Interesting paper on the merits of low volatility stocks
Greenbackd on Benjamin Graham – Skill or luck ?
MUST READ: Howard Marks Q4 memo. Time to be cautious, at least for bonds.
Bruce Greenwald on Apple and Amazon
Cable TV seems to have one more life
“Inspired” by Gannon’s post about the book and indirectly Whopper, I read the book, partly also to understand why I got the Kabel Deutschland short wrong.
The book is sketching John Malone’s business history from the early 70ties, when he joined the almost bankrupt regional cable company TCI until the early 2000s when he already was a billionaire.
For me, especially the following points stood out:
Malone as CEO/cable operator
+ Malone is rather a “financier” and deal maker than an operator, although he certainly knows his stuff about cable and media
+ very early, even at university he already developed the concept to use maximal leverage for regulated “quasi monopoly” businesses
+ at his time at TCI, he perfected this business model even further. He used depreciation/amortization aggressively in order to be able to “compound” cable assets without paying a single cent of taxes
+ he was one of the first CEOs to convince investors to disregard earnings and focus on cashflow
+ in his first 15-20 years at TCI, he managed to increase the share price by several thousand percent without ever showing a single cent of profit
+ he perfectly understood competitive behaviour, effectively running a “cable cartel” for many years and extracting the maximal gain for shareholders (would be maybe a very good study for the Bruce Greenwald book..)
Malone as an investor
+ as an investor he is being quoted rather as an “asset collector”
+ this implies that he has extremely long time horizon’s, sometimes 20 years and more and no hurry to cash out
+ his “exits” were usually tax optimised stock swaps into more liquid shares of acquirers
+ his first “genius” stroke was the early spin-off of Liberty media which made him rich. This is also one of the very prominent spin offs Joel Greenblatt wrote in his “You can be a stock market genius” about. I think it also explains a lot why such a special spin off worked so well. Malone structured the spin off in a way that people were not really interested in the spun off shares. With a loan of his employer, he then bought up as many shares as he could.
+ some investments he made were either genius or sometimes monopolistic, for instance buying a struggling network and then allowing it to be distributed over his cable systems. One example was the “BET” network, were he invested 500 tsd USD in the early 80ties as the founder was struggling, distributed it via his cable network and then sold the stake for close to 1 bn USD to viacom in 2003. This shows his patience with such investments and might be one of the best “angel investments” in history.
Although the book clearly has some lengths, I found the book very interesting and highly recommendable from many perspectives. It offers good insights into the cable business as well as into “cutting edge” corporate finance and long term investment thinking.
John Malone is also someone you definitely you want to follow. So if John Malone aggressively buys into German cable, it is maybe not the best timing to short Kabel Deutschland at the same time.
I wish I had read this book much much earlier…….
One of my “secondary” goals for 2013 is trying to develop a more “formal” checklist especially for my “boring stock” strategy. As the “Boss Score” is only ment to be a starting point, I usually try to “quick check” certain points in order to find out if a deeper analysis makes sense.
One of the first thing one has to decide is: “what kind of stocks am I looking for” ? I don’t believe that a single check list for all kind of different stocks exists. So please keep in mind, the purpose of this checklist wil be to find stocks that:
– perform consistently well over time but not spectacularily so (no “wide moat” companies)
– have little fundamental downside (low debt, “hard” assets, stable sector)
– can be “left alone” if necessary for a long time because management is trustworthy (“low maintenance”)
– are nevertheless “mispriced” by the market
So far I have come up with the following list and the first 27 items (beta version):
1 . Market cap between 25-250 mn
“sweet spot”, large enough to invest, small enough to deter “large professional” investors
2. Less than 3 analysts following on Bloomberg or very bad sentiment
Unfollowed or “hated” stocks have larger potential to be mispriced
3. “low key” IR. E.g. no English annual reports, short quarterly updates etc., no share price on company homepage
