As some might remember, I kind of like the Magic Sixes Screen (P/E < 6, P/B 6%) initially mentioned by Peter Cundill.
Many of the “Magic Sixes” companies are declining and/or cyclical companies which do not score well on my Boss Screen which is looking for stable companies.
The exception at first sight seems to be French DIY chain Mr. Bricolage.
A couple of weekes ago I had looked at luxury stocks as potential short opportunities and Michael Kors as a potential short but decided against it for the time being.
Yesterday, Burberry, the UK luxury Group issued relatively weak numbers and the share price dropped by some -20%.
For those who don’t read the outstanding Bronte Capital blog regularly, I can ony recommend: put it on your priority reading list.
After his not so well timed Richemont short, he has now set his eyes on Chinese company Focus Media from China.
Focus Media is a (on paper) fantastically profitable company from China wich was already subject of a Mudddy Waters report.
John Hempton has now a real series of very detailed posts about the company:
Poujoulat:
Quite surprisingly, Poujoulat announced a stock split 1:4,, this is the release from Poujoulat:
En date du 21 juin 2012, l’Assemblée Générale de la société POUJOULAT a décidé la division par 4 de la valeur nominale de l’action POUJOULAT négociée sur le marché ALTERNEXT Paris. Cette mesure permettra de fluidifier les échanges et de rendre le titre POUJOULAT plus accessible (son cours étant actuellement supérieur à 130€) En pratique, l’opération de division par 4 sera réalisée sur les soldes EUROCLEAR du vendredi 7 septembre prochain et sera effective le lundi 10 septembre à l’ouverture du marché. Les détenteurs d’actions POUJOULAT se verront attribuer automatiquement 4 actions nouvelles pour une ancienne.
Les droits antérieurs rattachés aux actions ne seront pas modifiés, notamment le bénéficie du droit de vote double pour toute action gérée au nominatif pur depuis plus de 24 mois. Le nombre d’actions POUJOULAT en circulation sur ALTERNEXT Paris sera ainsi porté de 489 750 à 1 959 000.
Let’s wait and see if this somehow helps the stock or not.
This post was inspired by an interesting paper which explores how much of WBs success is attributable to leverage.
The authors calculate that Buffet applied (mostly through his insurance float and debt a leverage ratio of between 1.4:1 to 1.6:1 over the life of Berkshire.I would speculate that this might be even higher if one factors in his sales of S&P puts and CDS protection.
However, for the ordinary investor it is quite difficult to gain access to cheap insurance float and the AAA funding cost Warren Buffet enjoys.
So what are the alternatives for “normal” investors ?
Reader Ben forwarded me his great write up for Curanum, the German care and serviced appartment provider for senior citizens which I publish with his permission:
His conclusion was as follows, but I think one should read the whole piece although Ben is not recommending the stock at the moment::
Conclusion
As overcapacity is expected to be reduced in the upcoming years I expect occupancy rates to recover from their current lows. As this will give Curanum some time to breathe, the management will have to make additional investments in their facilities to be able to comply with regulatory requirements. From my perspective there is not much room for additional acquisitions for the following reasons.First, the company is highly leveraged. Second, the company just increased its number of outstanding shares by almost 20%. Hence, demand from equity holders should be satisfied at the moment and banks are currently reluctant to even refinance existing debt. Given the high cost pressure and limited pricing power a further decline in margins within the next years is highly likely from my perspective. The company is currently generating healthy cash flows, though capex seems to be too low, which will negatively affect cash flow generation in the future. Most of this is reflected in the current share price, so I do not think that Curanum is a prime short candidate.
To the contrary, given the current downside trend in the stock price, the sock seems to be ready for a rebound. A short term catalyst could be a successful refinancing of the maturing debt facility. However, from a long term investor perspective I do not think that the company does offer an attractive risk/return profile.
Performance:
August was the second best month for the portfolio so far with a performance of +6.5% against +3.2% for the Benchmark (30% Dax, 20% MDAX. 50% Eurostoxx). YTD that means an incredible 24.5% for the portfolio against 16.7% for the Benchmark.
The Story of the takleover fight for German hospital operator Rhoen Klinikum has been in the news quite often lately.
I try to summarize it in a few short sentences:
– Fresenius AG the big German healthcare group launched a bid at 22.50 EUR contingent on getting 90%
– in the meantime, some of the German competitors bought large stakes (Asklepios, Braun) of 5% to block the deal
– additionally some M&A arbitrage specialists (John Paulson) took stakes as well, hoping for a higher bid
– on the weekend, Fresenius then declared that they will not pursue the offer and the stock price drops almost 30%
Rhoen is now back or even below the level before the offer:
This shows that merger arbitrage is not an easy business. I have to confess that i was tempted to speculate on the Fresenies offer as well, but thanks to not having time to write a blog post, I didn’t jump into it as I would have done before I started the blog.
Fresenius is a big player and I would have thought that they might make at least one more attempt to gain 90%, which under German law would give them the right to squeeze out monrity shareholders.
