Author Archives: memyselfandi007

Dart Group – When to sell / Skill & Luck in investing

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Today, Dart Group issued preliminary 2012/2013 figures which were excellent.

The stock price jumped another 10%, making Dart my first triple in the 2.5 year history of the blog portfolio:

For me, two questions are now interesting:

1) Should I sell ?
2) Was this skill, luck or both ?

Re 1)

The nice thing about the blog is that you can always go back and look what you have written back then.

Dart was actually the first tangible result of my “Boss Score “model back in June last year. Additionally, at that point in time, the stock was very cheap by any standards.

That’s what i wrote about valuation:

Valuation

A few simple thoughts about valuation:

Dart Group will never be a P/E 15 company, but it could easily be a P/B 1 company. At the moment, you get a company which increases shareholder equity by something close to 20% p.a. at 0.6 times equity. If we assume for instance they manage to generate 15% ROE in the next 3 years and the company would trade at book at that time, we would have a fair value of 1.7 GBP per share or an upside of 150% over 3 years. More than enough for me.

Looking back, under my metrics, Dart increased equity by 8% in 2011/12 and 18% for 2012/13, on average 13%. So slightly below my expectations but still very good. However the share price has shot way beyond my expectations.

Compared to back then, Dart now looks quite expensive as this table shows:

at purchase now Easyjet Ryanair Vueling
P/E: 4.7 11.0 24.6 18.3 11
P/B: 0.6 0.6 1.8 3.33 3.2 1.17
P/S: 0.1 0.1 0.4 1.4 2.1 0.2
Div. Yield 2% 0.87% 1.70% n.a. n.a.
Market Cap 97 mn 348 5558 10290 275
Debt/Assets 2% 1.70% 22.30% 39% 4.50%
EV/EBITDA 0.02 1.8 10.2 8.2

I have included some other discount carriers in the table. Compared to Easyjet and Ryanair, Dart looks rather cheap, but honestly I do not really understand why Ryanair and Easyjet trade so high. Vueling from Spain in comparison does look cheaper than Dart on that basis.

All in all, Dart performed according to my expectations, but the multiple expansion was clearly above expectations.

Personally, I don’t believe that a business like Dart will trade at 2 times book in the long run, nevertheless, momentum and comparable valuations could carry the stock even higher.

As a compromise, I will sell half of my position as of today.

2) Skill or luck

A second question one should always ask oneself: Was this just luck or was some skill involved.

With Dart, I actually try to improve my process compared to the past. I looked quite deeply for instance into fuel hedging as well as into the business model.

That is what i wrote in the first post about the business model:

Business model

There is an interesting discussion about the business model to be found here.

In essence within the airline business, their main competitive advantages seem to be

– regional focus (not fighting on the crowded London market)
– buying cheaper used airplanes for cash instead of leasing new ones (used aircraft buying seems to be one of the special abilities of the CEO..)
– higher flexibility due to ownership and contracts with Royal Mail
– differentiation with slightly better services as a “family budget” airline

I am not able to judge how this holds against Ryanair and Easyjet going forward, but so far the strategy seems to have worked OK and better than many of the smaller competitors.

Actually, part of that competitive advantage, the Royal Mail contract got lost earlier that year and they earn lower margins. What I clearly didn’t see was the fact that Dart could compensate this by growing quite significantly with their packaged tours. This was luck.

Secondly, the stock got a lot of tailwind by the very good performance eof Ryanair and Easyjet. Over the last 12 months, Ryanair gained 84% and Easyjet 147%. Compared to that, Dart’s 192% look good but not totally out of line. That was luck too.

So overall I would say my dart investment was maybe 50% skill and 50% luck. Clearly, my boss model and the research helped to identify a stock which was undervalued. However the timing and the extent of the share price increase and multiple expansion are more luck than anything else.

Quick check: CIR Spa (ISIN IT0000080447) – HoldCo sum of part play with “special situation” catalyst ?

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This is an idea I read recently on the beyondproxy blog/site.

