This is an idea a reader mailed me some time ago and originated in the Value Investor Club. The idea is freely available following this link.
A quick summary of the stock & the case:
Market Cap: 573 mn EUR
P/E 12.4
Div. Yield 5.97%
P/B 1.8
EV/EBITDA 3.7
Very good idea from the excellent Wexboy blog:
Send your favourite idea to him and he will analyse the stock and post it on his blog. Only very few “restrictions” apply:
– Should be accessible to the average reader – basically any company (or fund) listed on a developed market exchange (doesn’t exclude emerging market stocks if they’re listed in London/NYC, for example)
– Favourite‘s a flexible idea – might be the latest stock you bought, the most interesting/unusual, the cheapest, the least risky, the stock with the most upside potential, etc…
– You should have some skin in the game – please disclose what % of your portfolio is in this stock
– Stocks that can be bought & held for a few years are definitely preferable – so no ‘quick trades‘, or (specifically) event-driven ideas
I will be doing my own review/valuation of all stocks submitted. Remember, like most readers, I’m interested in great investments, not speculations… And I use a value perspective. This is not to suggest that I’m averse to a good growth story – I love ‘em, I just don’t want to pay too much for them!
I hesitate to call any stock in my portfolio as best idea, nevertheless I will participate with German DIY chain Hornbach Baumarkt AG (ISISN DE0006084403). Although I have analysed the stock extensively in German language, I was always to lazy to wwrte a detailed analysis in English. Maybe Wexboy will do that for me 😉
Some highligts of Hornbach:
+ honest, long term oriented management (majority family owned) with clear strategy
+ conservative balance sheet, replacement value significantly above book value
+ still cheap (P/B 0.96, PE 10)
+ only limited impact of internet on business model
+ special short/medium term growth opportunity if largest competitor Praktiker defaults
+ 5% weighting in my model portfolio (max. allowed before price appriciation, similar in private portfolio)
Some reasons why stock is cheap:
– complicated legal structure (both, holding and operating company are listed)
– low liquidity, low or almost no analyst coverage
– very competitive business
– no short term catalysts
As Wexboy wants as many ideas as possible, I would highly recommend all readers to send their proposals to him.
wug3Another of my “core value” holdings is Westag und Getalit, a German based manufacturer of building materials and suplies. Mostly, they produce doors, panels and other wood products.
When we started the portfolio, we chose Westag because it was a “cheap” stock (single digit P/E) with almost no debt.
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WMF AG is one of the “core value” stocks, I have only mentioned briefly. WMF was founded over 150 years ago (wikipedia). The company is well known for generations in Germany for producing excellent kitchen supplements, especially cooking pots and pans, cuttlery and other “kitchen helpers”. Additionally they started at some time in the sixties to produce coffee makers, especially for the professional area like restaurant, company cafeterias etc.
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This is one of the books I always wanted to read but never managed to:
When Joel Greenblatt published this book in 1997,he had a tremendous run as manager of Gotham capital.
The book is aimed towards the “average” investor and makes the case for investing in special situations.
The best special situation he recommends are spinoffs, when a usually large company is spinning off a part of its business in the form of stocks which are simply distributed to the owner of the large company. As the owner of the large company don’t really want this stock, this creates an investing opportunity, especially if the management of the spin off is incentivised correctly.
He touches a couple of other special situations (merger securities, recaps, reorganisations, companies emerging from bankruptcy), which should be well known to people having read “Margin of safety” or other value oriented books.
The case studies in the book are good, it is interesting to see that Greenblatt invests even in highly indebted companies if they are “special”.
For a European investor in our time howver, the book contains only partly directly actionable advise, as spinoffs are avery rare breed today. However it is still a very good books which shows that “special situation” investing can lead to great investment results.
Summary: I think the book is a good start for anyone who wants to have an “easy to read” entry into the world of special situation investing, although the focus of the book might not be easily applicable in current times.
After yesterday’s starting post for Vetropack, I would like to add some additional thoughts.
Business model & possible moat:
Vetrpopack basiscally produces glass bottles for beer, juice and softdrink companies. With all those beverages, usually both, the brewing and botteling part is done locally. Beverages esp. in glass containers are ussually difficult and expensive to ship, so especially the big breweries and soft drink companies produce everything locally.
The same applies for the glass containers themnselves , which are relatively cheap but expensive and difficult to transport. So somehow similar to a cement plant, someone with a local glass bottle production has a local natural cost advantage (“moat”) to competitors from geographically remote regions. The major difference to cement plants being the lower cyclicality of the business.
