting for a recovery

A quick look into the complicated Energy Transfer /Williams NatGas pipeline merger 

 

Kinder morgan (KMI): Asymmetric upside potential

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So let’s move on from focusing on the bad things and look at the the things that I like at Kinder Morgan. While I was writing this post, I found a very good blog post from Glenn Chan from 2 years ago which I can only recommend and includes a lot of interesting points about Kinder Morgan.

The Management:

Rich Kinder, age 71 owns 11% of the company and was famous for paying himself only 1 USD salary during his time as CEO.

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Kinder Morgan (KMI): Slow moving train wreck or Contrarian opportunity ?

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In late 2014 I started looking into oil related companies. I have looked at a couple of energy related companies like explorer Peyto, LNG liquification terminal Cheniere , Consol Energy and Gaztransport. I only bought Gaztransport which I then sold 6 weeks later. As I am still interested in the Energy sector, I will cover some stocks from time to time.

Kinder Morgan, the US pipeline owner/operator looks like another typical potential contrarian “Value investment”.

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What I liked at first sight: Read more

Free cashflow reporting: Doing it “Grenke style” (Grenke, Silver Chef)

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After my post about Australian Leasing companies a few days ago, I decided to start with Silver Chef, a company I found interesting.

Negative Free cash flow at Silver Chef

As many other value investors have, I have incorporated the concept of Free Cash flow into my investment process. A company which produces great earnings but no free cash flow is often a big red flag (see for instance the Globo Plc case)

So a first look at Silver Chef seems to indicate that they  have a big problem. Great earnings but negative free cash flows and increasingly so:

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