As my first attempt at this post somehow disappeared, I will now just copy the introduction from the beyond proxy post:

CIR Group is a company whose story is an intricate all-Italian tale of family ownership, corruption and dirty politics. This unique combination of factors seems to be frightening investors away from the company thereby causing its shares to become substantially undervalued. Within the next two quarters however, the Italian courts will decide on a legal dispute that will put an end to the tale and, most likely, a higher valuation on the stock.

CIR is structured as a holding company. It owns controlling interest in four businesses (Sorgenia, Espresso, Sogefi and KOS) and has substantial investments in alternative assets such as hedge funds and other financial instruments. Its liabilities consist mainly of €300mm of publicly traded bonds and €564 million of legal reserves.

and this is the “kicker”:

CIR carries a €564 million liability that has been booked as “Borrowings”. In reality, this is not borrowed money – it is a legal reserve for an infamous legal proceeding that has been making headlines in Italy for the past twenty years: the so-called ‘Lodo Mondadori’.

The author (a Italian grad student by the way) then values the company with a simple sum of part model, using share prices for the listed subsidiaries (Espresso, SOGEFI) and NAVs (P/B=1) for the unlisted shares (utility Sorgenia, hospital KOS). As a result, the author sees an upside of at least 20% in any case or up to 135% in case of a positive outcome of the “Berlusconi situation”

I think this is a good starting point, but I would adjust the approach slightly:

1. add control premiums to the participations
2. adjust NAVs for unlisted participations if appropriate (and comparables are available)
3. deduct finally a control premium for the CIR share

One could ask: Why add control premiums and then deduct them again ? Well, clearly, being a minority shareholder in the middle of an Italian shareholding chain is not the best position to be in. The main effect of this approach is to deduct a control premium from the expected Berlusconi settlement. This should be done as one does not know what happens with the money. I assume it will not be paid out as a dividend.

Assumptions:

1. For a control premiums in both cases I assume 30%
2. For the unlisted utility, I will use a P/B valuation not at nAV but at 0.5 times NAV. This is in line with similar Italian utilities like Iren (0.58) and Enel (0.6). I use 0.5 because the others are even profitable, Sorgenia is not.

First step: Sum of parts ex “Berlusconi”

CIR Spa 12/2012          
 
Assets          
    mn EUR MTM Control premium MTM + prem
Participations 1,192        
– Sorgenia   197.7 186 30% 241.8
– Espresso   341.7 178 30% 231.6
– Sogefi   106.9 172 30% 223.7
– KOS   99.2 99.2   69
– CIR Investimenti   421 421   421
– others   25.5 25.5   25.5
           
Receivables (group) 320   320   320
Cash, securities 291   291   291
other 67   67   67
Total 1,870   1,760   1,891
           
Liabilities          
LT debt -299   -299   -299
“Berlusconi liability” -564   -564   -564
Other -68   -68   -68
Total -931   -931   -931
           
NAV 939   829   960
shares 793.3   793.3   793.3
NAV per share 1.18   1.05   1.21

This rather simple table shows how i moved from the current “carrying values” in the HoldCo balance sheet of CIR Spa Holding to my mark-to-market valuation BEFORE applying the overall control discount. Remark: Using consolidated numbers for a company consisting of mostly 50% participations does not make a lot of sense.

Step 2: Berlusconi scenarios and control discount

before tax After Tax Per sh NAV Upside -30% control Upside
               
Base case       1.21 27% 0.85 -11%
Berlusconi min 150.0 97.5 0.12 1.33 40% 0.93 -2%
berlusconi max 564.0 366.6 0.46 1.67 76% 1.17 23%
Belusconi Mid 357.0 232.1 0.29 1.50 58% 1.05 11%
last news -15% 479.4 311.6 0.39 1.60 69% 1.12 18%

Here you can see the base case (as is) and 4 potential scenarios for the payment, assuming that 150 mn before tax is the minimum. The upside is calculated based on a current share price of 0.95 EUR per CIR SpA share

We can see that after applying the -30% control discount on the sum of part, without the Berlsuconi settlement, the shares look rather expensive. The max. upside with around +28% is rather limited at this price.

So it looks like that some of the expected Berlusconi payments are already priced in. At that price, I don’t think CIR SpA is attractive if one applies a 30% control discount.

