Last Friday, I asked you to be Mr. Market for the weekend and make me an offer to buy/sell a part interest in a small American business with international operations. Unlike Mr. Market, who doesn't care much about such matters, you had a short financial summary of the company at your disposal.
What I didn't take into account was that Mr Market doesn't work on weekends. So, in doing exactly what I asked, the closed Mr. Markets didn't submit any quotes whatsoever.
The idea was to offer a price where you would be ambivalent about buying and selling. That should be, what you think is the fair price of the business. In tune with the age-old rule for splitting pies, where one cuts while the other picks a piece, you got to pick the price and I to decide whether to buy or sell at that price. There was this one commenter that was willing to bite below $10/sh, but I am afraid I'll have to take that bite from under his nose, because this company is a hidden champion.
Started in 1952 in Alliance, Ohio, by a 42-year-old, successful agricultural equipment salesman, Howard Brembeck, at United Cooperatives, Chore-Time Equipment would revolutionize poultry and swine feeding. Brembeck improved, and invented, ways of delivering food and water to farm animals and of storing grain. In 1976, Chore-Time merged with Brembeck's grain storage company/brand Brock to form CTB — the company we are looking at today.
Thanks to Howard Brembeck's innovations CTB International (CTBC) became a market leader in the U.S., expanded sales to more than 100 countries and added manufacturing bases in Europe and Latin America. Today, the company is "one of the largest global providers of poultry production systems, hog production systems, egg production systems and grain storage bins." Its strength lies in offering total solutions to its clients and in its strong distribution network.
Between 1955 and 1992, CTB's sales grew from $100,000 to $100,000,000. That's 20% growth compounded annually. Inflation was running at 4% to 4.5% per year, on average. During that period the company benefited greatly from the increasing affluence, and numbers, of Americans and then, Asians, Latin Americans, Central and Eastern Europeans. As world population grew and people became richer, more people could afford more animal protein, and poultry and swine provide the best value for money. In farmers' efforts to improve efficiency in producing animal protein, CTB was their best friend, delivering end-to-end solutions worldwide.
Soon after Brembeck retired at the age of 85 in 1995, CTB was acquired by leveraged buyout company American Securities. Brembeck's daughter and her son (CEO 1994-1999), now with family name Chocola, retained a minority stake in the company. Under a new owner, the company made two big acquisitions in 1997 — a Dutch manufacturer of climate control systems and software for the poultry and livestock industries, and an American producer of grain bins. Later that year, the company went public on NASDAQ (ticker CTBC) by floating 5 million shares (around 40% of the company) at $14. The money was used to pay off some of the debt and make more acquisitions of adjacent businesses.
Timely and appropriate acquisitions were essential to CTB's strategy of broadening their products and services to meet more of the needs of farmers. In large part, the company's edge was providing complete solutions to clients. CTB aimed to be the go-to place for poultry and livestock farmers. Apart from comprehensively meeting their clients' needs, CTB had the extensive distribution network, which made it possible to deliver their machines wherever and whenever they were needed. There were only two competitors who came close to matching CTB's ubiquitous service: GSI Group, a private agricultural equipment manufacturer (Howard Buffett was a chairman and part-owner between 1996-2001, after the ADM scandal), and Gehl, more popular with its skid loaders (acquired in 2008 by Manitou of France).
What is CTB worth?
The period we are looking at — 1997-2001, the short stretch during which the company was public — was a tough time for CTB. The demand for its products was hit by the Asian crisis. Brazil was also affected and had to devalue its currency and get help from the IMF. CTB had a joint venture, Rota Brock, there, which had to be dissolved before it even went online. Its other operations in Latin America were not doing well either. Meanwhile in the U.S., the hog and egg markets suffered major downturns. As you have seen in the summary financials, 1998 saw a 34% decrease in net income. Sales were flat in 1999 and declining in 2000 and 2001. Yet, through restructuring, the company managed to push margins back to where they were before 1998. Reorganizations rarely work and CTB executed its perfectly.
Despite all these negative circumstances, CTB had no problems operating at a $25 million profit and netting $12 million, on average. More impressive is that it didn't deviate much from these averages year after year (and those were difficult years), except for the big drop in net income in 1998. I admire such consistency and would easily value the whole company at $200 million to $250 million. Less $40 million debt in 2001, $160 million to $210 million would be a fair value for the equity of this sweet little company.
Now, lacking the information on the sources of debt (making acquisitions and being acquired by a private equity firm) and the causes of the stale, even deteriorating, performance, I would have been more cautious. I would have wanted to know more about the company before I made up my mind. Even without any further information though, I doubt I would have considered a company with this record was worth anything less than 10 times average earnings. This would have been unjustifiably skeptical.
What was CTB selling for?
CTBC was a very thinly traded stock with a small float.
In its short life as a public company, CTB traded from a low of $70 million to a high of $225 million. Four out of its five public years, it could be purchased for as little as $70 million to 80 million. But no one did! Until...
On Aug. 19, 2002, CBT International (CTBC) was acquired by Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) for $180 million, including $40 million assumed debt.
Nowadays, as part of Berkshire, CTB continues to expand its product lines in related fields to better serve its customers. In May this year, it announced the acquisition of another Dutch company, Meyn, the world’s largest poultry processing machinery manufacturing company. CTB's CEO, Victor A. Mancinelli, said: “Meyn is a great match for CTB. The acquisition joins together leading companies in two distinct sectors of the poultry industry. The acquisition will provide CTB with the ability to offer global poultry companies total solutions from grow-out through the eventual processing cycle.”
Now, it is important to go and read the 10-K's and 14As. As Whopper has noted, quoting "Moonwalking with Einstein," in his post on deliberate practice, spending time trying to figure out an expert's thinking may count for more than years of doing the same thing over and over again (like staring at numbers out of context).
Now that you have valued the company free of the bias introduced by knowing the price, the name of the company, or that a successful investor bought it up, you need to go back read the annual reports. I have summarized the most important things here, but looking at the facts with your own eyes will probably reveal more. As you go through the statements and learn about the company, keep thinking what Buffett must have seen that made him acquire the company. How does it fit his criteria? How did he see it 10 years in the future? What competitive advantage did it have? Was it cheap?
Just as reminder — an excerpt from Buffett's letters to shareholders:
Charlie and I look for companies that have
a) a business we understand;
b) favorable long-term economics;
c) able and trustworthy management; and
d) a sensible price tag.
We like to buy the whole business or, if management is our partner, at least 80%.
Here is what Buffett had to say about CTB:
"This is a strong company with great American values. It has an excellent franchise, strong market share in a basic industry and top-flight management."
When you are done...
Here are videos of Buffett addressing CTB personnel in 2009 and 2010. In the latter video, he says he wasn't interested in such a small company the first time the idea was pitched to him by a Kansas City broker. He warmed up to it only after discussing it with his son, Howard (remember, he was chairman of competitor GSI Group), and meeting with CTB's CEO, Mancinelli.
You can also read the consultant's, now nonexistent Bear Stearns, valuation at the time of the acquisition.
Hope you had as much fun with CTB as I did!
An interesting, irrelevant bonus fact: Berkshire seems to have been affected by the notorious, and now all-but-forgotten, Y2K bug. The date in this URL appears to be August, 1902 while it actually was August, 2002. Probably, Buffett couldn't be bothered with the Y2K craze, let alone spend money on fixing the computers.