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Dec 5, 2011 Dr. Reddys Laboratories Ltd. ADS (RDY) - $33.94 Pharmaceuticals Pharmaceutical Product Development Inc. (PPDI) - $0 Biotechnology Lincare Holdings Inc. (LNCR) - $26.3 Health Care Providers Mindray Medical International (MR) - $29.35 Medical Equipment Shire plc (SHPGY) - $99.7 Pharmaceuticals |
One sector with good future perspectives is the healthcare sector due to a growing aging population. But the whole sector contains several industries with slow growth and decreasing market share (e.g., drug manufacturing). Other industries running very well (e.g., medical instruments). However, we can not distinguish between good and bad industries. Every difficult industry also has good companies. It is more important to take a closer look at the companies. Recently, I screened the sector by stocks with a positive dividend yield as well as high expected mid-term earnings per share growth (more than 15% yearly for the upcoming five years). [url=http://long-term-investments.blogspot.com/2011/12/12-healthcare-dividend-stocks-with-best.html]12 companies fulfilled these criteria[/url]. Only two of them came from the drug manufacturing industry, the industry with the highest dividend yield. Roughly 42% originate from the medical instruments and supplies industry. Unfortunately, most of the companies were very small and they had a market capitalization of less than $300 million. The high growth was explainable with the small size and led to higher risks. I like to focus only on stocks with a market capitalization above $2 billion. These are the results: [b]1. [/b][b]Dr. Reddy's Laboratorires[/b][b] (RDY) [/b]has[b] [/b]a market capitalization of $5.07 billion. The company employs 14,923 people, generates revenues of $1,439.17 million and has a net income of $212.72 million. The firm’s earnings before interest, taxes, depreciation and amortization (EBITDA) amounts to $323.26 million. Because of these figures, the EBITDA margin is 22.46% (operating margin16.91% and the net profit margin finally 14.78%). The total debt representing 24.81% of the company’s assets and the total debt in relation to the equity amounts to 51.25%. Due to the financial situation, the return on equity amounts to 24.84%. Finally, earnings per share amounts to $1.33 of which $0.22 were paid in form of dividends to shareholders last fiscal. Earnings are expected to grow by 22.95% for the next five years. Here are the price ratios of the company: The P/E ratio is 22.53, P/S 3.62 and P/B ratio 5.79. Dividend Yield: 0.84%. The beta ratio is 1.08.[b] [/b] [b]2. [/b][b]Pharmaceutical Products[/b][b] (PPDI) [/b]has[b] [/b]a market capitalization of $3.78 billion. The company employs 11,000 people, generates revenues of $1,470.57 million and has a net income of $127.33 million. The firm’s earnings before interest, taxes, depreciation and amortization (EBITDA) amounts to $247.55 million. Because of these figures, the EBITDA margin is 16.83% (operating margin12.41% and the net profit margin finally 8.66%). The total debt representing 0.00% of the company’s assets and the total debt in relation to the equity amounts to 0.00%. Due to the financial situation, the return on equity amounts to 9.72%. Finally, earnings per share amounts to $1.43 of which $0.60 were paid in form of dividends to shareholders last fiscal. Earnings are expected to grow by 16.34% for the next five years. Here are the price ratios of the company: The P/E ratio is 23.23, P/S 2.57 and P/B ratio 3.09. Dividend Yield: 1.81%. The beta ratio is 0.71. [b]3. [/b][b]Lincare Holdings[/b][b] (LNCR) [/b]has[b] [/b]a market capitalization of $2.11 billion. The company employs 10,225 people, generates revenues of $1,669.20 million and has a net income of $181.57 million. The firm’s earnings before interest, taxes, depreciation and amortization (EBITDA) amounts to $450.96 million. Because of these figures, the EBITDA margin is 27.02% (operating margin 20.02% and the net profit margin finally 10.88%). The total debt representing 24.17% of the company’s assets and the total debt in relation to the equity amounts to 49.60%. Due to the financial situation, the return on equity amounts to 19.12%. Finally, earnings per share amounts to $1.90 of which $0.40 were paid in form of dividends to shareholders last fiscal. Earnings are expected to grow by 15.67% for the next five years. Here are the price ratios of the company: The P/E ratio is 12.56, P/S 1.22 and P/B ratio 2.21. Dividend Yield: 3.49%. The beta ratio is 0.64. [b]4. [/b][b]Mindray Medical Intl.[/b][b] (MR) [/b]has[b] [/b]a market capitalization of $3.21 billion. The company employs 6,400 people, generates revenues of $704.31 million and has a net income of $155.47 million. The firm’s earnings before interest, taxes, depreciation and amortization (EBITDA) amounts to $190.94 million. Because of these figures, the EBITDA margin is 27.11% (operating margin 23.39% and the net profit margin finally 22.07%). The total debt representing 0.50% of the company’s assets and the total debt in relation to the equity amounts to 0.60%. Due to the financial situation, the return on equity amounts to 19.35%. Finally, earnings per share amounts to $1.35 of which $0.30 were paid in form of dividends to shareholders last fiscal. Earnings are expected to grow by 15.10% for the next five years. Here are the price ratios of the company: The P/E ratio is 20.63, P/S 4.22 and P/B ratio 3.03. Dividend Yield: 1.18%. The beta ratio is 1.24. [b]5. [/b][b]Shire Plc[/b][b] (SHPGY) [/b]has[b] [/b]a market capitalization of $18.82 billion. The company employs 4,183 people, generates revenues of $3,471.10 million and has a net income of $586.60 million. The firm’s earnings before interest, taxes, depreciation and amortization (EBITDA) amounts to $1,043.40 million. Because of these figures, the EBITDA margin is 30.06% (operating margin 22.73% and the net profit margin finally 16.90%). The total debt representing 20.56% of the company’s assets and the total debt in relation to the equity amounts to 45.19%. Due to the financial situation, the return on equity amounts to 26.95%. Finally, earnings per share amounts to $4.07 of which $0.39 were paid in form of dividends to shareholders last fiscal. Earnings are expected to grow by 15.57% for the next five years. Here are the price ratios of the company: The P/E ratio is 24.64, P/S 5.14 and P/B ratio 7.37. Dividend Yield: 0.48%. The beta ratio is 0.80. |
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| Bruce Berkowitz
Sep 13, 2011 Bank of America Corp. (BAC) - $7.84 Banks Citigroup Inc. (C) - $33.54 Banks JP Morgan Chase (JPM) - $38.28 Banks Berkshire Hathaway Inc. Cl A (BRK.A) - $119800 Property & Casualty Insurance |
[img]http://gurufocus.com/images/useruploads/1616660064.jpg[/img] For those investors who are not making knee-jerk reactions to Bank of America (BAC) headline news events and subsequently selling BAC shares absent thoughtful research and analysis, many value the stock based on an estimate of the company's tangible book value of equity per share and then multiplying that value by what they believe is an appropriate multiple. In the Aug. 10, 2011, Bank of America conference call, world-renowned investor Bruce Berkowitz provided further support to the notion that the market is taking this approach, with his comment to CEO Brian Moynihan, "You made reference to tangible book value in your answer and it sounds to me that you look at the change in[i] tangible book value[/i] as the change in[i] intrinsic value[/i] of the operation or a change in the [i]shareholders' wealth[/i] of the operation." Regardless of the merits of this approach, the reality is Bank of America shares are and will likely continue to trade on a price-to-tangible book value of equity basis until the company's business outlook is more clear. IMPORTANT NOTE: An appropriate framework for estimating the intrinsic value for shares of Bank of America (or any equity security) involves creating worst, best [i]and[/i] base case scenarios with probabilities assigned to each of the outcomes. The weighted-average valuation under these scenarios would be the intrinsic value estimate for the security being valued. Based on our research and analysis, the likelihood of [i]this[/i] scenario occurring — the worst case — for Bank of America is probably [i]no greater[/i] than 10 to 15%. So, this is one step of a multi-stage process in evaluating the intrinsic value of BAC. [b]Tangible Equity Estimates[/b] A footnote in Bank of America's most recently filed 10-Q reminds us, "Tangible equity ratios and tangible book value per share of common stock are non-GAAP measures. Other companies may define or calculate these measures differently." The primary source for data used in the calculation of BAC tangible book value for this report is [i]Consolidated[/i] [i]Financial Statements for Bank Holding Companies - FR Y-9C[/i] filed by Bank of America with the Board of Governors of the Federal Reserve System. According to the Federal Reserve website, the FR Y-9C is "used to assess and monitor the financial condition of bank holding company organizations, which may include parent, bank, and nonbank entities. The FR Y-9C is a [b]primary analytical tool used to monitor financial institutions between on-site inspections[/b]. The form contains more schedules than any of the FR Y-9 series of reports and [b]is the most widely requested and reviewed report[/b] at the holding company level." [Note: You can find the most recent FR 9-YC for the Top 50 bank holding companies [url=http://www.ffiec.gov/nicpubweb/nicweb/Top50Form.aspx]here[/url].] As of June 30, 2011, the [i]reported[/i] tangible book equity for BAC was $12.76 (the 10-Q issued by the company actually reports $12.65). Calculations for the former estimate (all book values) are shown below: [img]http://gurufocus.com/images/useruploads/1511160116.jpg[/img] However, before accepting this calculation at face value, it's important to take a closer look at one of the key factors that impact the tangible equity account[i]: Provision for Loan Losses.