Peer Companies
I found the following companies which could be considered “peers” i.e. companies manufacturing glass packaging:
Vidrala SpA (Spain, glass bottles, very similar to Vetropack)
Gerresheimer (Germany, glass and plasticv bottles, more focused on pharmaceutical containers)
Zignago Vetro SpA (Italy, glass bottles)
Based on “simple” valuation ratios, the results look interesting:
| Tkr & Exch | Mkt Cap | P/E | P/B | P/S | EV/EBITDA T12M | Net D/E LF |
|---|---|---|---|---|---|---|
| VET SW | 650.8 | 10.40 | 1.23 | 0.80 | 4.46 | 0.00 |
| VID SM | 418.1 | 10.49 | 1.84 | 1.08 | 6.33 | 76.20 |
| GXI GR | 913.4 | 17.59 | 1.81 | 0.86 | 6.38 | 69.45 |
| ZV IM | 373.6 | 11.03 | 3.51 | 1.41 | 6.40 | 69.86 |
Although the P/Es are quite similar, all the other peers carry a significant amount of debt. This results in a singificantly lower EV/EBITDA multiple for Vetropack compared to its much more highly levered peers, which interestingly all trade around 6.4x EV/EBITDA.
EV/EBITDA is often used as a “proxy” for a private company valueation (Gabelli). Under this metric, Vertropack would be significantly undervalued compared to its Peers.
For me its not clear why the most solid company of the peer group should have the lowest relative valueation, in my opnion this should actually imply a premium.
Portfolio Management
As mentioned in the first post, Vetropack has currently a weight of 2.9%. As the cash balance in the portfolio is currently at the low end of the target (10%), I will either need to decrease another position or fund the increase through a short position.
My initial idea to create a pair trade between Vetropack and Gerresheimer (short) does not work to well. Correlations between the peer companies are extremely low (Vetropack against Gerresheimer for instance 0,24 for the last 12 months).
So before increasing the Vetropack position I will have to reduce other positions first.
One stock which has been popping in and out of the Magic Sixes Screen several times is the Finish Paper Company UPM Kymmene.
Current “simple” value metrics are (stock price 8,30 EUR):
P/B 0.60
P/E Trailing 2010 5.4
Dividend Yield: 6,65%
Market Cap is 4.4 bn, there are no majority shareholders. The stock is fairly liquid.
Some standard quick qualitiy checks:
Tangible Equity: Tangible book value per share is 10,86 EUR (YE 2010), which represents ~80% of book value, so no issues here
Debt: Net debt per share is relatively high at ~7.1 EUR per share, however with ~2.5 EUR trailing 12M EBITDA per share, total EV/EBITDA at ~6.8 looks OK.
Free cashflow: Free cashflow is positive as far as I can look back (1999).
If I find a stock interesting, I try to do a quick check of historical earnings quality and cashflow usage based on Bloomberg numbers:
| Year | Earnings | Dividends | Free Cashflow | Debt per share |
|---|---|---|---|---|
| 2001 | 1.93 | 0.75 | 1.62 | 10.52 |
| 2002 | 1.06 | 0.75 | 1.67 | 10.53 |
| 2003 | 0.61 | 0.75 | 1.26 | 10.21 |
| 2004 | 1.76 | 0.75 | 0.70 | 9.58 |
| 2005 | 0.50 | 0.75 | 0.31 | 9.62 |
| 2006 | 0.65 | 0.75 | 1.11 | 7.92 |
| 2007 | 0.16 | 0.75 | 0.37 | 7.96 |
| 2008 | -0.35 | 0.40 | 0.14 | 9.12 |
| 2009 | 0.33 | 0.45 | 1.97 | 7.74 |
| 2010 | 1.08 | 0.55 | 1.43 | 7.14 |
| Total | 7.73 | 6.65 | 10.57 | |
| In % of Earnings | 86.1% | 136.8% |
In this case, the result looks quite good. UPM seems to generate much higher free cashflows than earnings (137%). Also 86% of Earnings have been distributed to shareholders via dividends and the company has significantly reduced debt until 2010.
First summary after this “Quick check”: From a “semi mechanical” point of view, the stock might be a interesting Contrarian investment, so it makes sense to more deeply research the company.
One of the companies which recently appeared in the Magic Sixes Screening (P/B < 0.6, P/E 6%) is another Italian Company named Iren Spa.
Based on “simple” criteria, the Share seems to be really cheap:
P/B 0.58
P/E 4.59
Div. Yield 9,15% (!!)
The description of the business in Bloomberg reads as follows:
IREN S.p.A. generates, distributes, and sells electricity and district heating. The Company manages natural gas distribution networks, markets and sells natural gas and electricity, and manages water services.