Many investors skip such stocks
4. Potential special circumstances like Euro crisis, very diverse business activities, complex structure, Spin off etc.
increases chance of mispricing
5. Low historical beta /volatility
Good for my nerves, bad for any index oriented investors
6. Dividend yield > 3%
subjective criteria based on experience
7. P/E < 10
For some reasons I prefer “single digits” P/E
8. P/B < 1.2
Maybe anchoring effect, but in my opinion limtis downside risk
9. EV/EBITDA <= 6
in order to detect “special effects”
10. 10 Year mean reversion potential > 50%
Mean reversion potential based on P/E- net margin & EV/EBITDA, EBITDA margin
11. Positive 10 year FCF yield
no FCF generation normally indicates issues with capital allocation efficiency
12. Large acquisitions in the past or serial “acquirer” ?
might severly impact quality of reported numbers
13. Large share of intangible assets ?
again, quality of reported numbers
14. Significant pension liabilities, operating leases ?
Adjust for them accordingly to see if total leverage still acceptable
15. Low financial debt (net debt/equity <0.5)
again to minimize downside risk
16. Family owned / run
better chance for long term strategic management, best with founder still in charge and not too old
17. Treatment of shareholders in the past ?
Any indications of screwing shareholders in the past ?
18. Sharecount stable or decreasing ?
Does company dilute shareholders e.g. via options to management ?
19. Alignment of management and shareholders ?
Does management earn comparably much more than their shareholdings ? Outsized & unwarranted bonuses ?
20. Subjective impression of company management (pictures, speeches, comments)
Might sound stupid, but sometimes a picture says more than 500 pages …. Avoid jet set, sleazy looking guys
21. 10 Years of comparable history available ?
preferably companies with a long term track record as listed companies without major restructurings etc.
22. Industry in general decline
avoid value traps or make sure to understand whats going on
23. Positive/neutral short term (6m-1 year) price momentum ?
only catch the falling knife if you are very very sure
24. high quality investors as share holders ?
Preferable less known but good investors
25. Do I understand the business model ?
Why is the company succesful over the long run ?
26. Potential short/medium catalyst ?
i.e. sale of loss making division, change in shareholder structure etc.
27. 10 year sales growth above inflation
Don’t pay for growth, but if you get it cheap…also trade off with FCF
For each item I will give a score which is either:
+1 for a very positive answer
0 for a neutral position
-1 for a negative aspect
I will then add all the scores, the maximum is then logically the total number of checklist items. Anything which scores above 50% or more will be analysed deeper. In order to “callibrate” the list, I will also calculate scores for all my current holdings.
For a first test I calculated the “sores” for the following positions:
Installux: 18
Total Produce: 16
Hornbach: 16
Tonnelerie: 22
AS Creation: 20
Vetropack: 18
Buzzi: 10
As with any checklist or other “Model”, I don’t think one should follow this like a slave. Rather it should help to look more structured at a stock and also being able to review such a stock periodically on a structured basis.
I would be highly interested if any of the readers has comparable checklists and suggestions for the list.
John Hempton from Bronte is actually long Herbalife. Fascinating story.
Longtermvalue blog is unhappy with his 2012 performance. He argues that small investors must use their advantages even better.
Eddy Elfenbein has published his 2013 buy list. Great how he beats the S&P 500 year after year with a simple large cap portfolio.
Wexboy too, writes about his favourites for 2013.
Good long story about Dish Network. Being nice to employees seems not to be their main strategy. Nevertheless, the stock has risen 4-fold since 2009.
Economist story of a relatively unknown fraud 200 years ago, involving among others, bonds of a non-existent country called Poyais.
Detailed story on Nokia’s decline from Techcrunch
In my small series about utility companies, it might make sense to start with those companies which are at least geographically in my “circle of competence”, Germany.