[/i] According to the June 30, 2011, SEC Form 10-Q, the reported Allowance for Loan Losses account stood at $37,213 million. Each quarter, management estimates the portion of loans which are unlikely to be repaid and makes a Provision for credit losses, which flow through to the Income Statement (thereby reducing earnings and, as a result, shareholder's equity). These provisions are set aside and added to the Allowance for Loan Losses liability account on the Balance Sheet. There are a number of reasons to believe reserves set aside by management already are sufficient to cover sizable loan losses over the next three (3) years. However, the purpose of this report is to arrive at [i]a worst case scenario[/i] in the event they did not do so. That said, let's take a closer look what happens if management proves to be overly optimistic and additional provisions are necessary: What is the potential magnitude of this error and how will it impact tangible equity per share? One conservative approach to determining the adequacy of the Allowance for Loan Losses for Bank of America is to take the reported Allowance for Loan Losses and compare it to the total of reported Other Real Estate Owned (OREO), Loans 90+ days Past Due, and Nonaccruals (less 75% of the latter two that are wholly or partially guaranteed; see Schedule HC-N: Past Due and Nonaccrual Loans on the FR 9-YC for more details). [img]http://gurufocus.com/images/useruploads/1422448423.jpg[/img] Based on this analysis, it appears the allowance for loan losses account should be increased by $19,275,172 million and the shareholder's Equity account reduced by a correspondingly identical amount. This results in an adjusted tangible equity per share value of $10.85. Note that if Berkshire Hathaway (BRK.A)(BRK.B) exercises its $700 million in warrants from the deal announced Aug. 25, 2011, the contributed capital of $5 billion is offset by the issuance of shares, which changes the adjusted tangible equity per share value slightly downward to $10.62. As an aside, Wall Street consensus estimates for BAC tangible equity per share are $12.85, $13.10, and $14.45 for periods ending 2011, 2012, and 2013, respectively. It's important to be mindful of this as it contrasts with the highly conservative nature of the estimates used in this analysis. On a related matter with the potential to negatively impact tangible equity per share, it is unclear how successful Bank of America will defend itself against claims resulting from the Countrywide Financial Corp. acquisition. A proposed $8.5 billion settlement of Bank of New York claims would remove a substantial portion of this uncertainty; however, no one knows for certain whether or not this will be approved as other claimants are challenging the settlement. The argument that Bank of America artfully and legally limited its legal exposure is compelling. Nonetheless, there's no guarantee claimants will be unsuccessful in piercing the corporate veil separating the two entities, subsequently leading to additional material expenses for BAC. The same holds true for the recent AIG claims. On the other hand, BAC's recent significant sales of non-core assets (increasing Bank of America's Tier 1 capital level by $3.5 billion and reducing its Tier 1 capital requirements by $16 billion in August), significant cost-cutting and restructuring efforts along with the liquidity afforded by $450 billion in cash and equivalents are not reflected in the adjusted tangible book value equity, either. Regardless, we believe the highly conservative nature of the assumptions used in this analysis sufficiently account for one or more of these adverse events occurring. [b]Range of Price-to-Tangible Equity Ratios[/b] Shares of Bank of America closed at $6.98 on Sept. 9, 2011, trading at an unadjusted 0.55x price-to-tangible equity ratio. The chart below shows the price-to-tangible equity value ratio for shares of BAC over the past decade: [img]http://www.gurufocus.com/ic/attachment/201109/14/1_13160268970bKI.jpg[/img] By way of comparison, the chart below illustrates Citigroup's price-to-tangible equity valuation over the same time period: [img]http://gurufocus.com/images/useruploads/24869533.jpg[/img] Bank of America and Citigroup traded at the same [i]average[/i] price-to-tangible equity multiple over the past decade with median, high and low multiples at similar levels. So while Citigroup (C) may not be a great comparable, at least the market historically valued C's and BAC's tangible equity similarly. JPMorgan's (JPM) summary statistics, by comparison, averaged 2.36x, with a median, high, and low of 2.49x, 3.38x, and 1.14x, respectively. Recently, Bank of America was trading at 50% of the lowest level reached by JPMorgan over the past decade. [b]Worst Case Scenario: Intrinsic Value Estimate for Bank of America[/b] An adjusted baseline tangible book value of $10.75 is generated assuming a 50% probability that Berkshire Hathaway will exercise its warrants for 700 million shares of BAC. Applying an arbitrary but not wholly unrealistic 20% discount to the price-to-tangible equity ratio — tested twice by the market, once in March 2009 and again today — we arrive at an estimated 0.45x multiple. The matrix below provides a sensitivity analysis under varying assumptions for adjusted tangible book value of equity per share and price-to-tangible equity valuations. As mentioned, the baseline for the worst case scenario of $10.75 per share and 0.45x lead to a value of $4.85 ($10.75 x 0.45 = $4.85). This leads to a [b]worst case[/b] [b]scenario[/b] intrinsic value estimate of $4.85 per share which represents a 30% downside from current levels. It appears, based on this analysis, the market believes the appropriate price-to-tangible equity valuation of 0.55x is appropriate, yet is also confident adjusted tangible equity per share will reach $13.00 — producing the $7.15 market or intrinsic value in the lower right-hand corner of the matrix. [img]http://gurufocus.com/images/useruploads/1121861601.jpg[/img] Alternatively, if one were to assume shares of Bank of America will trade as low as Citigroup shares did in March 2009, leading to a 0.34x price-to-tangible equity ratio, the appropriate value (assuming the same adjusted tangible book value of equity of $10.75), the worst case scenario intrinsic value estimate for BAC would be approximately $3.76 ($10.75 x 0.35x = $3.76) found in the center column of the top row. To reiterate our earlier comment regarding this report, a worst case scenario is one step of a multi-stage process in evaluating the intrinsic value of Bank of America shares. We believe the probability of a worst case scenario occurring for Bank of America is [i]no greater[/i] than 10 to 15%. Using the baseline $4.85 per share intrinsic value estimate for BAC implies 30% downside risk for shares of Bank of America from its current level. Disclosures: [i]One or more clients of CastlePoint Investment Group, LLC, own shares of Bank of America.[/i] |
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Aug 18, 2011 UnitedGuardian Inc. (UG) - $16.12 Pharmaceuticals |
[b]ABOUT ME[/b] Stumbling on Graham's "The Intelligent Investor" 12 years back changed my perspective on investing. Before that, I had never ventured into the stock market in particular. Over the years, I have read books on different areas of investing: its origins, risk and probability. I am of the opinion that if anyone is doing serious investing, then it has got to be value investing. It is the perception and probablistic evaluation of the true value of business that makes this game so enjoyable. [b]PHILOSOPHY[/b] In search of stable business with a high growth potential (domestic or international), I stumbled across a company called United Guardian Inc. (UG). UG is categorized as a small-cap business. The screening criteria was strict enough since venturing in the mid- or small-cap world has its share of adventures and pitfalls. Further, I made it a point to look at businesses that are established, have demonstrated growth through earnings and cash flows and, importantly, are in easy to understand sectors of the economy. In order to provide a safety net, considering the size of the company, dividend payout was taken into consideration to understand management diligence in returning cash to the shareholders for returns below the cost of capital. UG fitted the criteria beautifully. UG, established in 1942 started publicly trading in mid-80s, is into the consumer non-cyclical sector and manufactures products in the Personal and Household industry. I particularly like this sector and industry as it is a easy to understand, repetative, and has fairly predictable cash flows. Numerical snapshot - ROE (5 yr. avg.) >= 20% - ROE (TTM) = 29.12% - zero debt - 10 yr. EPS growth >= 5% - high dividend payouts - NPM = 27.69% [b]ANALYSIS[/b] United-Guardian Inc. ("United") is a diversified company that conducts research, product development, manufacturing and marketing of pharmaceuticals, cosmetic ingredients, health care products, medical devices and proprietary industrial products. A lot of details about the nature of the business are given in 10-Ks, however, I will touch on some important points. It operates as a single business unit with products in personal care, medical, pharmaceutical and industrial. All of these products are marketed through marketing partners and distributors. ISP is one of their major distributors. Per their latest 10-K, pharma products are sold through major full-line drug wholesalers; personal care products are sold outright to the marketing partners; and the medical and industrial products are directly sold to the end users. What is interesting is that the company claims to have a pipeline of products ready to be marketed that are currently under various stages of development. With a pipeline of products being developed, the company has a chance to diversify into those. Here is a brief description and segments of products the company is involved in. Personal care -- ingredients used in moisturizers, skin creams, cleansers, makeup and body lotions Medical -- lubricants for catheters, prelubricated enema tips, pre-lubricated condoms Pharma -- prescription drugs to prevent calcifications in urethral catheters and the urninary bladder infections, which have received regulatory approval in the U.S. Industrial -- Products that are used in detergents and water insoluble materials Economics of scope is prevalent since the know-how is spilled over to different sectors, e.g., the lubrajel variants in the personal care are also used in the medical sector. The company has two major product lines: LUBRAJEL and RENADIN. Together they accounted for 95% and 96% of revenues for the years ending December 2010 and December 2009 respectively. Breakup is below:
[b]Revenue decomposition[/b]
Segment revenue breakup
Geographical revenue breakup
To put things into perspective about the nature of international growth, the table below identifies the growing revenue base for the company in international markets from 2001. From 2009 onwards the company released China and Canada breakups as given above. Since the numbers for these countries were not given before 2009, for comparison's sake, in 2010 and 2009 they are coupled in the Other* section. Table 2001-2010 (in millions)
CAGR for international growth is a decent 7%. [b]Ratios and Other Numerics[/b] Further, these numbers have little value if they do not result in profitability and cash flows. The company is profitable and, as can be seen the overall return on equity, has been very healthy with free cash enough to pay for the dividends. Dividends have consistently increased at a CAGR rate of 18.59% from 1997. The FCF has been growing at a CAGR of 6% starting 2001. With a high dividend payout, the management appears to be conservative in doing incremental investments for capex. Further the company has been able to slowly increase its margins from 22.1 in 2003 to around 27.7 in 2010, signifying improving operating efficiencies. Another point to note is the ability of the company to be a zero debt company which enforces our view of the management being conservative. The company's TEV/EBIT is at 10.46 with EBIT and EBITDA at $5.513 million and $5.968 million respectively.
