We are joined today by contributing editor Irwin Michael, one of Canada's leading experts in value investing. IRWIN MICHAEL'S UPDATES on AMERICAN NATIONAL INSURANCE, PLAYMATES HOLDINGS LIMITED AND PLAYMATES TOYS, and POLARIS MINERALS.
AMERICAN NATIONAL INSURANCE (NDQ: ANAT)
Originally recommended on Jan. 5/04 (IWB #2401) at $85.57. Closed Thursday at $73.91. (All figures in U.S. dollars.)
Thankfully, the credit and equity markets have recovered from the brink of collapse. Although it has been a wild ride, fundamentally sound banks and insurance companies have rallied off their lows. Over the past year, shares of American National Insurance plunged from a 52-week high of $111.99 to reach a low of $33.74 per share, a decline of 70%. As the markets rebounded so did the shares, which bounced approximately 120% to the current price of $73.91 per share.
Throughout the crisis, deciphering the balance sheets, valuing assets, and determining potential liabilities was an extremely difficult task. However, the credit and equity markets are no longer anticipating a "worst-case-scenario". The pricing of financial assets and liabilities has become more rational and transparent. Since 1905, ANAT's conservative culture and balance sheet enabled the company to survive all manner of "wars, hurricanes, economic volatility, extraordinary technological advancements, evolving products and the changing needs of policyholders and agents". We believe that the company has weathered this most recent storm and has emerged financially sound.
In fiscal 2008 and in the first quarter of fiscal 2009, the impact of falling stock markets and weak credit markets had a significant impact on the company's financial performance. After-tax net realized investment losses totaled $246.7 million and $47.75 million, in fiscal 2008 and the first quarter of 2009 respectively. Currently, only 8% of the company's investment portfolio is in preferred and common stocks, with the balance in debt securities. The bond portfolio is diversified and investment grade with 95% of the positions rated BBB or higher. With a conservative asset mix and a better tone to the markets, we believe that the first quarter of this year will prove to be the trough in terms of investment performance.
Now that the dust is beginning to settle, we can return our focus to the performance of the company's ongoing operations. Today, ANAT has over $69 billion of life insurance policies in force and over $18.5 billion of assets. As a display of confidence, the board of directors declared the regular quarterly dividend of 77c per share on April 24. Amazingly, this is the 99th consecutive year that dividends have been paid to shareholders.
From a valuation perspective, ANAT trades well below its historic price to book multiple of 0.8. With a current book value of $115.46 per share, we believe that the stock should continue to rebound from historic lows as the underlying credit and equity markets stabilize.
Action now: Hold.
PLAYMATES HOLDINGS LIMITED (HKEx: 635) AND PLAYMATES TOYS (HKEx: 869)
Originally recommended on June 4/07 (IWB #2721) at US$1.35 (adjusted for consolidation). Closed Friday at HK$1.83.
In light of dramatic share price declines, Playmates Holding Limited (PHL) and Playmates Toys Limited (PTL) have instituted share buyback programs. PHL is authorized to repurchase 21,880,069 shares and PTL is allowed to repurchase 49,500,000 shares, which represents 10% of the issued share capital of each company. With PHL trading at HK$1.83 relative to its book value of HK$7.93 and PTL trading at HK15c relative to its book value of HK19c, both issuer bids are accretive.
Unfortunately both PHL and PTL were heavily impacted by the financial crisis and ensuing economic downturn in fiscal 2008. PHL revalued its real estate investments to fair value of HK$1.55 billion, down approximately HK$118 million in 2007. The company also incurred a net loss on portfolio investments of HK$306 million (including realized losses of about HK$226 million and unrealized losses of about HK$80 million). Despite the disappointing charges, management expects rental income to remain "stable in 2009 on the strength of the quality and composition of the tenants".
PTL also faced a difficult year in 2008, with sales down 22.6% to HK$704 million from HK$909 million in 2007. The toy division reported an operating loss of HK$139 million, with specific weakness in the United States and European Union. The operating margin was particularly hit by an increase in close-out sales of discontinued toys as the enforcement date of more stringent safety standards approached. Although management expects that the current fiscal year will be difficult for the toy industry, they were encouraged about two major brands that are supported by theatrical releases in 2009; Terminator Salvation and Star Trek.