There are currently 8 listed companies which qualifiy one way or the other as “utilities” which are:
| Ticker | Name | Mkt Cap | EV/EBITDA T12M | P/B | P/E | Dvd Yld |
|---|---|---|---|---|---|---|
| EOAN GR Equity | E.ON SE | 28,194 | 7.5 | 0.7 | 7.8 | |
| RWE GR Equity | RWE AG | 19,099 | 4.7 | 1.2 | 8.3 | 6.3 |
| EBK GR Equity | ENBW ENERGIE BADEN-WUERTTEMB | 8,340 | 5.6 | 1.4 | 31.0 | 2.7 |
| MVV1 GR Equity | MVV ENERGIE AG | 1,549 | 8.3 | 1.4 | 25.3 | 3.8 |
| FHW GR Equity | FERNHEIZWERK NEUKOELLN AG | 72 | 6.8 | 2.1 | 15.6 | 4.5 |
| MNV6 GR Equity | MAINOVA AG | 2,031 | 22.9 | 2.2 | 20.8 | 2.5 |
| WWG GR Equity | GELSENWASSER AG | 1,887 | 17.8 | 2.3 | 19.3 | 3.2 |
| LEC GR Equity | LECHWERKE AG | 2,198 | 20.0 | 2.7 | 22.6 | 3.2 |
Obviously, the large companies look the cheapest. Most of the smaller companies are in fact subsidiaries of the large players or owned by the Government such as:
– Lechwerke is owned ~90% by RWE
– Mainova is part of EON (91.3%)
– Gelsenwasser is owned by the government (92%)
– MVV is majority owned by the city of Mannheim (50.1%)
– EnbW is majority owned by the Government (85-90%)
– Fernheizwerk Neukölln is owned by Sweidish Vattenfall (80.1%)
RWE is de facto controlled by the regional government as well, only E.On to my knowledge does not have a controlling shareholder or significant Government influence.
A
s one could read in the press, the regulatory environment in Germany is supposed to be quite ugly, among others, the major issues are:
– unpredictable politics (close down of Nuclear power plants following Fukushima), the utilities are actually trying to sue the Governemnt for this
– heavily subsidized renewable energy (costs are added to the electricity bill for retail customers)
– relative low allowed yields on infrastructure which led the major players to shed electricity grids and gas pipelines
– heavy competition for instance for electricity. I just checked, where I am living (Munich), I got ~44 different offers for electricity
Going back to the “Buffet on utilities” approach, especially suing the Government (i.e. regulator) is maybe not a ver good long-term strategy if you then want to negotiate your next investment.
Another interesting aspect in my opinion is the fact, that especially the subsidiaries with purely local (regulated) focus show quite satisfying longterm ROEs.
| 10Y ROE | 5Y ROE | Debt/Equity | |
|---|---|---|---|
| FERNHEIZWERK NEUKOELLN AG | 18.6% | 19.6% | 0.0% |
| LECHWERKE AG | 24.5% | 13.9% | 0.2% |
| GELSENWASSER AG | 17.7% | 12.5% | 2.1% |
| MAINOVA AG | 17.1% | 9.1% | 70.3% |
| ENBW ENERGIE BADEN-WUERTTEMB | 21.0% | 12.8% | 94.1% |
| MVV ENERGIE AG | 10.3% | 11.3% | 107.6% |
| RWE AG | 17.4% | 15.4% | 122.4% |
| E.ON AG | 10.2% | 1.8% | 79.2% |
I find especially Lechwerke, Fernheizwerk and Gelsenwasser fascinating. Without any leverage they manage to produce solid double-digit ROE’s over long periods of time. So looking at this one might think that both, for RWE and EON, the German regulator is maybe not the real reason for their current problems.
Rather bad management and failed international expansion are the drivers between the rather bad performance in the last few years. Eon for instance lost lot of money with gas contracts outside Germany.
This is also the major issue I have with E.on. For some reason, they believe that they must grow outside Germany, just recently they swapped German Hydro plants with Austrian Verbund against a 50% stake in a Turkish utility group. Earlier in 2012 they teamed up with Brazil’s Eike Batista to invest in Brazil. Some people might like this exposure to “growth markets”, but personally I think this is a quite risky strategy.
Again, if we look at the comparable performance between E.on and its listed German subsidiary Mainova, we can see that at least this German business performs quite well and consistent despite E.on’s claims of bad German regulation:
Some additional thoughts about E.on based on the 2011 annual report:
– Nuclear is not coming back, that was more than 1 bn of EBIT which is missing going forward
– 60% of sales are actually energy trading revenues. The results of this “sector” look quite volatile
– they show huge swings in the net results of financial derivatives. In 2010 for instance, E.on showed a net gain of 2.5 bn against a 2011 loss of -1 bn .
