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Prem Watsa Thinks C and RIMM Are Undervalued

January 09, 2012 | About:
roydamico

roydamico

1 followers
Prem Watsa is very savvy. He predicted the crash of 1987, the Japanese collapse of 1990 and the last meltdown.

Born in 1950 in India, he received a degree in chemical engineering and moved to Canada. Then he received an MBA from the Richard Ivey School of Business. That is not all, Watsa also is a CFA charter-holder. He is the founder, chairman, and CEO of Fairfax Financial Holdings, based in Toronto, Ontario.

Watsa gained an appreciation of value investing after reading Benjamin Graham’s book. He also is a large admirer of Warren Buffett, modeling Fairfax after Warren Buffett’s Berkshire Hathaway.

His performance is spectacular and he ranks among the best investors in Canada and in the world. He has a remarkable capacity to identify assets that are undervalued. Prem Watsa is bearish on commodities, equities, as well as the U.S. and Chinese economies. He also is hedging his portfolio against deflation.

“For the past 25 years, the book value of Prem Watsa’s Fairfax Financials has compounded a cumulative 24,424%, versus 979.7% for the S&P500[/i],” says Jacob Wolinsky, who is the vice-president of business development for SumZero LLC, the world’s largest community of buy-side analysts. “His performance is spectacular and he ranks among the best investors in Canada and in the world.”

I analyzed some of his top picks. In some stocks I use Fast Graphs tool to check is current price is too far away from the normal P/E ratio line and the normal justified valuation feature that Fast graphs calculates.

LVLT:

Level 3's core business is wholesale communications services. The firm serves about 190 markets via its intercity network, which spans in North America and Europe.

It also owns metro networks in about 125 markets connecting to about 7,900 buildings.

The firm provides data transport, co-location, Internet access, and other telecom services. Level 3 also owns a small coal-mining operation.

LVLT has been bleeding cash throughout its entire history (see below), accumulated massive debt (over $8 billion today) and has not been able to grow the top line organically. Its big acquisition of Global Crossing brings hope that LVLT will have enough mass to change for positive.

In terms of financial performance, LVLT has not done well. However, management expects great synergies by combining these two companies.

RIMM:

Research In Motion designs and markets wireless handsets, software, and services. RIM's primary revenue driver is the sale of handsets to carriers worldwide that promote the company's BlackBerry line of devices. Unfortunately, research in Motion's relevance in the smartphone market is rapidly diminishing. A series of uninspiring device launches has hurt the firm's credibility.

In a smartphone market growing more than 50% annually, Blackberry is experiencing inexcusable year-over-year shipment declines. Management claims this is not representative of an inflection point for the business, but rather a temporary setback.

Until recently, international sales growth offset rapid declines in the U.S. market.

In terms of last quarter results, at $16.77, it has a market cap of $8.79B, PE of 3.06, Book value of $19 and $2.21/share in cash with no debt. The Street expects the company to earn $1.19 per share on $5.26 billion in revenue.

As we can see, RIMM price (black line) is below the normal P/E line (blue line) and RIMM earnings justified valuation (orange line). The market gives a high probability of very low future earnings in the coming years. Prem Watsa found this as a superb opportunity to buy RIMM at very cheap prices.

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MMI:

Motorola Mobility Holdings has two main businesses, mobile devices and home, which account for two thirds and one third of revenues, respectively. The mobile devices segment sells smartphones that use the Android operating system and lower-end voice-centric phones developed and manufactured by ODMs. The home segment sells customer premises equipment for cable TV, IPTV, and DSL service, and back-office equipment to encode and transport voice, data, and TV service.

Google's $40 per share offer for Motorola Mobility is generous and this is a great opportunity for Motorola shareholders to cash in their chips. The handset business has yet to achieve sustainable profitability, but the company would eventually expand operating margins into the high single digits.

PPP:

Primero Mining Corp. is a Canadian-based precious metals producer with established operations in Mexico.

Primero offers exposure to un-hedged, low cash cost gold production with a substantial resource base in a politically stable jurisdiction. The Company is ideally positioned to deliver aggressive growth plans and create exceptional shareholder value.

From a financial standpoint, the company maintains a strong balance sheet allowing flexibility. It has $65 million in cash and $70 million in annual cash flow with a prudent level of debt.

Primero is committed to its vision of sustainability and growth with leading industry health and safety practices, locally renowned community development programs, and being “clean industry” certified.

C:

Citigroup is a global financial services company doing business in more than 160 countries and jurisdictions. It serves commercial and consumer clients through its regional consumer banking segment and provides investment banking, treasury, and securities services through its institutional clients group.

Citigroup now offers investors something unusual for a U.S.-based bank: the possibility of loan growth. Thanks to its presence in developing economies, Citigroup is poised to continue adding high-margin loans to its balance sheet while many of its peers in the United States and Europe suffer from low interest rates and minimal loan demand in deleveraging developed economies.

Citigroup is now in good financial health, with a tangible common equity ratio of 7.5% and an allowance for loan losses sufficient to cover more than 5% of its loan book. The company is also now consistently profitable.

Citigroups's decision to promote Vikram Pandit internally appears to have worked out very well. While other banks fought with regulators and dealt with moderate to severe liability issues, Citi cooperated with its regulators and took swift action to refocus the bank's business model. Today the company is strongly positioned.

The stock appears fairly valued in FAST graphs valuation tool. As we can see in the chart, the stock is trading very close to the earnings justified valuation line (orange line) and its normalized P/E ratio line (blue line).

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Rating: 3.6/5 (13 votes)

Comments

tonyg34
Tonyg34 - 2 years ago
If you really think RIMM is undervalued just b/c it no longer trades at a 40 PE multiple, then by all means load up. If you look at the actual business that the stock represents you might notice that RIMM is a commodity handset manufacturer that has no competitive advantages and whose name brand has been dragged through the mud as it can't compete on price or features. Even if the company mounts a strong turnaround it won't be back at a 40 PE. You wrote that earnings are expected to come in at $1.19/share but you're chart says the shares are worth north of $140/share.

Again, I'm not saying that RIMM isn't cheap, or even that its a bad investment, but the chart is just nonsense. There is no way that a company with declining sales and declining revenues deserves to trade at those kinds of valuations. Broken growth stocks don't make very good value stocks (HLYS)

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