Legal disputes /court cases as special situationss

In general, legal disputes are often quite interesting special situations. This is a quote from the 1951 edition of Ben Graham’s 1951 edition of “security analysis” (via CS Investing):

Class D Litigated Matters.

There are fairly numerous cases in which the value of a security depends largely on the outcome of litigation. This may involve a damage or subordination suit (e.g., International Hydro Electric, Inland Gas Co.); disputed income tax liability (e.g., Gold and Stock Telegraph, Pittsburgh Incline Plane); an appeal from a reorganization plan wiping out stock issues (e.g., St Louis Southwestern Ry., New Haven R.R.). In general, the market undervalues a litigated claim as an asset and overvalues it as a liability. Hence the students of these situations often have an opportunity to buy into them at less than their true value, to realize attractive profits—on the average—when the litigation is disposed of.

What kind of holding company is CIR SpA ?

A few months ago, I had a post about how I distinguish Holding companies:

For myself, I distinguish between 3 forms of holding companies:

A) Value adding HoldCos
B) Value neutral HoldCos
C) Value destroying HoldCos

Back then, we saw that even for a “value neutral” holding like Pargesa, a 30% discount applied. So implicitly I assume CIR SpA is value neutral as well. At least the reporting is quite transparent. In the past, CIR was involved in many typical Italian Feuds like Olivetti and Mondadori, but I haven’t read anything that they try to screw minority shareholders of their own group.

Although Benedetti Junior looks a little bit like someone who enjoys doing shady deals 😉

According to the last annual report, Benedetti Senior has ceded control of CIR SpA to his sons.

Summary:

Although I like the unique aspect of this special situation, the potential upside is NOT attractive enough to justify an investment at current prices.

I will keep this on the radar but I would not invest above ~0.70 EUR. I would need 50% upside in order to justify the risk of the underlying companies which are clearly struggling.

Some links

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Genius investor Eddie Lampert is still struggling with Sears

Home run investing via “on base” investing – Great interview with Zeke Ashton

Carson Block goes mainstream- warns on EM exposure of US companies

Good post about a column about private companies in the NYT (good blog by the way…)

If I would be 10-15 years younger, I would do ANYTHING to get this job at John Hempton’s Bronte

Nate from Oddball seems to become famous plus a new interesting “oddball” stock

Midyear performance review “Wexboy style”

Friday night IVG Bombshell

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Friday night, 8 pm seems to be a good time to land a real bombshell. IVG distributed an Adhoc notice with some update information about the upcoming restructuring.

Among other stuff, the comment on potential recovery rates in a liquidation. This is the German original:

ergäbe folgende Befriedigungsquoten: ca. 96% bis ca. 100% für Objektfinanzierungen (Carve out debt), ca. 86% bis ca. 89% für den syndizierten Kredit von 2009 (Syn Loan II), ca. 46% bis ca. 55% für den syndizierten Kredit von 2007 (Syn Loan I) und ca. 27% bis ca. 41% für die Wandelanleihe. Die Gläubiger der Hybridanleihe und die Aktionäre der Gesellschaft würden in diesen Fällen voraussichtlich jeweils keine Befriedigung erhalten.

So nada/niente/rien for Hybrid and Equity and only 27%-41% for the convertible. This is significantly below the latest trade of around 58% as of today.

After all, my summary from May seems to be spot on:

the likelihood of IVG “surviving” long term in my opinion is very small or even zero. So equity and hybrid should be avoided

I am really glad that I sold out:

Overall, for the portfolio I would for the time being sell down the position at current rates and eat the loss. I am pretty sure that I am too early but as I know that I am a rather bad short term speculator, I want to play this safe.

This is by no means over yet but it doesn’t look good.