– E.on has around 17 bn liabilities for nuclear waste etc. This liability is hard to analyse and could be grossly over-/understated. In the notes they state that the discount rate they use is 5.2%. I think this is a rather high rate. Combined with the long duration of those liabilities, there could lurk a potential multi billion hole there as well as in the 14 bn pension liabilities
– another “whopper” are the 325 bn EUR (yes that’s three hundred twenty five billion) of outstanding fossil fuel purchase commitments. Disclosure is rather limited here but I guess this is one of the big problem areas where they have locked in Russian NatGas purchases at too high rates
–
On the plus side we could add:
+ maybe earnings were understated to put pressure on regulators and trade unions
+ positive effect from future reduction in interest rates
All in all, EON in the current form looks like a big black box to me. mostly due to the large trading activities which are not transparent at all. I would be not able to value the company. I also don’t think it is particularly well-managed. As there is no dominant shareholder, the major “upside catalyst” could come from an activist investor. In contrast, I think current management will most likely waste the cash flow in stupid “growth investments”.
Another issue, and that goes for most of the German utilities is the fact, that the combination of Nuclear exit and strongly subsidised local renewal energy production might have altered the business model going forward. So betting on a “reversion to the mean” might not necessarily work here, at least not in the short run.
Last but not least, I don’t see how I could have any “edge” in valueing E.on. It is a liquid large cap stock, with plenty of analyst coverage. True, sentiment is quite bad which is maybe a chance at some point in time but as a private investor with a small portfolio, this is not the first place to look for “value”.
Yes I know, for many “value investors”, a P/B of 0.77 and dividend yield of 7.6% would already be enough and maybe yield starved investors will bid up E.On stocks for the dividend, but looking 3.5 years ahead, I don’t see a real “Margin of safety” at current prices with the current management and strategy plus taking into account the fundamental issues mentioned above.
Performance
2012 was a very good year for the blog portfolio. Overall performance 2012 including dividends and interest) was 37,4% vs 26.6 % for the Benchmark (50% Eurostoxx, 30% DAX, 20% MDAX), resulting in a relative outperformance of 10.4% for the year 2012.
Further details can be found in the following table:
| Bench | Portfolio | Perf BM | Perf. Portf. | Portf-BM | |
|---|---|---|---|---|---|
| 2010 | 6,394 | 100 | |||
| 2011 | 5,510 | 95.95 | -13.8% | -4.1% | 9.8% |
| Jan 12 | 5,972 | 99.27 | 8.4% | 3.5% | -4.9% |
| Feb 12 | 6,275 | 105.90 | 5.1% | 6.7% | 1.6% |
| Mrz 12 | 6,330 | 107.22 | 0.9% | 1.2% | 0.4% |
| Apr 12 | 6,168 | 108.02 | 0.8% | -2.6% | -3.3% |
| Mai 12 | 5,750 | 108.90 | -6.8% | 0.8% | 7.5% |
| Jun 12 | 5,969 | 110.17 | 3.8% | 1.2% | -2.6% |
| Jul 12 | 6,229 | 112.15 | 4.4% | 1.8% | -2.6% |
| Aug 12 | 6,428 | 119.48 | 3.2% | 6.5% | 3.3% |
| Sep 12 | 6,510 | 123.48 | 1.3% | 3.3% | 2.1% |
| Okt 12 | 6,672 | 125.32 | 2.5% | 1.5% | -1.0% |
| Nov 12 | 6,804 | 127.04 | 2.0% | 1.4% | -0.6% |
| Dez 12 | 6,973 | 131.81 | 2.5% | 3.8% | 1.3% |
| YTD 12 | 6,973 | 131.81 | 26.6% | 37.4% | 10.8% |
| Since inception | 6,973 | 131.81 | 9.1% | 31.8% | 22.7% |
The December 2012 outperformance is mainly a result of some significant year-end effects in some of the stocks like Total Produce, SIAS and Buzzi to name a few.
