Category Archives: Quick Check

All German shares Part 12 (Nr. 201-225)

The next 25 randomly selected company in my “Grand Tour Germany” project with 6 of them going onto my watch list. Enjoy !!

201. TTL Beteiligungs- und Grundbesitz AG

A 67 mn EUR market cap company that started as tech company in the dot.com boom, went bust and then reemerged as real estate company a few years ago. The company invests into real estate and real estate companies. As mentioned several times, not an area that I am much interested in. “Pass”.

202. FinLab AG

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Travel Series 8: GDS (Sabre, Amadeus, Travelport) – Ultimate travel platforms or Dinosaurs waiting for extinction ?

Time to do another “travel series” post after the last Tripadvisor post a few months ago.

GDS – The business

The so-called “GDS” (short form of Global Distribution System) is one of the oldest “platform business” I know about.

Basically (and as far as I understand it), it is a real-time repository of available airplane seats, hotel rooms and rental cars from different suppliers (airlines, Hotels etc.). This repository can then be accessed by travel agents, OTAs etc. in order to book these offers for their ultimate clients. The GDS charge money both for access to the system and transactions.  The added value comes clearly from the fact that they act as a single interface to many different back-end systems on the supplier side.

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Gaztransport (GTT), Cheniere (LNG), Swatch

Gaztransport – Dodged the bullet..

Well, that was quick. 2 weeks after I reviewed Gaztransport, they have dislosed the following:

2016-01-29

Paris, 29 January 2016 – GTT (Gaztransport & Technigaz) announces that it received today a notification from the Korea Fair Trade Commission informing the company that an inquiry has been opened into its commercial practices with regard to its Korean shipyard clients.

The result: The stock price dropped  ~20% in two days:

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Quick update Bilfinger

I looked at Bilfinger for the first time in August 2014, after the price dropped almost 50% from its peak some months before. I resisted again in November 2014.

Again as a reminder my comment from the first post:

– some of the many acquisitions could lead to further write downs, especially if a new CEO comes in and goes for the “kitchen sink” approach
– especially the energy business has some structural problems
– fundamentally the company is cheap but not super cheap
– often, when the bad news start to hit, the really bad news only comes out later like for instance Royal Imtech, which was in a very similar business. I don’t think that we will see actual fraud issues at Bilfinger, but who knows ?

So now the new CEO came in on June 1st. And surprise surprise, the 6th profit warning within a year if I have counted correctly.
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Quick check: John Deere (DE) – Great “cannibal” or cyclical trap ?

Looking at Berkshire’s portfolio is clealry a “must” for any value investor. Whenever they disclose a new stake it makes clearly a lot of sense to look at least briefly at what they are buying. Berkshire disclosed the John Deere position in late February this year. I assume this is a “Ted & Todd” stock. Looking at the track record of Berkshire’s public holdings, this is actually a good sign as Ted&Todd have beaten the “master” now several years in a row.

Looking quickly at Deere, it is not difficult to see some of the attractions:

+ relatively cheap (trailing P/E of 12,6, Stated EV/EBITDA of 5,5, EV EBIT 7)
+ organic growth, low Goodwill, good profitability in the past
+ good strategy /incentives in place
+ solid business model, significance of dealer network (quick repairs during harvest season…)
+ “Cannibal”, is massively buying back stocks

Especially the massive share buy backs are clearly a common theme for “Ted&Todd stocks”. Starting in 2014, Deer has reduced the sharecount constantly from around 495 mn shares to now ~344 mn shares.

However we can also see quickly a few “not so nice” things at Deere:

– pension /health liabilities (health – how to value ? 6bn uncovered. Very critical, healthcare sunk GM, not pension (EV multiples need to be adjusted for this)
– they do not cancel shares, held as “treasury”, why ?
– Financing business –> receivables & ROA most likely not “true”..
– lower sales but higher financing receivables ? Channel stuffing ?
– comprehensive income to net income volatility
– cyclical business. current profit margins still above historical average

Financing business

One of the most interesting aspects of John Deere is clearly the financing business. As other companies they offer financing, here mostly to dealers and not to the ultimate clients. A financing business is nothing else than an “in-house bank”, sharing much more characteristics with a financial than a corporate business, for instance requirement of continuous capital market access, default risk etc.

What I found especially interesting is the following: looking at Bloomberg, they already strip out automatically all the debt from the financing business when they show EV multiples. This could be OK if the debt is fully non-recourse however I am not so sure with Deere. Although they not explicitly guarantee the debt, there seems to be some “net worth maintenance” agreement in place which acts as a defacto guarantee for the debt.

