Stahl has trailed the markets in the last five years, returning 4.4% cumulatively compared to 12.2% for the S&P 500. His long-term record is better, with a 10-year cumulative return of 81.5% compared to the S&P 500’s 16.4%.
Though his fund was down 11% for 2011, Stahl explained in his year-end letter that the companies in his portfolio are unpopular as he believes the market is in a bubble phase. The loss had more to do with the share price of the companies in his portfolio than simply having low intrinsic value or being purchased at an insufficient discount.
“As a group, these companies are quite profitable, maintain liquid balance sheets and are managed by owner-operators. These are highly successful individuals who are typically their companies’ largest shareholders and their equity typically represents a large or dominant portion of their personal wealth, such that they have the greatest self-interest in the appreciation of those shares,” he writes.
In the fourth quarter, he bought 32 new stocks. The largest new buys are: Air Lease (AL), Colfax (CFX) and Republic Bancorp Inc. (RBCAA).
Air Lease (AL)
Air Lease Corporation is an aircraft leasing company principally engaged in purchasing commercial aircraft and leasing to airlines around the world. Air Lease has a market cap of $2.49 billion; its shares were traded at around $25.22.
Air Lease Corporation went public in April 2011 and traded as high as $29.94 per share, but soon fell to as low as $17.24 per share in the fourth quarter. Stahl was able to buy 2,242,516 shares at an average price of $22 in the fourth quarter.
Stahl gave a lengthy analysis of Air Lease in his fourth quarter letter:
Air Lease is the second coming of Steven Udvar-Hazy. In 1973, Mr. Udvar-Hazy co-founded what became International Lease Finance Corp. (“ILFC”), and in doing so established a new industry: leasing commercial aircraft to airline companies. He was successful both in concept and execution. ILFC, which is the world’s largest aircraft lessor, was sold to American International Group (“AIG”) in 1990 for $1.3 billion. Mr. Udvar-Hazy remained CEO of ILFC until 2009, and retired from AIG in February 2010. By April 2011, he had engineered the IPO of a new aircraft lessor, Air Lease, bringing with him ILFC’s senior officers, who had worked for him there since 2002.
The basis for this new venture appears to be the reluctance of AIG to invest in the business. The two largest aircraft lessors are owned by diversified financial companies, the 2nd being GE Capital, which, like other major finance companies, is shrinking its balance sheets. Yet, this is occurring at what seems to be an opportune moment to allocate additional capital to the business:
− On a secular basis, airlines continue to increase their use of leasing. The proportion of aircraft fleets leased was about 0% in 1973, about 20% 25 years later in 1998, and 35% 12 years later in 2010. Leasing permits airlines to deploy their insufficient capital elsewhere, to more readily expand and diversify their fleets, and is a particularly helpful mechanism for new, rapidly expanding low-cost airlines such as abound in emerging economies.
− The airline industry is expanding. Historically, passenger traffic has increased on a 1:1 basis with world GDP growth, but most of that growth has been coming from emerging economies. Asia/Pacific traffic, for instance, which was 17% of world traffic in 1990, was 29% in 2010. Therefore, market size expansion in the next decade should be greater than in the decade prior.
− As mentioned, some of the largest aircraft lessors, like ILFC, are policy constrained with regard to expanding their capital base.
− The cost of capital, which is to say interest rates, has never been as low.
Accordingly, Mr. Udvar-Hazy is entering a market that is growing in overall size, for which penetration of this particular service is also expanding, in which major competitors are constrained, and for which expansion capital is cheap. Certainly, he knows how to build such a business.
The worldwide commercial aircraft inventory is a far more stable figure than one might infer, given the cyclicality in passenger traffic. Inventory has trended up even during downturns, as orders placed during a preceding cyclical upturn in traffic are ultimately delivered. Borrowing from ILFC’s financial statements for reference, revenues and earnings of that company increased sequentially between 2005 and 2009, even through the financial crisis and the decline in passenger traffic during 2008 and 2009. Neither, compared with most finance companies, do aircraft lessors use a great deal of leverage; ILFC’s debt to equity ratio in 2009 was 3.5x, and its interest coverage ratio was also 3.5x.
Leases are typically net leases, under terms that require the lessee to pay all operating expenses, including insurance and maintenance, and to return the aircraft in a condition that conforms to a detailed set of qualitative criteria.