However, now it is a different situation.
Rhoen is a well managed company and scores quite well in my Boss model. On top, we know that the private market value of the company is 22,50 EUR and one could theoretically buy it at a nice discount. Rhoen is one of the few German companies which do not have a majority shareholder although the fuender with his 13% holding still has a big influence but obviously not enough.
However, Rhoen is now clearly “in play”. I am considering really hard, if I should not open a half position for my “special situation” bucket.
Any opinions on that one ?
Sequoia Funds shareholder day Q&A transcript
Toby Carlisle (Greenbackd blog) lecture about how to beat the magic formula
Bronte has a couple of great posts about Chinese company Focus Media as a potential short. Despite his mistake with Richemont, I think Bronte is still an outstanding investment blog, if not the best.
Great post from Damodaran about Apple’s short product life cycles
Don’t miss Nate’s take at diversification at Oddball.
Some interesting blogs I discovered lately:
Ragnar is a pirate Great blog about off-radar investments including reantal housing experiences etc.
Also sprach analyst: Hong Kong based blog with a lot of (critical) infos about China
In the last two posts (part 1, part 2) about Reply, I mentioned that there was some questionable provisioning for overdue receivables and that free cash flow generation in general looks relatively weak.
So let’s look at a further example, if and how reliable Reply’s accounting is.
In 2009, Reply made an interesting deal, as stated in the 2009 annual report:
Acquisition of Motorola Research centre
In February 2009 Reply Group, through the subsidiary company Santer Reply S.p.A., finalized the acquisition of the Motorola research centre based in Turin.
The acquisition, accountable as a “net asset acquisition” was purchased by Reply for a symbolic amount of 1 Euro and comprised 339 employees, 20.6 million Euros in cash, 2.9 million Euros of assets and liabilities for 23.5 million Euros. Reply has committed to the operation on the basis of the research perspectives outlined at the time of acquisition and the agreements defined with the public administrations (Region and Ministry of Development).Such agreements foresee that the Piedmont Region finance through a free grant a maximum of 10 million Euros on the condition that the Research centre carries out projects within the research and development of Machine to Machine (“M2M”) and that proof can be provided. Furthermore, the Ministero dello Sviluppo Economico (S.M.E.) has made a commitment to grant the Research centre a loan for a maximum of 15 million Euros of which 10 million a free grant for research and development projects similar to those agreed with the Piedmont Region.
In the last months the Board of directors of Reply Group and Santer Reply S.p.A have outlined and defined organizational strategies of the course of business of the Centre. More specifically costs related to research projects have been quantified and the financial resources necessary for such research projects and means of disbursement have been defined by the Public Administrations.
So they “bought” a company for 1 EUR which had 20.6 mn in cash. In theory, we should see this as a positive investing cashflow in the CF statement. Lets look at the 2009 statement:
Strangely, the stated “payments for the acquisition of subsidiaries net of cash received” is negative !! We know that they only paid 1 EUR, received 20 mn and didn’t do other big acquisitions in 2009.
I do not know where they actually booked the acquired 20 mn EUR liquidity, but this is very very strange.
The second part of the puzzle are the Government grants out of this deal.
In their notes, they state the following:
Government grants
Government grants are recognized in the financial statements when there is reasonable assurance that the company concerned will comply with the conditions for receiving such grants and that the grants themselves will be received. Government grants are recognized as income over the periods necessary to match them with the related costs which they are intended to compensate.
So what in theory should happen is the following:
-when they receive the money, the book a liability against the money (P&L neutral)
– then over time they reduce the liability by booking this release as profit
Based on Note 29, Reply booked already such a provision of ~23 mn EUR at the end of 2009, from where they used half of it again. I am not sure why,but again, where is the corresponding asset ? I would assume somewhere in other receivables (as they may not have received the Government money in 2009).
If one of the readers really understands what is going on here, then please help me.
In 2010, the provisioning continues, it looks like the increase and use those provisions as they like to:
This might explain why the very unusual and unexplained line item “changes in other assets and liabilities” makes up 2/3 of Reply’s 2010 operating cashflow.
in 2011, the provision is still significant:
So what does that mean ?
In my opinion, there is poor visibility in the accounts and especially in the cash flow statements. We know now, that the Motorola transaction netted them around 40 mn EUR net cash, but didn’t show up in the investment cashflow. As it didn’t show up in financing cashflow neither, it has to be moved into operating cash.
As operating cash in total from 2009-2011 was only 55 mn EUR, basically a large amount of the operating cashflow in this period seems to be non-operating and coming from the acquired Motorola Research center.
At this point it is time to stop and summarize:
– at least to me, the accounting and cashflow treatment of the Motorola acquisition is not transparent
– together with the weak cash flow generation, large goodwill position and a large number of acquisitions this is A BIG RED FLAG
Maybe I am just not clever enough, but my philosophy to avoid companies with large intangibles and non-transparent accounting makes me stop here and not further investigate the company.
value and opportunity 