Interestingly, Third Avenue seemed to have bought into IVG earlier this year. That’s what they say in their last shareholder letter:

Our analysis determined that the IVG Convertible Bond swere most likely the “fulcrum” security in the capital structure. In other words, holders of the IVG Convertible Bonds are likely to participate in a debt-for-equity restructuring, and the subordinated securities(preferred and common) would retain little or no value. IVG Convertible Bonds mature in 2017, but holders have an option to put the bonds to the company in 2014. The Fund purchased approximately 5% of the outstanding IVG Convertible Bonds at an average cost of sixty-eight cents on the dollar. As a larger holder,we anticipate having a seat at the table with the company

Man, that sounds really stupid. Even I had found out that the “fulcrum” security were the loans. it seems to be that Marty Whitman’s successors got a little bit sloppy.

So let’s get some Popcorn and watch what will happen on Monday.

Missed opportunities: Osram, Praktiker, Powerland

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Osram:

Good idea, bad execution is my summary for this one. The main mistake was clearly some kind of “anchoring”, because I wanted to see a price below 23 in order to buy. ANother question would be if you should, as a true value investor, do such “trades” at all.

Clearly, I am not yet convinced of Osram’s long term potential, but to me it was clear that this looked very similar to Lanxess’ first day on the stock market. A friend told me that “if you miss the limit by a few cents, then the margin of safety was too small anyway”. That is a good point. On the other hand, I think one can also add “alpha” if one does those kind of trades consequently (like the KPN trade), if the odds are in one’s favour.

I mean this is the whole idea of “special situation” investing. It might not be a pure “Margin of safety trade” each time, but if the chances are 55:45 on average instead of 50/50, over time this strategy will also produce good results.

For the time being, I will however remain on the sidelines with Osram.

Praktiker

Almost exactly a year ago after I sold the Praktiker Bond, the Insolvency now seems to be unavoidable.

Looking back, the sale at ~44% in July looked like really bad timing in the beginning:

Clearly, this was a missed opportunity as well, as the price even doubled after I sold July 2012. But after the “restructuring”, the Praktiker bond in my opinion was a pure speculation, the odds were at most 50/50 or worse. Clearly, I did not forecast the bad weather, but overall this whole affair looked just too bad. So I do not regret this missed opportunity as the fundamental decision was clearly correct.

Just as a remark: I assume that the recovery for the bond will be very low, maybe even single digit percentage points. Everything valuable has been pledged away and I don’t think they will get any fresh money into the capital structure “below” the bond.

Powerland

2 years ago, I looked at Powerland, a “German-Chinese” IPO. Already a superficial look at the company showed a lot of inconsistencies. Now it looks like that the game is over.

I am not sure why I didn’t short the company. This was clearly a case with a very big chance of being a fraud. There would have been even a second good chance when the CFO in November 2012 surprisingly left the company. So clearly a missed opportunity as I didn’t follow up on that one.

Update Osram Spin off & Lanxess

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Valuation update:

That’s what I wrote 2 weeks ago:

Valuation

EBITDA was ~250 mn for the first 6 months of the fiscal year 2013. If we assume ~500 mn for the year 2013 and ~500 mn net debt, then 105 mn shares at 30 EUR would mean an EV/EBITDA of ~7. If we add 500 mn of unfunded pension liabilities, we have EV/EBITDA of ~8. That is not really cheap but rather expensive for such a cyclical and capital intensive business.

2 things changed here:

1) The price was 24 EUR as a first trade, 20% lower as discussed 2 weeks ago
2) The net debt number i used was not the most recent one but from 30.09.2012. The most recent one was 0.5 bn

So overall, the current evaluation looks like a lot more reasonable (2.4+0.5)/0.5 = 5.8 x EV/EBITDA if one assumes 500 mn EBITDA.

Lanxess

Just for fun, I looked up some info about the Lanxess IPO in 2004/2005. Interestingly, Bayer tried to IPO Lanxess against cash as well but then had to settle for a Spin-off.

On the first trading day, Lanxess went down -6.3% from an opening price of 15.75 EUR to 14.85 EUR. This was the lowest price ever for Lanxess.

In order to get not to excited about spin-off, one should remember the HypoReal Estate spin-off from Hypovereinsbank. We all kno how this ended.

Summary:
Based on the now siginficantly reduced valuation, I feel tempted to go into Osram although with only a smaller alliocation (2-2.5%) of the portfolio as a spin off special situation. I will however wait until late afternoon to finally decide.