CAGR growth for dividend is 18.59% starting in 1997 when the company started paying dividends of $0.06 CAGR. Growth for FCF is 6% starting in 2001 when FCF was at $2. [b]Dividend Discount Model[/b] I am applying the DDM here (could have applied FCF as well). Since the company has been in existence from 1942, going concern is not a problem. Although the limitations of DDM (or FCF) are well known in terms of estimation of discount rate and so on, this analysis is necessary to get an idea as to where we stand assuming that the current conditions for the company continue. Applying sensitivity analysis will give a broader picture on the range of investment opportunities for this company. Inputs: · Starting dividend = $0.63 (2010 dividend paid) · Cost of capital = 17% (a very established business since 1942 hence the only premium is the liquidity premium. Selection is random) · Initial growth rate = 18.29% for 5 years followed by 17.29% for next 1 yr. and then followed by 16.29% for next 4 years (note : These are based directly from CAGR with 1% drop every random interval) · Perpetual growth rate is set to 5% and we use the H model for the growth to be slowed down to this 5% in 15 years. With this the value of the stock is $16.25 — that is 16% at the discount with the price at the time of this writing. Selective Sensitivity analysis is given below for a sample set:
With the current market value of $13.73 the stock appears to be fairly valued for a discount rate of 18% and going concern assumption. Since the investment is longer term, the CAGR growth rate matrix is used. [b]SUMMARY[/b] A steady business, good financial position, high dividend yield and a fair price is a compelling reason to consider United Guardian (UG) for investment. Although per DDM, the stock appears to be fairly valued at specific discount rates, accumulation of the stock on any further downside may be a good possibility. The heavy yield and fewer price fluctuations make it a safe investment with an upside potential driven by international growth. Further heavy insider ownership (approximately 45%) suggests that management has confidence in the business. In 2010 the RENACIDIN product line suffered a setback because of some regulatory problems with a major drug company. These problems were unrelated to RELACIDIN; however, there was a temporary suspension of RENACIDIN production in August 2010. But his did not have a significant impact on the earnings. This is what the CEO had to say in the latest 10-Q: "We are very pleased that we were able to attain this level of revenue and earnings despite the fact that our most important pharmaceutical product, Renacidin(R) Irrigation, was in very short supply for the entire quarter due to production problems experienced by our outside supplier. Fortunately, the drop in Renacidin sales was offset by very strong sales of our cosmetic ingredients line, which enabled us to attain these strong sales and earnings. Now that the production problems have been resolved we expect Renacidin sales to rebound strongly in the second quarter." In 2008 the original founder, Dr. Alfred R. Globus, died at the age of 88. His nephew, Ken Globus, heads the company. It is possible that if the management cannot find means to grow, the company's reputation may suffer. However, it also sparks the speculation of a potential take-over now that a new CEO is in charge. With the small size and a tight control by the insiders buy out is a possibility. The company also terminated the DB pension plan thereby recovering from any future pension obligations. This is a great news now that the pension expense is clearly expensed out in the income statement. As can be seen from the analysis, it looks a great investment to accumulate on the downside considering its potential for growth (capital appreciation), very low fluctuations to the market, or safety of income (dividend yield about 5%). [url=http://www.gurufocus.com/StockBuy.php?GuruName=Mario+Gabelli]Mario Gabelli[/url]'s GAMCO owns 4% of shares outstanding. [b]DISCLOSURE [/b]I own shares of United Guardian Inc. This article does not constitute any investment advice. |
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Aug 9, 2011 OneBeacon Insurance Group Ltd. (OB) - $16.13 Property & Casualty Insurance |
[b]Business overview[/b] OneBeacon Insurance Group (OB) is a property and casualty insurance company registered in Bermuda. The firm’s products include professional liability, marine, collector cars and boats, excess property, accident and health, etc. The business can be divided into three main segments: Specialty Insurance Operations, Other Insurance Operations and Investing, Financing and Corporate Operations. In 2001, the firm was acquired by White Mountain Insurance group from Aviva, and became the wholly owned subsidiary of White Mountain. At the end of 2006, 27.6 million or 27.6% of company’s common shares were sold by White Mountain in the IPO. As the result, White Mountain now holds 76% of the company. [b]Insurance operation[/b]
For OB, the premium earned keeps reducing in value. The biggest drop was in 2010 when the earned premium dropped from $1.9 billion to $1.5 billion. This was mainly due to the sale of personal lines and non-specialty commercial lines. In December 2009, the company sold the renewal rights to Hanover, and the traditional personal line to Tower was completed on July 2010. In the last six years, there has been one year of negative net income. The negative net income was due to the negative realized investment losses and the change in accounting policies adoptioned from 2008. The firm adopted SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities." It elected to record the changes in net unrealized gains and losses from available-for-sale securities and investments in limited partnerships, hedge funds and private equity interests in revenues to calculate net income. Before, these changes had been included in other comprehensive income.