An additional important point is the following: Deere shows very good profitability on capital in its “core” business. However, this is partly due to the fact that they show almost no receivables in the core segment. the receivables are indirectly shown in the financing business. To have the “true” ROIC or ROCE, one would need to add back several months of receivables to the core segment in my opinion.

Cyclical aspect: Corn prices

This is a 35 year chart of annual corn prices:

corn annual

We can clearly see that corn prices went up dramatically in around 2006 but are dropping since 2013 back to their historical levels. Demand for farm equipment is pretty easy to explain: If you make a lot of money on your harvest, you have money to spent for a new tractor (with a small time lag).

This is the 17 year history of Deere’s net margins:

Net margin
31.12.1998 7,52%
31.12.1999 2,08%
29.12.2000 3,76%
31.12.2001 -0,49%
31.12.2002 2,32%
31.12.2003 4,17%
31.12.2004 7,04%
30.12.2005 6,89%
29.12.2006 7,82%
31.12.2007 7,68%
31.12.2008 7,32%
31.12.2009 3,78%
31.12.2010 7,17%
30.12.2011 8,75%
31.12.2012 8,48%
31.12.2013 9,36%
31.12.2014 8,77%
Avg total 6,02%
Avg 2006-2014 7,68%
Avg. 1998-2005 4,16%

So it is quite interesting to see, that in the 7 years before the “price explosion” of corn, margins were quite volatile and around 4,2% on average. In the last 9 years however, the average jumped to 7,7% with 2014 being still above that “high price period” average.

Clearly, Deere doesn’t only sell to corn farmers, but many other agricultural prices have faced similar declines.

To be honest: I do not know enough if Deer can maybe keep the high margins they are enjoying currently, but to me at least the risk of margin mean reversion is pretty high for such a cyclical business.
Even if we assume mean reversion only to the overall average of ~6%, this would mean around 6 USD profit per share which seems to be currently also the analyst consensus.

Summary:

For me, despite a lot of positive aspects, John Deere is not an attractive investment at the moment. Despite being well run, the business is cyclical and has profited from high crop prices in the past. The balance sheet is not as clean as I like it and the valuation is not that cheap if we factor in pensions and the financing arm. Clearly the stock looks relatively cheap to other US stocks but the risks are significant. Maybe there is more if one diggs deeper (network moats via dealers etc.) but for the time being I will look at other stuff. At an estimated 2015 P/E of 16-17, there are many opportunities which look relatively speaking more attractive and where I can maybe gain a better “informational advantage” than for such a widely researched stock.

Edit: By the way, if someone has a view on the moat / brand value of John Deere I would be highly interested……

Updates: Admiral CEO, Lloyds Banking, Cranswick + Editorial (Comments)

Editorial stuff:

While I was away (without access to my account) some people complained that their comments were not shown while other comments went through. The reason is the WordPress commenting system. If you comment for the first time, I need to manually approve this first comment. Once you are approved, further comments appear automatically if you login and comment the same way than you had done for the first time. So for anyone who commented for the fist time in the last 2 weeks, the comments were still in the “to be approved queue”.
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Short cuts: Admiral, KAS Bank, NN Group

Some quick updates on preliminary numbers form 3 of my financial stocks:

Admiral

Admiral released “preliminary annual” numbers yesterday. EPS declined slightly which was not a big surprise. My take aways at a first glance:

Negative:
– UK car still tough, UK comparison some issues due to competition, however cycle might turn in 2015
– slowing growth in Italy

Positive:
+ Italy at break even, break even in Spain expected for 2015
+ US growing strongly
+ Intenational comparison sites profitable

The CEO letter is again a must-read for anyone who is interested in Admiral and/or insurance. These guys are really different.

KAS Bank

Kas Bank came out already a few days ago with a press release on preliminary 2014 numbers. EPS almost doubled to 1,65 EUR due to the already mentioned one time effect. “Normal” earnings would have been around 0,74 EUR per share.

On the negative side, KAS Bank’s equity has been siginficantly reduced by an increase in the pension liability due to lower discount rates. Additionally they announced that they will expense 5 mn or so p.a. of the one-time gain as “investments”. Top line income acually fell but they were able to cut costs quicker. Overall, if low or negative rates will remain for a lnger time, the upside potential of KAS Bank now seems to be limited.

NN Group

Finally, NN Group came out with their 2014 results already 4 weeks ago. As with any life insurance company, they are quite difficult to interpret. What I found quite intereting is the fact that they said that their Solvency II ratio under the Standard model is 200%. Normally, most internal models show much higher solvency ratios than the standard model. In my opinion. NN Group remains the best (and only !!!) European Life insurance company to invest in despite the overall extremely difficult environment.

In any case, I will need to analyse all cases in more detail once the annual reports come out, especially with regard to KAS Bank and the pension issue.

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