As of lunch time, only ~7.8 mn shares have been traded, I assume there is more to come. If the price goes significantly below 23 EUR, I will be on the buying side.

Performance June 2013

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Performance June 2013:

Performance in June 2013 for the portfolio was -1.6% against -4.3% of the BM (50% Eurostoxx, 30% Dax, 20% MDAX). YTD, the portfolio is up +17.7% against 7.1% for the BM.

Interestingly, this was the first negative month for the portfolio after 18 consecutive positive months, for the BM the “run” were 12 months of positive returns. The positive aspect is the fact, that the draw down was a lot less than the benchmark, even adjusted for cash.

Graphically this looks as follows:

Positive contributors were EGIS (+6.6%), Rhoen (+6.5%). Loosers were SIAS (-15,1%), EMAK (-12,4%), AS Creation (-7,1%).

Portfolio transactions

As discussed, I closed the Kabel Deutschland short after the official offer of Vodafone. The result was a loss of ~-22% on this position.

Only new entry of the month was Thermador. In order to remain within my 20% allocation to France, I sold Bouygues at the same time, resulting in a profit (incl. dividend) of ~+11%.

Portfolio as of 30.06.2013

Name Weight Perf. Incl. Div
Hornbach Baumarkt 3.7% 2.4%
AS Creation Tapeten 4.0% 39.2%
Tonnellerie Frere Paris 5.8% 81.6%
Vetropack 4.1% 6.6%
Installux 2.7% 14.2%
Poujoulat 0.9% 11.4%
Dart Group 4.7% 167.3%
Cranswick 5.7% 37.0%
April SA 3.5% 12.5%
SOL Spa 2.7% 31.5%
Gronlandsbanken 2.2% 23.2%
G. Perrier 3.2% 18.8%
IGE & XAO 2.0% 4.8%
EGIS 2.8% 7.6%
Thermador 2.7% 1.5%
     
KAS Bank NV 4.7% 28.7%
SIAS 4.8% 36.7%
Drägerwerk Genüsse D 9.1% 180.1%
DEPFA LT2 2015 2.6% 58.3%
HT1 Funding 4.6% 56.2%
EMAK SPA 4.6% 45.1%
Rhoen Klinikum 2.3% 18.1%
     
     
     
Short: Prada -1.0% -15.3%
0 0.0% 0.0%
Short Lyxor Cac40 -1.1% -11.0%
Short Ishares FTSE MIB -1.8% -3.6%
     
Terminverkauf CHF EUR 0.2% 6.9%
     
Cash 20.4%  
     
     
     
Value 50.5%  
Opportunity 32.9%  
Short+ Hedges -3.7%  
Cash 20.4%  
  100.0%

Comment

Nothing really new.

Thermador Groupe (ISIN FR000006111) – a true “hidden champion” from France ?

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Back to my favourite hunting ground France, the country which, according to the “famous” Harvard professor Niall Fergusson, will burn this summer.

Thermador Groupe is (as many others) a result of my boss screener. The score is not super high but indicates that it might be a high quality company at an attractive price. So what are those guys doing ? According to Bloomberg the following:

Thermador Groupe wholesales plumbing supplies. The Company buys plumbing supplies primarily from manufacturers outside France and distributes them throughout France. Thermador distributes ball, butterfly, check, motor-operated and solenoid-operated valves, pneumatic actuators, central heating system components, plastic pipe, and domestic and small community pumps.

Doesn’t sound too exciting but that is usually a very good sign.

Valuation looks Ok, but not exciting:

Market cap: 247 mn EUR
P/E (2012) 11.7
P/B 1.9
P/S 1.2
EV/EBITDA 6.2
Div. yield 5.4%

The company is debt free and showed 5.4 EUR net cash per share at year end 2012. So far so good, but why should this company be a “hidden champion” ?