The combined ratio is the common measure for the insurance industry. A ratio above 100% means that the insurance company pays out a claim larger than the premium received. Over the last five years, the combined ratio of OB was well under 100, except for 2010, when it reached just above 100. The increase in the combined ratio for 2010 was primarily due to higher catastrophe losses and a number of large losses experienced earlier in the year, especially in the exited businesses, the non-specialty commercial lines business which had been in run-off following the sale of the renewal rights, and the traditional personal lines business. Above is the consolidated ratio, comprised of specialty insurance operations and other insurance operations, whereas specialty insurance combined ratios always stay well below 100. [b]Insurance float[/b] In order to assess the operation efficiency and profitability of the insurer, the amount of float generated compared to the cost of generating it determines whether the business gets the negative and positive value or not. The float is the money that insurance companies temporarily hold but do not own. There is float because premiums are received before losses are paid. The time interval can sometimes extend to decades. During this time, the money can be invested by the insurer. The good insurance companies are those which can grow their float over time, and the cost of float should be below the cost of Treasury 10-year notes. Below is the insurance float reported by the company over the last five years:
The insurance float of the company keeps reducing over time, and the big reduction in 2010 compared to 2009 is due to the personal line transaction. The figures do not look very impressive. OB seems to downsize its business by selling other business segments, which leads to a decrease in the float generated. [b]Investment[/b] In OB's investment portfolio, 74% is fixed income instruments, then short-term investments and common securities; the least is in private equity, hedge funds and convertible bonds. In the large category of fixed income instruments, the majority is asset backed securities (46%), then debts issued by corporations. The US government obligations (which are considered risk-free) take only 10% of the fixed income segments or 7.7% of the total investment portfolio. [b]Management[/b] [i]Lowndes A. Smith – Independent Chairman of the Board of Directors of OneBeacon Insurance Group[/i] Mr. Lowndes A. Smith became independent chairman of OB in October 2006. Mr. Smith serves as Managing Partner of Whittington Gray Associates. Mr. Smith formerly served as currently ice Chairman of The Hartford Financial Services Group, Inc. and President and Chief Executive Officer of Hartford Life Insurance Company until 2001. He joined The Hartford in 1968. Mr. Smith is also a director of White Mountains, and the Chair of the Audit Committee and serves on the Compensation Committee of the Board of Directors of White Mountains. [i]T. Michael Miller – President, CEO[/i] He has been a director of the Company since August 2006. He joined the Company as Chief Operating Officer in April 2005 and became President and Chief Executive Officer in July 2005. [i]Paul McDonough – CFO[/i] Mr. Paul H. McDonough is Chief Financial Officer, Senior Vice President of OB. He was elected Chief Financial Officer of OneBeacon in August 2006 and was elected Chief Financial Officer of OneBeacon LLC in December 2005. [i]Bradford Rich – General Counsel[/i] Mr. Bradford W. Rich is Senior Vice President, General Counsel of OB since September 2007. Mr. Rich previously served as General Counsel of USAA and ACE Ltd. He began his legal career as an assistant staff judge advocate in the United States Air Force, after serving as a staff assistant to the President of the United States. [i]Ann Andrews – Chief Accountant[/i] Ms. Ann Marie Andrews is Chief Accounting Officer of OB since October 2006. She joined the company in 2002. The total insiders including executives and directors altogether hold around 3.9% of the total shares outstanding. The largest shareholder of OB is White Mountain, with 76% of the company. With the majority of executives being low-level shareholders with several years of contribution, the management at OB in the shareholders’ view has a low probability of being outstanding compared with other insurance/reinsurance companies. [b]Valuation[/b] [i]Liquidation valuation[/i] Tangible book value is considered the proxy for [url=http://wiki.fool.com/Liquidation_value?source=ihlsitlnk0000001]liquidation value[/url] — an estimate of what the insurance company would be worth if the company closed its doors, paid out claims, and returned excess capital to shareholders. The tangible book value of OB was US$1.152 billion by June 2011, at a market capitalization of US$1.23 billion. The company is trading at 1.06x the tangible book value. [i]Comparables valuation[/i] For the insurance and banking industries, P/B has proven to be more meaningful than the P/E ratio. Over the last five years, the P/B of OB has been as follows:
For its competitors, according to Yahoo! Finance:
The valuation does not point out a screaming buy for an investor like me at this current price, justifying with both its past valuation and its comparables valuation. [b]Conclusions[/b] OB is in a downsizing phase to focus on some key insurance segments only. The company has completed the sale of Commercial Lines and Personal Lines. It is held by its parent company, White Mountain Insurance. Only when the company at least shows some of its success in its future development would I maybe feel more comfortable to take some position in this company. Otherwise, with the current situation, the declining float amount due to business restructuring, the investment portfolio mainly of asset-backed securities, the light investment of management, and a not very attractive current valuation, the value investor like me will not consider OB at the moment. This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risks For other posts on insurance fields, please visit: [url=http://www.gurufocus.com/news/136777/partner-re-pre--a-conservative-stock-in-reinsurance-industry]Partner Re (PRE) - A Conservative Stock In Reinsurance Industry[/url] [url=http://www.gurufocus.com/news/136885/valuing-insurance-companies]Valuing Insurance Companies[/url] [url=http://www.gurufocus.com/news/138305/warren-buffett-accounting-and-bond-investment-of-insurers]Warren Buffett: Accounting And Bond Investment Of Insurers[/url] |
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Jul 15, 2011 Limelight Networks Inc. (LLNW) - $3.46 Telecommunications Equipment |
Limelight is a provider of content delivery network services. It provides software services to improve the quality of online media, web applications, enable secure online transactions, manage and monetize digital assets, and optimize advertising campaigns. [b] Business overview[/b] The company operates in one business segment: providing content delivery network services and in three geographic areas — North America, Europe, Middle East and Africa (EMEA) and Asia Pacific. The main region that attract most of the revenue is from the North America, however, the percentage is decreasing for the last 03 years, staying at 71%. The contract with customers is normally one year or longer. These contracts generally commit the customer to a minimum monthly level of usage with additional charges applicable for actual usage above the monthly minimum. [b]Customers[/b] Limelight customers operate in the media, entertainment, gaming, software, enterprise, and public sectors. According to its annual report, at the end of fiscal year 2010, the company got 1,824 active customers worldwide including Amazon, Deutsche Bank, Electronic Arts, Goodby, Silverstein, and Partners, GroupM, General Electric, HBO, Microsoft, MySpace.com, Netflix, Nintendo Wii, Nissan, Ogilvy, Oracle, Pokeman, Sony Playstation, Toyota of Japan, TWBA, Universal McCann, and Yahoo. No customer that accounted for more than 10% of our revenue. Only Microsoft took more than 10% of total revenue in 2009 and 2008, The diversification of customers gives the company more flexibility for its operation efficiency. In any case that the company encounter the discontinuation of service usage by one customers, it will not affect very significantly on the company’s long term performance. For sales and marketing, the company is doing sales via several channels: via telesales, field sales force, distribution partners and resellers. [b]Research and Development[/b] For the fast growing industry like this, R&D is very important for keeping the company maintain its position in the market place as well as growing it. Limelight had 118 employees in research and development group. It is located in Atlanta, Georgia and at the headquarters in Tempe, Arizona. The company is said to test services to ensure scalability in times of peak demand. It uses internally-developed and third-party software to monitor and to improve the performance of platform in the major Internet consumer markets around the world where the services are provided. [b]Operating performance [img]http://gurufocus.com/images/useruploads/1072041541.jpg[/img] [/b] Having looked at the income statement, it can be seen that the revenue has been increasing really fast over the last 9 years, from US$ 2 millions in 2002 to $183 millions at the end of fiscal year 2010. While the operating income and the net income subject to wide fluctuations with instability. The increase in the revenue from 2006 to 2008 is due to the increase in the recurring CDN service revenue contracts. And the increase in the revenue the recent year is both based on the increase in the cloud based services as well as from the consolidation of two acquired EyeWonder and Delve, contributing nearly 3/4 of the increase in revenue. The sudden plunge of operating and net income in 2007 and 2008 was because of the provision for litigation costs. The company was involved the case of patent infringement versus Akamai Technologies, Inc., or Akamai, and the Massachusetts Institute of Technology. The jury awarded Akamai an aggregate of around $45.5 million in lost profits, reasonable royalties and price erosion damages, plus pre-judgment interest estimated to be $2.6 million. [b]Financial Health[/b] The company is having ample amount of leverage, no interest bearing debts. The large items are accrued liabilities and account payable only. However, due to the acquisitions in 2010, the company records in its fiscal 2010 balance sheet the goodwill items of $94 millions, intangible assets of $14 millions, accounts for 38.1% total assets. Besides, the company got operating leases and other contractual obligations, totalling $62millions, spreading over several years into the future. [b]Free cash flow [img]http://gurufocus.com/images/useruploads/1214452470.jpg[/img] [/b] The free cash flow has been always negative for most of the time over the past 06 years. It is due to the large capital expenditure that the company has to invest for growth to purchase servers and other network equipment associated with the company’s network build-out. [b]Management’s holdings[/b] [b] [/b] The key executives do not hold large position in the company (only 6.5%), the largest are Michael Gorgon (Co-founder), John Vincent (CEO of Eyewonder) and Jeffrey Lunsford (President, CEO and Chairman), each holds around 1.4-1.8% the total shares outstanding. [b]Competitors[/b]
Looking at the comparables figures of competitors and the industry, we saw that only AKAM got TTM profit, and it’s currently valued at 33 times P/E and nearly 5.5 times total revenue. The sales of LLNW has been increasing quite rapidly over the years, it is now value at 2.6 times sales, higher than most of its competitors and the industry average. [b]Valuations[/b] It is hard to pin point the value range for this stock. Currently the tangible book value stands at $142.33 millions. So with the enterprise value of $384.85millions, the LLNW is trading at 2.7 times the enterprise value. I do not think this current price to be undervalued for the stock, taking the past performance as well as the asset values. [b]Conclusions[/b] This is in the technology industry – subject to rapid change, negative free cash flows, high amount of good will and intangibles, and no dividends history. The company has been making several acquisitions for the growth purpose, and the top line keeps increasing due to both the increase in the number of customers as well as the acquisition consolidations. The management doesn’t take much of the stake in the company; it represents little incentive to act for the general shareholders currently. However, for the growth technology company, the management can find several ways to enhance the value of shareholders or even buy back stocks for themselves. The current price does not seem to be undervalued level. Nevertheless, if the company could prove in the future that they are on the right track of growing, in the number of customers, the top line, the bottom line and the free cash flow, the real value of the company would keep increasing. For now, it is not shown to be clear yet. The rumour has been for some years whether Limelight is the target for acquisition. It is very hard to know, as the thought itself is quite speculative. What the value investor like us often based on is the intrinsic value of the company compared to the price itself currently. If any investor like to gamble on the news, just please do so only with the amount that he/she can afford to lose. Disclosure: None This is the subjective viewpoint of the author, it is not the recommendation to buy, hold or sell any stock. The person who wishes to do so should conduct his/her own research, act on his/her own decision, and bear his /her own risks. |
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Jun 26, 2011 Q.E.P. Co. Inc. (QEPC) - $0 Durable Household Products |
In the recent first quarter of 2011, QEPC reported more than double increase in the net income. That further enhanced the rapid increase in the share price. During the time horizon from July 2009 to now, its share price skyrocketed from $2.5 to $19.5. Is the business operating efficiently? And would investors be better off to buy in at the current price? The company was founded in 1979, one of a leading worldwide manufacturers, marketers and distributors of hardwood flooring, flooring installation tools, adhesives and flooring related products targeted for the professional installers as well as the do-it-yourself consumers. It sells its products to home improvement retail centers and specialty distribution outlets in 50 states in the US and throughout the world. [b]Customers[/b] In the recent filing with SEC in fiscal year of 2009, the company has disclosed its concentration in two customers. Dated from 1982, it began selling products to Home Depot, and in 1993, the Company added Lowe’s as a customer, which is the second largest home improvement retailer in the world and eighth largest retailer in the United States. Home Depot and Lowe’s are two largest customers accounting for 59% and 7% of the Company’s fiscal 2009 sales. In the fiscal year of 2011, the company get delisted in NASDAQ and begin to trade in the OTC, which limits the information available. In the annual report of 2011, it said that the customer base includes a high concentration of home improvement retailers with one such customer accounting for a total of approximately 63% and 60% of sales in fiscal 2011 and 2010, but it didn’t mention the name of that customer. [b]Operating figures[/b]
Starting from the top line, the revenue has been increasing gradually, over the last 10 years, revenue went from $110millions to $238millions, growing at the rate of 8.2% per annum. Over the last 10 years, it has two years of negative operating income, which is in 2007 and in 2009. During fiscal 2007, the Company recognized the impairment of $7.5 millions for goodwill and in Mexico, U.K. and U.S. reporting units. And in 2009, another impairment charge of $7.9 million applied to the unit of Domestics, Australia/New Zealand and Europe because of the reduction in net sales due to the global economic downturn. The negative income in 2006 was due to two items in financial charges, the increased in warrant put liability and the increased in the borrowing interest expense. Now the warrant put liability is no longer in the company’s balance sheet.