Also many of the stocks are rather “boring” low beta stocks. Therefore the 2012 outperformance should be viewed more as lucky timing of special situations than anything else. In a normal “bull year” like 2012 the portfolio should significantly underperform. In 2012 however, some of the special situations (esp. AIRE KgAA and Draegerwerke) catalysed unexpectedly early and let to this outperformance. From an overall strategy point of view, i would assume that my portfolio outperforms in bad years and underperforms in bull years.
To be honest, I don’t think that the current portfolio has an equal upside potential like in the beginning of last year, mostly due to the lack of really interesting special situation investments. For instance, the upside of athe Draeger Genußschein was much higher when it trades at ~2.5 times the pref shares than the current 4.5 times. On the other hand, I think the portfolio is well protected to the downside which should be the major concern of any (real) value investor.
Portfolio:
The only change in the portfolio in December was the purchase of some Sol Spa shares in the last few days, taking advantage of the significantly dropping share price.
| Name | Weight | Perf. Incl. Div |
|---|---|---|
| Hornbach Baumarkt | 4.5% | 6.9% |
| AS Creation Tapeten | 4.1% | 22.2% |
| BUZZI UNICEM SPA-RSP | 5.5% | 16.0% |
| WMF VZ | 3.4% | 42.6% |
| Tonnellerie Frere Paris | 4.9% | 31.5% |
| Vetropack | 4.5% | -2.3% |
| Total Produce | 6.2% | 53.3% |
| SIAS | 6.3% | 52.6% |
| Installux | 2.9% | -1.6% |
| Poujoulat | 0.9% | -2.8% |
| Dart Group | 3.8% | 83.7% |
| Cranswick | 5.0% | 2.7% |
| April SA | 3.5% | 33.0% |
| Bouygues | 3.1% | 15.2% |
| KAS Bank NV | 4.7% | 9.6% |
| Gronlandsbanken | 1.2% | 19.5% |
| SOL Spa | 1.7% | -0.7% |
| Drägerwerk Genüsse D | 9.2% | 96.5% |
| IVG Wandler | 4.9% | 11.6% |
| DEPFA LT2 2015 | 3.0% | 52.6% |
| HT1 Funding | 4.7% | 38.4% |
| EMAK SPA | 4.4% | 17.6% |
| Rhoen Klinikum | 2.4% | 2.4% |
| Short: Focus Media Group | -1.0% | -3.7% |
| Short: Prada | -1.2% | -17.3% |
| Short Lyxor Cac40 | -1.3% | -5.7% |
| Short Ishares FTSE MIB | -2.2% | -7.5% |
| Terminverkauf CHF EUR | 0.2% | 5.0% |
| Tagesgeldkonto 2% | 10.7% | |
| Value | 63.4% | |
| Opportunity | 28.6% | |
| Short+ Hedges | -5.5% | |
| Cash | 10.7% | |
| 97.2% |
The cash quota of ~10% is within my usual target range.
Outlook and comments:
If I would be in the “tactical” Asset allocation business, I would expect a rather strong start into the new year.(Edit: Is started writing this 2 days ago…) So many investors have watched the stock market from the outside and momentum looks quite strong. It looks like the fear of missing out another strong year is overcoming the fear of Euro crisis, fiscal cliff etc. or to quote Howard Marks: “when greed is stronger than fear”.
On the other hand, as a bottom up value investor one should be more cautious than ever. When greed is trumping fear, naturally for a value investor times get harder as under valuations are fewer and harder to find. The temptation rises to invest in “weak” stocks or turnarounds without much downside protection.
This goes together with the behavioural bias of “overconfidence” which usually is getting stronger after good years.
So the main focus for value investors will be to “stay the course” and not get lured into more risky and only superficially “cheap” stocks despite another period of potential underperformance against major stock indices.
The “harvest” will come when everyone is “on board” in the stock market and the next (inevitable) correction or contraction will come.
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
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
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.