Thankfully, both PHL and PTL have reasonably clean balance sheets. PHL has a current ratio of 1.7 times and total bank borrowings to total tangible assets of only 8.7%. PTL has slightly higher debt levels, with a current ratio of 1.0 times and total bank borrowings to total tangible assets of 13.2%. In order to enhance the company's working capital levels, the directors of the corporation issued one bonus warrant for every five shares held by shareholders but excluding overseas investors. At HK90c, full exercise of the bonus warrants would result in the issue of 43.76 million shares and would raise almost HK$40 million.
The shares have since recovered from the lows and the global economy seems to be showing signs that the worst has past. However, we will monitor both of these stocks closely for any adverse developments, particularly related to the health of the balance sheets.
Action now: Hold.
POLARIS MINERALS (POLMF, Financial)
Originally recommended on April 30/07 (IWB #2717) at C$9.90, US$8.94. Closed Friday at C$2.05, US$1.83.
We recently had Polaris' management into our offices for an update on the company's operations and financial situation. Admittedly, it has been a very disappointing investment over the past year, given the company's sensitivity to the economic downturn, credit crisis, and collapse of the West Coast housing market. However, management was more upbeat than we had seen in a long time.
They suggested that the company's end markets had finally stabilized, that customers were beginning to bid on construction projects again, and that the stimulus package was starting to encourage new activity. Operationally, the Orca quarry is performing well, full shift hours have been restored, and an updated technical report extended the life of the quarry past 2025 assuming peak annual sales volume of 9.6 million short tons per year by 2015.
Financially, the balance sheet is debt-free, the fuel surcharges are working, and the company expects to be cash flow neutral this year.
In response, the shares have moved dramatically from the 52-week low of $1.10 to trade around the $2.05 level. The market is starting to price in a turnaround in economic activity. It is now just a question of the timing and pace of a recovery in demand. Thankfully, we believe that the company has managed to weather the worst of the storm.
Action now: Hold.
AMERICAN NATIONAL INSURANCE (NDQ: ANAT)
Originally recommended on Jan. 5/04 (IWB #2401) at $85.57. Closed Thursday at $73.91. (All figures in U.S. dollars.)
Thankfully, the credit and equity markets have recovered from the brink of collapse. Although it has been a wild ride, fundamentally sound banks and insurance companies have rallied off their lows. Over the past year, shares of American National Insurance plunged from a 52-week high of $111.99 to reach a low of $33.74 per share, a decline of 70%. As the markets rebounded so did the shares, which bounced approximately 120% to the current price of $73.91 per share.
Throughout the crisis, deciphering the balance sheets, valuing assets, and determining potential liabilities was an extremely difficult task. However, the credit and equity markets are no longer anticipating a "worst-case-scenario". The pricing of financial assets and liabilities has become more rational and transparent. Since 1905, ANAT's conservative culture and balance sheet enabled the company to survive all manner of "wars, hurricanes, economic volatility, extraordinary technological advancements, evolving products and the changing needs of policyholders and agents". We believe that the company has weathered this most recent storm and has emerged financially sound.
In fiscal 2008 and in the first quarter of fiscal 2009, the impact of falling stock markets and weak credit markets had a significant impact on the company's financial performance. After-tax net realized investment losses totaled $246.7 million and $47.75 million, in fiscal 2008 and the first quarter of 2009 respectively. Currently, only 8% of the company's investment portfolio is in preferred and common stocks, with the balance in debt securities. The bond portfolio is diversified and investment grade with 95% of the positions rated BBB or higher. With a conservative asset mix and a better tone to the markets, we believe that the first quarter of this year will prove to be the trough in terms of investment performance.