We can see the gross margin has been ups and down, fluctuating over years, between the range of 27-34%, the operating margin and the net margin is not very impressive, and subjects to wide fluctuations.
To analyze the Dupont profitability model, we can the return on equity has been in the wide fluctuations as well. The asset turnover is quite stable and it seemed to have the rising trend over the 10 year period. The financial leverage level has been contributing quite a lot to the high return on equity over the last 5 years as the net margin was not very impressive. [b]Financial Health[/b] For the quarter ended May 2011, the company reported to have $48.8 millions in total liabilities, and $39.7 millions in equity, which indicates the Debt /Equity ratio of 1.23. A little bit high leverage; moreover, the debt figure should be adjusted for other commitments as well as the preferred stocks. For preferred stocks, there are 03 classes, the Series A is cumulative preferred stock and there are currently 319,160 shares of Series A Preferred Stock issued and outstanding. The holder of each share of Series A Preferred Stock shall be entitled to receive, before any dividends on the Company’s common stock, cumulative dividends equal to the prime interest rate on the first day of the month in which the dividends are payable, less 1-1/4%, payable in semi-annual installments. Besides, there were 17,500 shares of Series C Preferred Stock issued and outstanding. The holder of each share of Series C Preferred Stock shall be entitled to receive, before any dividends on the Company’s common stock, cumulative dividends at the rate of $.035 per share per annum, payable in annual installments. There is no preferred outstanding stock for series B at the moment. The number of preferred stocks outstanding is not very large at the moment, so it doesn’t affect much on the financial health currently. For other commitments, QESP will have to make the minimum payments under non-cancellable operating leases. The total operating lease payments are around $6 millions which doesn’t appeared on the balance sheet. With those adjustments to be made, the Debt/Equity ratio is around 1.4 with the majority of the debt items in trade account payables and accrued liabilities. Whether the business can sufficiently generate enough cash to meet with the liabilities, we will examine the trend in the free cash flow and the working capital
Over the past 10 years, the the FCF as well as Working capital is subject to large fluctuation as well, Working capital tended to decrease over time until 2009 and went back up for the last 02 years. The reason for the high FCF in the last 02 years because of high net income (due to lower cost of good sold) and increase in the trade payables and accrued liabilities. It seems quite hard to have some predictability on the profitability and free cash flow the firms might generate in the future. [b]Management[/b] [b][i]Lewis Gould, Chairman of the Board, CEO[/i][/b] He has served in this position since 1979. Mr. Lewis Gould, formerly President, will remain as QEPC’s Chairman of the Board and Chief Executive Officer. [b][i]Leonard Gould, President [/i][/b] He has served as Senior Vice President, Retail Accounts of QEPC since 1998. He has held management positions in QEPC since 1995. On May 2008, He was appointed to be President of the company. In his new role Leonard Gould will be responsible for retail sales and all operational aspects of QPEC. Mr. Leonard Gould is the son of Mr. Lewis Gould and Ms. Susan Gould, the Secretary of the company. [b][i]James Brower, Executive Vice President and COO[/i][/b] He has served as Executive Vice-President and Chief Operating Officer since October 2005. Before that, he got substaintial experience in different operation fields with Dorel Juvenile Group, Applica Consumer Products, Inc and Remington Consumer Products, LLC. [b][i]Richard A. Brooke, Senior Vice President,Chief Financial Officer,Treasurer[/i][/b] He has served as Senior Vice President since January 2006. On August 2008, He got appointed as the Company's Chief Financial Officer, Senior Vice President and Treasurer. Before that, he was independent management consultant providing strategic and financial planning, restructuring and technology solution services from 1989 to 2006. Prior to 1989, Mr. Brooke was the chief financial officer of Sahlen & Associates, Inc., chief financial officer of Biogen, Inc., and a Partner with Deloitte Haskins & Sells. [b][i]Jamie L. Clingan, Senior Vice President[/i][/b] She has served as the Senior Vice President, International Marketing since July 2006. She has held management positions with QEPC since 2002. Prior to 2002, Ms. Clingan served as Marketing Manager with MAPEI Corporation, a supplier of adhesives and chemicals to the construction industry. Besides, there are Lawrence P. Levine, the General Counsel and Susan J. Gould, the wife of the chairman, to be the secretary. The largest shareholder is the chairman and CEO of the company, holding around 40% of the total outstanding shares, and his wife of 1.4% of the company. By looking at the share holding structure and the key executives, it gives me the feeling of the family company where the father, the son and the wife involves deeply in the operation of the company. [b]Comparables[/b]
When looking at this table, by far the best company in the industry is DHR, enjoying the highest gross margin at whopping 51% and net margin, nearly double the closest competitor. QEPC is very on average in terms of gross and net margin, the operating margin is the lowest of the four. [b]Valuation[/b] Comparing the relative P/E ratio with the industry and the closest competitors, QEPC seems to be cheapest. However, the low P/E is regarded as good stock normally, but not with the cyclical. Besides, the earnings and the cash flow of the company over the past 10 years seems to be very volatile, it’s hard to have some confidence on the future profitability. With the cyclical, we need to pay extreme attention to the health of the balance sheet. For QEPC it’s not in the warning sign, but it doesn’t give the common stock holder enough confidence to sleep well at night. Roughly, the average earning of the company over the last 10 years is at $1.7 millions. Assuming that is the average earnings for the future period to infinity, with the discount rate of 10%, the company would be value at $17 millions only. The liquidation value or net working capital of the company stands roughly around $22million. As for both liquidation value and going concern value, the maximum price I would pay for the business is around $39millions. [b]Conclusion[/b] The company earnings and cash flow are volatile, and the financial strength is not very outstanding. Besides, the stock price keeps increasing in the price at the breathtaking pace. At the market valuation of $65millions, I consider it is the overvalued. In the short-term, investors might still be able to see the market price increase, but the probability of price increase over the long run is low. If QEPC proves to produce good consistent earnings and cash flow over some more periods in the future, then it can enhance its balance sheet and the value investors would have more confidence to get involved. It is solely the subjective viewpoint of the author. It is not the recommendation to buy, hold or sell certain stocks. Anyone should do his/her own researchs for his/her own actions. |
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Jun 18, 2011 PartnerRe Ltd. (PRE) - $67.64 Property & Casualty Insurance AON Corp. (AON) - $48.06 Property & Casualty Insurance Marsh & McLennan Cos. (MMC) - $32.53 Property & Casualty Insurance |
Partner Re (PRE) provides reinsurance for its clients in150 countries around the world. The Company provides reinsurance of non-life and life risks of ceding companies (primary insurers, cedants or reinsureds) on either a proportional or non-proportional basis through treaties or facultative reinsurance. [b]Insurance operation[/b] [i]Figures in USD millions[/i]
As we can see here, PRE has managed successfully to expand the operation to growth in the net premiums written, growth of 11.34% compounded annually, during that time, the investment income is growing 10.86% annually for the last 10 years. Now we will break down to the segment and the investment to see clearly in terms of operating results. Fiscal year 2010, PRE had two brokers that individually accounted for 10% or more of its gross premiums written. The Aon Group (AON) (including the Benfield Group) took around 25% of total gross premiums written, while Marsh (MMC) (including Guy Carpenter) accounted for approximately 21% of total gross premiums written. We can divide the business into: North America, Global (Non-US) Specialty, Global Property and Casualty, Catastrophe which belongs to non-life, and life insurance. The life insurance segment is only very small percentage of the total business. The two largest segments contributing to the total premium is Global Specialty, and North America (51%-56%). Over the last 10 years, it generated the positive profit except in 2001 and 2005, and 2008, just a little bit of profit. By the time 2001, the company’s operating results got hit by the two largest events 2001: the terrorist attacks of September 11 and the collapse of Enron. During 2005, pricing was generally flat to down, besides, that year was consider as the worst year in the history of the industry in terms of catastrophe losses, with Hurricane Katrina being the largest insured event ever. In 2008, pricing declined in most major markets and most lines of business, and there was also an increase in severity of losses, such as Hurricane Ike, frequency of losses and significant and widespread financial turmoil stemming from the sub-prime mortgage and resulting global credit and financial crisis. When examining the operating result of any insurance companies, we should look at the expense ratio. Below are the ratios of non-life segments of PRE for the last 5 years:
The combined ratio is the common measure for the insurance industry. The ratio above 100% means that the insurance company pays out the claim larger than it receives the premium. For PRE, we can clearly see that combined ratio is well below 100%, and fluctuating over the years, highest at 2010 at 95%. However, the insurance operation is making profit. It effectively means the cost of funds is below zero for the last 05 years, and the reinsured are paying money for PRE to hold the cash, i.e the float. The float is the money that the insurance companies temporarily hold but do not own. There is float because premiums are received before losses are paid. The time interval can sometimes extend to decades. During this time, the money can be invested by the insurer. The good insurance companies are those which can growth their float over time and the cost of float should be below the cost of Treasury 10 year notes. For PRE, we have already seen they got the cost of getting the float below zero, and we will see their float has been growing as well. I calculated the average relative float with unpaid losses, unearned premium, funds held under assumed reinsurance with adjustment for premium receivable, prepaid acquisition cost and prepaid taxes. The amount of floats that PRE generated from 2006 stands at $8.2billion, and grow gradually to $11.8billion in 2010, the compounded annual growth of 7.55% per year. [b]Investment portfolio[/b] The insurance operation has done very good job of acquiring the floats which costs them less then zero. That’s the first step. The second step is how well they invest those floats; we will examine their investment portfolio. According to their annual report in 2010, the total investment amount reached $13.4 billions. The majority is in fixed income instruments (92.5%), whereas the largest percentage is corporate bonds of 46.5%, non-U.S. sovereign government, supranational and government related of 21.7%, and residential Mortgage backed securities (MBS) of 18.3%. Corporate bonds are comprised of obligations of U.S. and foreign corporations. At December 31, 2010, 91% of these investments were rated investment grade (BBB- or higher) by Standard & Poor’s (or estimated equivalent), while 67% were rated A- or better. For the second largest category, non-U.S. sovereign government obligations comprised 81% of this category, of which 94% were rated AAA. The largest three non-U.S. sovereign government issuers (France, Germany and Canada) accounted for 83% of non-U.S. sovereign government obligations. The residential MBS category included U.S. residential mortgage-backed securities, which accounted for 88%. Around 98% of these securities are backed by agencies of the U.S. government, so they generally have very low default risks, and this is considered as the standards on the mortgages before they are accepted. Basically, their investment policy is quite conservative, mostly in fixed income securities and the majority of them are either got the above average ratings (BBB or higher) or have low risk of default. Besides, referring to the first table in the analysis, we can see the investment income gradually rising gradually over the years. However, it will be better to see PRE moves out of the high-grade fixed income instruments and allocate more for better equity so that it can earn more on its float investments. [b]Exposures for Q1 2011[/b] According to the company’s report, PRE incurred net losses of $1,071 million related to the combined impact of the Japan Earthquake, New Zealand Earthquake, Australian Floods and an aggregate contract covering losses in Australia and New Zealand. Out of the total net loss amount, $722 million related to the Japan Earthquake, $252 million related to the New Zealand Earthquake and $97 million related to the Australian Floods and the aggregate contract covering losses in New Zealand and Australia. Obviously, the actual losses from those events may materially exceed the estimated losses as a result of, an increase in industry insured loss estimates, the expected lengthy claims development period, in particular for earthquake related losses, and the receipt of additional information from cedants, brokers and loss adjusters. [b]Management[/b] [i]Costas Miranthis, Director, President and Chief Executive Officer[/i] Mr. Miranthis was with Tillinghast Towers Perrin in London, U.K., from 1986 to 2002. He was managing the European Non-Life Practice and the Mergers and Acquisitions European Practice. He was also a member of Tillinghast Worldwide Non-Life Management Committee. He is a Fellow of the Institute of Actuaries and a Member of the American Academy of Actuaries. [i]Theodore Walker, Chief Executive Officer, PartnerRe North America[/i] Mr. Walker was appointed Head of the worldwide catastrophe underwriting operations in 2002. In 2007, Mr. Walker assumed the role of Chief Underwriting Officer for PartnerRe North America (formerly PartnerRe U.S.). He became the CEO of PartnerRe North America from Jan 2009. [i]Marvin Pestcoe, Chief Executive Officer, Capital Markets Group[/i] He joined PartnerRe in 2001 to lead PartnerRe’s alternative risk operations and was appointed as Deputy Head of the Capital Markets Group and Head of Capital Assets in 2008. Mr. Pestcoe was appointed as Chief Executive Officer, Capital Markets Group from Oct 2010. Mr. Pestcoe also has executive responsibility for the Life Business Unit. [i]Emmanuel Clarke, Chief Executive Officer, PartnerRe Global[/i] Mr. Clarke joined PartnerRe in 1997 and was appointed as Head of Credit & Surety PartnerRe Global in 2001 and Head of Property and Casualty, PartnerRe Global in 2006. In 2008 Mr. Clarke took the position as Head of Specialty Lines, PartnerRe Global and Deputy Chief Executive Officer, PartnerRe Global. Mr. Clarke was appointed as Chief Executive Officer of PartnerRe Global from September 2010. [i]William Babcock, Executive Vice President and Chief Financial Officer[/i] Mr. Babcock joined PartnerRe in 2008 as Group Finance Director. He was appointed as Executive Vice President and Chief Financial Officer in 2010. Prior to joining PartnerRe Mr. Babcock held the position of Chief Accounting Officer and Director of Financial Operations at Endurance Specialty Ltd. [i]David Outtrim, Chief Accounting Officer[/i] David Outtrim became Chief Accounting Officer in April 2010. He joined the Company in January 2007 as Group Controller and was responsible for the management of Group accounting and reporting processes and implementation and on-going management of the internal control environment procedures, processes and systems to support these requirements. Prior to that, he was the Financial Controller at Quanta Capital Holdings Ltd. from 2004 to 2006. Before that, Mr. Outtrim was an Auditor and Senior Manager at KPMG (Bermuda and Europe) from 1996 through 2004. The executive team has experience in insurance industry, in the ages of nearly 40-50s. What makes me not very interested in the management aspect is that the board of management and directors only hold very small percentage in the company (only 0.33% in total). [b]Valuation[/b] [b][i]Liquidation valuation[/i][/b] Tangible book value is considered as the proxy for [url=http://wiki.fool.com/Liquidation_value?source=ihlsitlnk0000001]liquidation value[/url] -- an estimate of what the insurance company would be worth if the company closed its doors, paid out claims, and returned excess capital to shareholders. As of March 2011, tangible book value of PRE stands at $5 billions. With current market value of $4.6 billions, the stock is trading at 92% of its tangible book value. [b][i]Relative valuation[/i][/b]
As we can see, historically, PRE has been trading above its book value, even with the year of losses in 2001, 2005. And currently it is traded at the lowest P/B comparing to its own 10-year history
Comparing to some of its close competitors and its industry, it is trading at the lowest level with the P/B ratio. Ø [b][i]Discounted Dividend Valuation (Gordon Growth Model)[/i][/b]
[i]Book Value/share and Div in USD[/i] For 10 years, PRE has ups and downs with different disastrous events. Nevertheless, on average, it has successfully gained the return on equity of 10.6%. Dividends over the last 10 years grow at 6.42% annually. If we assumed the growth in dividends would be 6.42% forever in the future, using the discount rate of 10%, the intrinsic value stays at $61/share. [b]Conclusions[/b] PRE is good reinsurance company, earning average of 10.6% on equity for the last 10 years, with the history of underwriting profit and growing float at the rate of 7.55%/year. However, the management and board of directors own very little stake in the company, and PRE’s investment portfolio is quite conservative. At the current price of $68/share, it is trading below its liquidation value, below its historical P/B and its competitors as well as industry P/B. For the discounted dividend valuation, the assumptions of dividends growing at 6.42%, discount rate of 10%, it is trading at premium above the calculated intrinsic value. PRE seems to be a good buy for conservative and income investors who prefer growing dividends over time. But for value investors, this stock would not be in their portfolio as it is not the screaming bargain at this price. There are better insurance companies out there which in the past have shown very satisfactory return over the long period, both operating results and performance in the market. Disclosure: This is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wish to buy, hold or sell the stocks has to do his/her own analysis at his/her own risks. Anh HOANG |
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Jun 16, 2011 Lubrizol Corp. (LZ) - $134.72 Specialty Chemicals |
The Lubrizol Corporation (LZ) is a specialty chemical company. The company supplies technologies and produce additives, ingredients, resins and compounds. Its products are used in a range of applications and are sold in markets, such as those for engine oils, specialty driveline lubricants and metalworking fluids, as well as markets, such as those for personal care and over-the-counter pharmaceutical products, performance coatings, medical products and compressor lubricants. Its specialty chemical products also are used in a variety of industries, including the construction, sporting goods, medical products and automotive industries [b]Pricing Power[/b] Pricing power is one of the most important points in evaluating the business. Lubrizol got the power to raise prices without losing business to a competitor. Lubrizol has raised its product price 18 times since 2004. Look at the graph below. Lubrizol's ability to pass on input costs is superb due to working with customers as early in advance as they can in a collaborative manner. It also helps that their customers have also been able to successfully raise prices as well. [img]http://gurufocus.com/images/useruploads/375925680.jpg[/img] [b]Five-Year Summary[/b] Lubrizol sales look good but slightly decreased in 2008 because of rapidly escalating raw material costs, and its EPS increased 47% in 2010, improved to more than 300% in five years.