A quick look at profitability over the last 11 years shows already, that those guys seem to do something right:

NI margin ROE ROE adj
31.12.2002 6.5% 12.7% 15.9%
31.12.2003 7.7% 15.4% 22.3%
31.12.2004 9.3% 18.4% 20.5%
30.12.2005 10.1% 19.5% 23.6%
29.12.2006 11.2% 22.6% 24.4%
31.12.2007 12.0% 24.5% 24.3%
31.12.2008 11.0% 22.2% 22.3%
31.12.2009 9.2% 15.9% 18.8%
31.12.2010 9.6% 15.8% 17.4%
30.12.2011 10.6% 17.8% 20.1%
31.12.2012 10.1% 17.0% 20.1%

High single digit margins and consistently ~20% return on investment implies that those guys know what they are doing.

But it gets even better. Despite good growth in those 11 years (sales doubled), the showed a very healthy free cashflow generation.

<

EPS FCF p. Share DIV
31.12.2002 1.66 1.09 1.51
31.12.2003 2.10 3.49 1.44
31.12.2004 2.70 1.40 1.44
30.12.2005 3.10 3.11 1.80
29.12.2006 3.96 0.94 2.06
31.12.2007 4.84 1.16 2.31
31.12.2008 4.96 2.27 2.61
31.12.2009 3.90 6.56 2.61
31.12.2010 3.99 0.97 2.61
30.12.2011 4.83 3.84 2.61
31.12.2012 4.98 4.25 3.05
       
Total 41.02 29.08 24.07

Around 75% of earnings have been converted into free cash flow and again, 90% of free cash flow has been paid out as dividends. Those are quite impressive numbers for a “traditional” business.

Business model

Again, the question here is: How do they do this ? On the surface, a wholeseller should not be able to make a net margin of 10%, so there must be a lot more to this story.

Thankfully, one doesn’t need to look around in the web to find out about them because they produce a fantastic annual report in English language.

If I understand correctly, the Thermador business model looks as following:

– they are basically the interface between a large number of manufacturers and DIY stores / local wholesale companies
– they are specializing on relatively complex pump systems where few if any manufacturers are able to produce the full range of components
– in effect they are a kind of “virtual” conglomerate which offers those system and guarantees availability of all relevant parts
– it looks like that they mainly source in Italy and China and then warehouse and distribute the systems in France
– according from their numbers, they buy stuff from around 200 producers and sell/distribute to up to 3000 customers per subsidiary

The last bullet is important: A “Normal” wholeseller, for instance in the food industry doesn’t have a lot of end clients. In such cases it is relatively easy to “cut out the middlemen”. For a wholeseller with a larger number of partners on each side, it is much easier to create value and extract higher margins.

Interestingly, they manage to do this (so far) by only 1 big distribution center in Southern France.

Uniqueness of the business models:

Despite having 8 subsidiaries which sometimes use the same providers and have the same clients, they are run completely independent. That is what they say in their annual report:

People sometimes ask us about the suitability of our organisation chart: why 8 subsidiaries with 8 management teams, 8 sales teams, 8 purchasing departments, 8 warehouses, etc. Wouldn’t we achieve economies of scale if they were aggregated? On the contrary, we think that the drawbacks this presents are more than counterbalanced by the efficiency inherent in small, specialised and highly motivated teams.

The 8 subsidiary directors do indeed have maximum freedom to develop their companies, and enjoy the support of the Group, which provides them with the financial, property and IT resources they need. They are very close to their markets, and have many years’ experience with the Group, with a sound knowledge of their businesses. Guillaume Robin looks to Marylène Boyer and Hervé Le Guillerm for day to day support in managing the Group. A more formal monthly meeting reviews cross-company issues and makes the decisions needed to ensure the Group works efficiently. Each week, the nine directors get together for lunch to talk about current topics. Twice a year, they spend a whole day off-site to discuss strategy and organisation. Finally, each January, fifty managers and supervisors from the Group get together for presentations of each subsidiary’s projects. The audience is then invited to ask the subsidiary directors about their visions, analyses, decisions and forecasts.

For anyone having “inside” experience in a large international company with a big HQ, this almost sounds too good to be true. Coincidently, I just read “The Outsiders” and I have to admit, that up until now I didn’t really think about organizational structures so much. But based on the book and my own “day job” experience, I believe that such a company without a big HQ has in itself a competitive advantage against competitors with a rigid hierarchies. Such companies are much faster and at the end of the day more efficient, because the big waste always happens at headquarters.