With $2.2 billion of equity capital raised in the IPO and a prior private placement, and $1.8 billion of borrowings, Air Lease has so far acquired $3.4 billion of planes, which numbered 79 as of September 30th. It has contracted to purchase another 126 aircraft between year-end 2011 and 2015, plus another 95 thereafter. It is in an early expansion phase.
As to valuation, current earnings cannot be used; they are not yet at normalized levels, since the current balance sheet can support a greater amount of operating assets than are yet in place. However, our position was established at only about 5% to 10% above book value and about 20% below the stock’s closing price on the day of its IPO last April.
Colfax Corporation is a global supplier of fluid handling products, including pumps, fluid handling systems and specialty valves. Colfax has a market cap of $1.38 billion; its shares were traded at around $31.66 with a P/E ratio of 24.2 and P/S ratio of 2.6.
Colfax shares actually got pricier in the fourth quarter than they were during the rest of the year. In the last six months, the stock price has advanced 22%. Stahl bought 428,247 shares at an average price of $26 per share in the fourth quarter.
The company is now trading at record high P/B and P/S ratios, and a P/E ratio of 2012.
After three years of choppy revenue and earnings growth, Colfax’s shares went up in the fourth quarter due to its third-quarter results announced on October 27. The company reported a 71.6% year-over-year increase in earnings, a 28% increase in sales and a 53.2% increase in operating income.
The negative effects of the global economic downturn on the company’s business began to lessen in mid-2010, when both sales and orders began to improve. The company still expects challenges, though. For instance, one of the company’s clients is the U.S. Navy, which is slowing down its spending. It is expecting increased business from countries outside the U.S. as they expand their fleets.
Colfax derived approximately 66% of its sales from operations outside of the U.S. in the year ended Dec. 31, 2010, and it has manufacturing facilities in eight countries. It is aiming to grow its market share in emerging countries. However, the company is subject to fines for selling to countries that are subject to U.S. sanctions or embargoes. For instance, it made sales of $60,000 from 2003 to 2007 to Cuba, for which it is under review by the US State Department and could face fines or other sanctions. Most of its growth strategy is based on making acquisitions to expand into new markets, and it also plans to enhance its product offerings.
Republic Bancorp Inc. (RBCAA)
Republic Bancorp Inc. has 43 banking centers and is the holding company for Republic Bank & Trust Company and Republic Bank. Almost 50% of its loan portfolio is originating mortgage loans, and 30% is originating commercial real estate loans. The bank is 55% owned by Bernard, Scott and Steven Trager (the chairman, vice chairman and CEO).
Republic Bancorp Inc. has a market cap of $541.3 million; its shares were traded at around $25.83 with a P/E ratio of 5.8 and P/S ratio of 1.7. The dividend yield of Republic Bancorp Inc. stocks is 2.4%. Republic Bancorp Inc. had an annual average earnings growth of 11% over the past 10 years. GuruFocus rated Republic Bancorp Inc. the business predictability rank of 5-star.
Republic Bancorp shares took a distinct turn upward in the fourth quarter. Stahl bought 79,430 shares in the fourth quarter at an average price of $20.59, meaning he got it for under book value, which was $21.59. For much of the rest of the year they sold for under $20. Today the stock closed at $26 per share.
This is only financial company appearing on GuruFocus’ Buffett-Munger screener, and it is trading at relatively low valuations.
Many of its financial results are also quite positive. Its revenue has grown at an annual rate of 10% over the last 10 years, and cash flow has grown for each of the last four years. Return on equity is at a record 20.8%, and return on assets is at a record 2.8% for 2011. Earnings also grew each of the last four years.
Republic increased its dividend by 8% in the second quarter of 2011, representing the 12th consecutive year that it has increased its dividend.
A risk involved with the company is that its Republic Bank & Trust business derives 78% of its net income from TRS, which offers bank products that help get customers who electronically file their tax returns their payments. RB&T is only of the few financial institutions in the U.S. that provide the service. Under the program, the taxpayer may receive a Refund Anticipation Loan (RAL), which has been questioned by various governmental and consumer groups. In May 2011, RB&T received an order to cease and desist which could result in an order by the FDIC to terminate its RAL program. It has a hearing on Feb. 12, 2012 in Kentucky regarding the matter.
From the above holdings, it appears that Stahl is willing to take a small amount of risk into his portfolio. But if the negative events don’t come to pass, he could make substantial gains from the stocks. See the rest of Murray Stahl’s buys and sells here. Also check out the Undervalued Stocks, Top Growth Companies, and High Yield stocks of Murray Stahl.