[b] Industry Strength[/b] NewMarket Corp. ([url=http://seekingalpha.com/symbol/neu]NEU[/url]) and Innospec Inc. ([url=http://seekingalpha.com/symbol/iosp]IOSP[/url]) are two of Lubrizol's closest public competitors. Below is a chart of the comparative performances of each company.
[b] Free Cash Flow[/b] Free cash flow is one of the more important fundamental metrics in evaluating an equity investment. Free cash flow to the firm (FCFF) represents the cash flow that a company generates in an accounting period, after paying operating expenses and making necessary expenditures. This cash flow represents the return to all providers of capital, whether debt or equity. It can be used to pay off debt, repurchase shares, pay dividends or be retained for future growth opportunities. Lubrizol has very good free cash flow compared to its competitors
[b]Conclusion: [/b][b]Lubrizol is a unique value stock[/b]. [i]This is not a recommendation to buy or sell shares of any securities discussed in this article. Please do your own research work.[/i] |
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Jun 9, 2011 Hudson City Bancorp Inc. (HCBK) - $7.19 Banks |
[b]Hudson City Bank (HCBK)[/b] Hudson City Bank is a traditional savings bank based in Paramus, NJ. The bank’s core business consists of taking deposits and making primarily 1-4 family first mortgage loans, with a specialty in jumbo loans in the New York metro area. The bank has $52.45 billion in assets (2011Q1) and operates 130 locations in the New York metro area or surrounding counties. Hudson City got through the sub-prime crisis in 2008 unscathed but not the current low interest rate environment. I believe that there are three main issues that surround Hudson City, keeping the stock price low. First, the amount of nonperforming loans has been rising while loan charge-offs have remained relatively low. Most understand that Hudson City’s loan portfolio is very high quality, so this likely is not the reason the bank is trading at low multiples. I will discuss this issue, however, to provide some clarity. Second, Hudson City has a very low net interest margin — the difference between what they pay to borrow money and the interest they charge for loans and as such they were forced to restructure their balance sheet in the first quarter of 2011. This issue likely contributes to the low valuation of the stock. Third, Hudson City is having trouble finding a way to grow its loan portfolio because of the continued interference of Fannie and Freddie in the mortgage market. This third issue is likely the biggest risk HCBK faces. Loan Portfolio[b]Nonperforming Loans[/b]As of the first quarter 2011 Hudson City had $886 million (or 2.92% of total loans) of nonperforming loans (NPLs) but took charge offs of only $21.3 million and has loan loss provisions of only $40 million (reduced this quarter from $45 million). To understand why loan charge offs and loan loss provisions have been small relative to nonperforming loans, we need to look first at the characteristics of Hudson City’s loan portfolio. Hudson City’s 1-4 family first mortgage and FHA/VA loan portfolio makes up 98.2% of its total loan portfolio. I’ll refer to it hereafter as “the loan portfolio.” When originating loans or purchasing loans from other borrowers, Hudson City insists that loans have a low total Loan-to-Value (LTV) ratio. The LTV ratio is the amount of money loaned in relation to the value of an asset that is put up as collateral (a home in this case). For example, if a borrower purchased a $1,000,000 home and paid $400,000 down and borrowed $600,000, that loan would have a LTV ratio of 60%: the amount of the loan ($600,000) divided by the value of the asset ($1,000,000). With Hudson City, the average LTV ratio of the loan portfolio at the end of 2009 was 60.8%. The average LTV of nonperforming loans was 72%. This makes intuitive sense as the less equity a person has in their home the less incentive they have to continue to pay the mortgage. [b]Future Charge Offs[/b] Hudson City had 71.2% of its loans in the NY Metro Area as of March 31, 2011Q1. According to the S&P/Case-Shiller home price index, there has been a 23% price decline in that area from the peak in June 2006 until January 2011. This compares to a 31% decline in the 20-area metro composite. Since April 2009 price declines in the NY Metro have been getting weaker and weaker. However, home prices may have further to fall according to some experts, including Robert Shiller himself. As we saw above, the LTV of Hudson portfolio is about 60% and the LTV of the nonperforming loans was about 72%. This means that Hudson can continue to see the amount of nonperforming loans rise, but because of the substantial equity cushion in its loan portfolio the bank likely will not have to realize proportional losses. In fact in some quarters the company has booked gains on the sale of foreclosed real estate. [b]Excess Capital[/b] The most important thing Hudson City has to protect itself from loan losses is excess capital. As of March 31, 2011 Hudson City had leverage (core) capital of 8.12% which is well above the 5% definition for well capitalized and 4% adequacy ratio. Hudson City also had risk based capital of 19.66% which is well above the adequacy level of 8% and the well-capitalized level of 10%. In a rising interest rate environment Hudson City can put this excess capital to work at higher interest rates and thus mitigate some of the effects that rising rates would have. This excess capital will likely be the most important thing in protecting Hudson City’s profitability in a rising interest rate environment. However in the current environment HCBK is having trouble growing its loan portfolio. Net Interest Margin and Balance Sheet Restructuring[b]Low Net Interest Margin[/b]Hudson City’s Net Interest Margin (NIM) is one of its greatest risks. The Net Interest Margin (NIM) is the difference between what a bank pays for its funding, be it borrowing or deposits, versus the rate at which it loans the money. NIM can be thought of as similar to the gross margin for nonfinancial companies. As of 2011Q1 Hudson City had a net interest margin of 1.72%. According to the St. Louis Federal Reserve, as of March 3, 2010 the average net interest margin of banks with assets over $15B was 3.83%. This means that Hudson City’s NIM is substantially worse than average. Why is Hudson City’s net interest margin so low? It is generally the result of how Hudson City has chosen to conduct business. The COO (now President) Denis Salamone summed it up concisely in [i]US Banker[/i]: "It's a pretty simple business proposition we offer people, you give us a lot of equity, and we give you a good rate." As we saw in the previous section Hudson City has a very low LTV ratio for its portfolio. It has been able to do this in part by offering loans at lower rates than competitors thus leading to a lower net interest margin. But net interest margin tells only part of the story. For a stable bank that derives most of its revenue from making loans, the efficiency ratio is the best measure of a bank’s profitability. When discussing banks that are rapidly growing or deriving a large portion of revenue from other non-banking sources, the efficiency ratio is not an effective of a measure. The efficiency ratio can be thought of as the rough equivalent to the operating profit margin (actually the inverse of the operating margin) of a traditional company. With traditional companies, the gross margin takes into account only the cost of goods sold. The operating profit margin also takes into account selling, general, and administrative expenses. So the operating profit margin shows a better picture of how profitable the company is overall. Similarly, the efficiency ratio takes into account not only the net interest margin (by using net interest income in the calculation of the ratio) but also most of the other costs a bank incurs. Hudson City had an efficiency ratio of 26% as of the first quarter of 2011. This means that it costs Hudson City 26 cents to generate $1 in profit. Hudson City, then, derives the bulk of its advantage not from expanding its NIM but from being as efficient as possible. The Federal Reserve has continued to keep interest rates low and this has had a negative impact on HCBK. During the low interest rate environment HCBK’s NIM has steadily declined. Last March HCBK’s NIM was at 2.2%, which is already considered low. One year later by March 2011 the NIM had fallen to 1.72%. Because of this Hudson City was forced to restructure its balance sheet. [b]Funding Structure[/b] Hudson City had financed itself through certain types of borrowings that early last decade when interest rates were higher. Generally the interest it paid on those borrowings was fixed. However Hudson City’s investment portfolio contained securities whose yields dropped as interest rates fell. HCBK also saw prepayments on its mortgage portfolio rise meaning it needed to reinvest those funds as well. Hudson City essentially could not find enough investments that yielded substantially higher than its borrowing cost so it was forced to restructured its funding and take a large loss in 2011Q1. Reasons for the slow growth and lack of investment opportunities will be discussed in the next section. A link to the press release with information on the balance sheet restructuring is [url=https://www.hcsbonline.com/documents/pr_03_28_11.pdf]here[/url]. Slowing Growth and Government Interference in Mortgage Market[b]Slowing Growth[/b]“Furthermore, in light of the current economic environment, where interest rate levels are artificially low and GSEs are actively purchasing loans, there is very little opportunity for residential mortgage portfolio lenders, like Hudson City, to profitably add to our loan portfolio and to continue our recent growth strategy.” n From the 2010 Letter to Shareholders From 2005 to 2008 Hudson City had grown their loan portfolio by over 20% each year. In 2009 the