Now that the dust is beginning to settle, we can return our focus to the performance of the company's ongoing operations. Today, ANAT has over $69 billion of life insurance policies in force and over $18.5 billion of assets. As a display of confidence, the board of directors declared the regular quarterly dividend of 77c per share on April 24. Amazingly, this is the 99th consecutive year that dividends have been paid to shareholders.
From a valuation perspective, ANAT trades well below its historic price to book multiple of 0.8. With a current book value of $115.46 per share, we believe that the stock should continue to rebound from historic lows as the underlying credit and equity markets stabilize.
Action now: Hold.
PLAYMATES HOLDINGS LIMITED (HKEx: 635) AND PLAYMATES TOYS (HKEx: 869)
Originally recommended on June 4/07 (IWB #2721) at US$1.35 (adjusted for consolidation). Closed Friday at HK$1.83.
In light of dramatic share price declines, Playmates Holding Limited (PHL) and Playmates Toys Limited (PTL) have instituted share buyback programs. PHL is authorized to repurchase 21,880,069 shares and PTL is allowed to repurchase 49,500,000 shares, which represents 10% of the issued share capital of each company. With PHL trading at HK$1.83 relative to its book value of HK$7.93 and PTL trading at HK15c relative to its book value of HK19c, both issuer bids are accretive.
Unfortunately both PHL and PTL were heavily impacted by the financial crisis and ensuing economic downturn in fiscal 2008. PHL revalued its real estate investments to fair value of HK$1.55 billion, down approximately HK$118 million in 2007. The company also incurred a net loss on portfolio investments of HK$306 million (including realized losses of about HK$226 million and unrealized losses of about HK$80 million). Despite the disappointing charges, management expects rental income to remain "stable in 2009 on the strength of the quality and composition of the tenants".
PTL also faced a difficult year in 2008, with sales down 22.6% to HK$704 million from HK$909 million in 2007. The toy division reported an operating loss of HK$139 million, with specific weakness in the United States and European Union. The operating margin was particularly hit by an increase in close-out sales of discontinued toys as the enforcement date of more stringent safety standards approached. Although management expects that the current fiscal year will be difficult for the toy industry, they were encouraged about two major brands that are supported by theatrical releases in 2009; Terminator Salvation and Star Trek.
Thankfully, both PHL and PTL have reasonably clean balance sheets. PHL has a current ratio of 1.7 times and total bank borrowings to total tangible assets of only 8.7%. PTL has slightly higher debt levels, with a current ratio of 1.0 times and total bank borrowings to total tangible assets of 13.2%. In order to enhance the company's working capital levels, the directors of the corporation issued one bonus warrant for every five shares held by shareholders but excluding overseas investors. At HK90c, full exercise of the bonus warrants would result in the issue of 43.76 million shares and would raise almost HK$40 million.
The shares have since recovered from the lows and the global economy seems to be showing signs that the worst has past. However, we will monitor both of these stocks closely for any adverse developments, particularly related to the health of the balance sheets.
Action now: Hold.
POLARIS MINERALS (POLMF, Financial)
Originally recommended on April 30/07 (IWB #2717) at C$9.90, US$8.94. Closed Friday at C$2.05, US$1.83.
We recently had Polaris' management into our offices for an update on the company's operations and financial situation. Admittedly, it has been a very disappointing investment over the past year, given the company's sensitivity to the economic downturn, credit crisis, and collapse of the West Coast housing market. However, management was more upbeat than we had seen in a long time.
They suggested that the company's end markets had finally stabilized, that customers were beginning to bid on construction projects again, and that the stimulus package was starting to encourage new activity. Operationally, the Orca quarry is performing well, full shift hours have been restored, and an updated technical report extended the life of the quarry past 2025 assuming peak annual sales volume of 9.6 million short tons per year by 2015.
Financially, the balance sheet is debt-free, the fuel surcharges are working, and the company expects to be cash flow neutral this year.
In response, the shares have moved dramatically from the 52-week low of $1.10 to trade around the $2.05 level. The market is starting to price in a turnaround in economic activity. It is now just a question of the timing and pace of a recovery in demand. Thankfully, we believe that the company has managed to weather the worst of the storm.
Action now: Hold.