Based on available data, the bulk of the business seems to be energy distribution, geographically 100% of the business is done in Italy.
Market Cap is around ~ 1bn EUR– There doesn’t seem to be a single majority shareholder.
The company was IPOed almost exactly 11 years ago at 2,70 EUR. Even taking into account dividends, the performance from the initial IPO was around -6% p.a., which is better than the Italian BM index (9% p.a.).
However, the first thing I usually check is the debt load and free cashflows.
Currently, they have around 2.14 EUR per share net debt per share, which results in an enterprise value of ~3,50 EUR per Share. Based on trailing 12M EBITDA of 0,43 EUR, this results in 12M trailing EV/EBITDA of 8,8x, which for a Italian utility seems to be quite rich.
Based on Bloomberg, free cashflow has been negative for every single year since IPO.
Last but not least, only 0,42 EUR of the 1.42 EUR book value is “tangible”. One would have to check, if certain infrastructure licenses are included in the intangible part.
However at this point I can already stop summarize:
For me, the combination of a large debt pile, negative free cashflows and a significant portion of non-tangible book value makes Iren SpA more or less uninvestible. Based on the pure financials without any further analysis there doens’t seem to exist any Margin of Safety despite qualifying as “Magic Sixes” stock. For the time being, Iren will not be analyzed further as there seem to be more attractive “targets”.
One of my best investment ideas at the moment are the Dragerwerk “Genußscheine Serie D” (ISIN DE0005550719)
Draegerwerk produces medical devices, safety and aerospace equipment. Draegerwerk has managed to achieve a remarkable turnaround which resulted in a very strong performance of the shares
They have a fairly complicted capital structure, with normal voting shares, preferred shares and participation rights.
The most liquid securities are the Non-Voting Preferred Shares which trade at the following multiples:
Price/Book 2,2
Price/Sales 0.61
Trailing PE 15.3
EV/EBITDA 6.1
Dividend Yield 1.48%
They are up YTD 34.2%, making them the 4th best perfomer in the German Top 100 HDAX.
The numbers above don’t look too compelling, so what’s the deal here ?
So now let’s look at the “Genußscheine”: Draegerwerke has issued 3 different series, the most liquid beeing the “D series” (ISIN DE0005550719).
In contrast to “regular” German style particpation rights which are more like a subordinated bond, they have some special features:
– they don’t have a fixed coupon or nominal value
– instead they simply pay 10 times the dividend of the Preferred Shares
– they cannot be called or cancelled. In the initial terms the only way to redeem them by the issuer was to exchange them into 10 Preferred shares
– in the case of a capital increase holders will be “compensated” for dilution in the form of cash (no new participation rights)
The last point raised some issue when Draegerwerk issed new shares in 2010 in order to pay for an acquisition (50% of an existing Joint venture with Siemens). in my opinion they paid out the fair amount, however with a 9 month delay.
To sum up the situation: The so called “Genußschein” is very similar to a preferred share, the main difference being that it pays 10 times the dividend.
Now the “Genußschein” currently trades at around 160 EUR which is roughly 2.0 times the price of a preferred share.
Or put it differently, through the Genußschein one could gain exposure to Draeger at the following multiples:
Price/Book 0.44
Price/Sales 0.12
Trailing PE 3.1
EV/EBITDA 1.2
Dividend Yield 7.5%
Now this looks like a value investment to me. There are two ways to play this:
1. Outright Ivestment
2. Relative Value long / short
For the Blog Portfolio, I have combined the long position in the “Genuscheine” with a short Position in the Preferred Shares in order to establish a “market neutral” position while harvesting the positive carry of 8 preffered dividends (short 2 shares /dividends, long 10 dividends).
As one could see, the are not perfectly correlated, so a long short position requires some “buffer” for diverging prices:
Over the medium term, the Genußscheine should perform better than the Preferred shares, especially if Drager further raises the dividend. If I were the CFO or Treasurer of Draeger I would be desperate to buy back the Genußscheine at the current level, so we could see some tender offer going forward.
Summary: Although the Dragerwerk Genußscheine are not called shares, they offer the same Exposure to Draegerwerk than the widely held Preferred Shares at a 80% discount. A long Genußschein / short Preferred share position offers a interesing risk / return profile with a nice carry.
As there seems to be more traffic coming from English speaking Websites, I will try to post more in English language.
I will start with a short series on my best Investment ideas next weeks.
Looking forward to receive input and comments on this either in English or German. No mandarin please.
In order to easily access all English language post, one could use the category drop down (“English”) or you could use this Link.
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