As a picture in the annual report shows, all the companies are located next to each other, however in different buildings.

thermador

What they seem to share (and what makes a lot of sense) is their IT system and of course the distribution center.

A few real “gems” from their annual report:

Since our teams are part of small companies, each person feels personally concerned: waste leads to an increase in costs and a drop in profits. We are therefore careful to turn out lights when we leave offices, close windows when the heating is on, recycle paper and to avoid heating (or cooling) excessively.

or this one:

Our travelling salespeople do not have “company” fuel cards. When they use their vehicle for professional travel, they are reimbursed on a per-kilometre basis. It is in their interest to drive economically. When they rent vehicles, they are limited to small cars which consume little fuel. Also, we ask all employees of the Group to live within 50 km of our head office.

Other positive facts:

– Management owns shares, management salaries are reasonable
– organic growth, no acquisitions
– clear structure, no minorities
– conservative discount rate for pensions (3%, below official guidance)
– all real estate owned, no signifcant leases

.
Profit sharing with employees

Again from the great annual report:

Variable component:
Since the beginning, Thermador Groupe subsidiaries’ profits have been shared with employees. Even before statutory profit sharing, we introduced our own brand of profit sharing in Thermador, the first company created in the Group’s history. This virtuous practice spread to the other subsidiaries subsequently. Profit sharing is the result of a year’s work, during which the management teams present the operating accounts of each subsidiary on a monthly basis. Everybody can understand how the annual result is put together, and what mass of profit sharing will be distributed. The distribution of that mass is decided by the management team, and takes into account each individual’s performance as fairly as possible.

In each subsidiary, the profit sharing amount therefore depends on profit, which means there are major differences between the companies of the
Group. It varies from 12 to 27 % of salary. The average for the Group is 22% of gross annual salary.

Again, this is something I have never read in such a clear and precise way in an annual report.

Funnily enough, a lot of this sounds exactly like in the Les Schwab autobiography I have reviewed a few days ago. Who would have thought that something like this can be found in “socialist” France ?

Stock price & valuation

The stock price is still far away from the highs in 2007:

From a valuation perspective, I don’t want to be too sophisticated. This is not a super cheap stock but a very high quality stock. Would this be a UK or US stock, it would trade at least at 8-10 EV/EBITDA. As this is a French stock, one should not expect a lot of “action”. Nevertheless I find it attractive at current levels as I am convinced that they will find ways to grow their business in the future.

Risks

Clearly, the economic situation in France is the biggest risk. Thermador started to expand interenationally. In their own style, they created of course a seperate entity for this. We will see if the business model works internationally as well. The unit Thermador International founded in 2007, grows quite quickly, but has yet to achieve the profitanility of the other subsidiaries.

Additionally, any consolidation, either on the manufacturer or client level might make Thermador’s business more difficult.

Finally, some very clever B2B internet company could try to compete with Thermador. However, I think Thermador is much more than matching producer and clients. There is a lot of distribution know how and facilities involved plus guaranteeing services and spare parts within a short time frame. But clearly, this is something to watch out for.

Summary:

Thermador is in my opinion a true “hidden champion”. For me the reason why this company trades below its “true” value is the uniqueness of its business model combined with they way the company is run and organized. Together, this is what I would call a “Les Schwab moat”, the power of a highly motivated company in a competitive market.

Clearly, the current situation in France doesn’t make things easier for Thermador. Nevertheless I entered into a 2.5% portfolio position at EUR 58.20 per share. As this would bring my net France exposure above 20%, I sold out the Bouygues stock as a risk management measure.

Sporadic links

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A very comprehensive post from Prof. Damodaran about equity value, firm value and enterprise value

Very interesting: Buffet’s Berkshire is buying a Life Insurance company from Hartford

Interview with the boss of Apollo, Josh Harris, about opportunities in Europe and distressed investing.

Two great posts about book value and earnings power.

Must read: Jason Zweig’s 30 year anniversary of his “intelligent investor” column

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