growth rate slowed to 7.75%. In 2010 the bank barely grew as the loan portfolio only increased 1.5%. The bank then started shrinking. In the first quarter of 2011 as assets dropped 14.3%. Growth has turned negative for two reasons. [b]Lack of Qualified Borrowers[/b] Management has made comments about it being a tough environment to find customers wanting loans who meet the banks qualifications or loans available for purchase that meet the banks standards. High unemployment, slow economic growth, and falling home prices have greatly reduced the demand for new lending. [b]Continued Involvement of GSEs in the Mortgage Market[/b] Fannie Mae and Freddie Mac continue to offer insurance for loans at what is generally viewed as below market rates and have accounted for more than 90% of mortgage production in 2010. This has the affect of crowding traditional thrifts such as Hudson City out of the market and making it difficult to grow their loan portfolio. Lack of qualified borrowers and the involvement of GSEs is perhaps the biggest risk as Hudson City traditional method of growing assets is no longer viable and it must find a new business model. Valuation[b]Valuation[/b]As of March 31, 2011 Hudson City had a book value of $9.58, and a Tangible Book Value of $9.26. The stock currently yields 3.8% (after the recent dividend cut). With Hudson City currently trading in the mid $8 range it would seem at first blush that HCBK would be an attractive investment. Since it is Hudson City’s asset growth that is of most concern we will lay out three different scenarios using an asset based valuation methodology. Hudson City has seen its return on assets drop from a high of 1.36% in 2002 to .8% as of last quarter. Historically Hudson City’s return on assets has averaged around 1%. Current Market Cap: $4.4B [b]Conservative:[/b] 2014-2016 Assets: 50B, Return on Assets (ROA) .75% = $375M in net income $375M times 10x multiple = $3.75B market cap $3.75B market cap in 2014: -5% CAGR on your investment at today’s price ($4.4B or roughly $8.5/sh) $3.75B market cap in 2016: -3% CAGR [b]Base Case:[/b] 2014-2016 Assets: 56B, ROA .85% = $476M in net income $476M times 12x multiple = $5.712B market cap $5.712B market cap in 2014: 9% CAGR $5.712B market cap in 2016: 5% CAGR [b]Aggressive:[/b] 2014-2016 Assets: 62.5B*, ROA 1%** = $531M in net income $531M times 14x multiple = $7.434B market cap $7.434B market cap in 2014: 19% CAGR $7.434B market cap in 2016: 11% CAGR *Valueline estimate: Hudson City’s total assets were $61 million in 2010 but now stand at $52 billion, so this scenario assumes higher growth for the next few years. Using an asset based model we can see that we need to use some aggressive assumptions in order to make HCBK shares look attractive and provide a satisfactory rate of return for an investor at today’s prices. SummaryAlthough Hudson City Bank looks cheap its old pre-2008 business model has essentially died because of government policy. HCBK now is being forced to find a new way to do business. Because of the forced change in its business model HCBK faces a very uncertain future. Even though its valuation currently may look attractive I believe the continued threats of long term government intervention in the financial markets, specifically keeping short term interest rates low and keeping the price of mortgage insurance low, do not make HCBK a good investment. Indeed, the Fed has shown no signs of raising rates and no concrete plans to reduce the role of Fannie and Freddie in the mortgage market have been presented.It would be wise to hold off on investing in HCBK until management informs shareholders of its strategy to grow the bank going forward. At that point investors can better judge the likelihood of success. Furthermore while shares do hold some upside, there is very little downside protection as aggressive growth assumptions are needed to realize a good return. Disclosure: None |
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| Joel Greenblatt
May 20, 2011 TALBOTS INC WT EXP 040915 () - $0 others |
[url=http://www.gurufocus.com/StockBuy.php?GuruName=Joel+Greenblatt]Joel Greenblatt[/url]'s magic formula has proven to be one of most popular and successful quantitative screens. By finding stocks with better than average return characteristics selling for below average prices, the screen has proven its ability to outperform the market. However, the screen has one blind spot- stocks with a market cap under 50 million. The magic formula newsletter aims to take advantage of this blind spot and find small companies with great business models trading for outstanding prices. This month's pick is trading for 5.5 earnings despite returns on capital approaching 50%. Even better, earnings understate the company's true cash flow! The company trades for about half the multiple of its direct competitors despite a stronger balance sheet and returns on capital twice their competitors. There's even a catalyst in place! Activists own 30% of shares outstanding and are pushing for the company to sell itself, which could result in a huge premium for shareholders. Interested? Find out what company this is in this month's microcap magic formula newsletter. This is the link to download the special report: [url=http://www.gurufocus.com/nl_downloads.php?nl=nl3&issue=May2011][img]http://www.gurufocus.com/images/download-icon.gif[/img][/url] |
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Apr 29, 2011 Intel Corp. (INTC) - $26.74 Semiconductors (IMG) - $ others VMware Inc. (VMW) - $95.58 Software Clearwire Corp. (CLWR) - $1.81 Internet (IMFT) - $ others (IMFS) - $ others SMART Technologies Inc. (SMT) - $3.67 Broadcasting & Entertainment Micron Technology Inc. (MU) - $7.95 Semiconductors (IMG) - $ others VMware Inc. (VMW) - $95.58 Software Clearwire Corp. (CLWR) - $1.81 Internet (IB) - $ others |
[b]COMPANY PROFILE[/b] Intel Corporation (INTC) is the world’s largest chipmaker by revenue ($43B in 2010) and unit shipments, eclipsing their peers in the semiconductor industry. They design, develop, and manufacture integrated digital technology, primarily integrated circuits (ICs, or aka chips) for original equipment manufacturers, original design manufacturers, personal computer (PC) and network communications products users, and other manufacturers of industrial and communications equipment. Additionally, they develop computing platforms—a combination of hardware and software designed to provide a solution. Although known for their dominant market share in microprocessors, Intel is transforming from this focus to become a company that can deliver complete solutions consisting of hardware/software platforms and supporting services. As stated in their recent 10-K, their goal is to be “the preeminent computing solutions company that powers the worldwide digital economy.” Intel was originally founded and incorporated in California in 1968 and later reincorporated in 1989 in Delaware. They are based in Santa Clara, California. Their company stock trades on the NASDAQ under the symbol INTC with a market capitalization of $111B. As of the end of 2010, Intel had 82,500 employees worldwide, of which 55% are employed in the US. [b]COMPANY HISTORY[/b] Intel was founded in 1968 by three men: chemist and physicist, Gordon Moore (of Moore’s Law fame); physicist and co-inventor of the IC, Robert Noyce; and chemical engineer, Andy Grove. Their company’s original name was NM Electronics, before changing it a year later to Integrated Electronics, or “Intel” for short. At its start, Intel set itself apart by their ability to produce semiconductors. Their primary products were static random access memory (SRAM) chips. During the 1970s their business grew and they expanded and improved their production processes to allow a wider range of products to be made. Intel created the first commercially available 4-bit microprocessor, the Intel 4004, in 1971. In 1972, they introduced the first 8-bit processor, the 8008. In 1974, the 8080 came out which was wildly popular in the growing personal computer movement and spawned a variant from Zilog, the Z-80, popularized in Radio Shack’s offering, the TRS-80. Motorola got into the microprocessor game as well with its 6500-series processors being used extensively by Apple in its early models of the Apple, Apple II, and the more powerful 68000-series in the line of Macs. Intel’s big break came with the introduction of the x86 architecture. The 16-bit 8086, and the 8-bit 8088, became the brains of the IBM PC in the early 1980s. Until then, Intel’s business was dominated by dynamic random access memory (DRAM) production. However, they faced increased competition by Japanese manufacturers reducing profitability of this commodity. Fortunately for Intel, the success of the IBM PC convinced then-CEO Andy Grove to shift their focus and concentrate on microprocessors. Intel followed this success up with the 80186 and 80286 (1982), the 80386 (1985), and the 80486 (1989). By the end of the decade, the rapidly growing PC market buoyed Intel’s position and they became the primary and most profitable hardware supplier to the PC industry. In 1991, they introduced the “Intel Inside” campaign which linked brand loyalty to consumer selection. By the end of the 1990s, Intel’s Pentium line of processors was a household name. In the 2000s, microprocessor demand slowed and competitors, mainly AMD, gained significant market share. Intel unsuccessfully attempted to diversify their business beyond chips. During 2005, CEO Paul Otellini, reorganized Intel to refocus the core processor and chipset business on platforms—enterprise, digital home, digital health, and mobility. To regain momentum from lost market share, Intel introduced the “tick-tock” product development model so they could regain their technological lead. This program alternated microarchitecture innovation with process innovation in yearly cycles to push a processor out approximately every two years. Recently, Intel acquired McAfee, a manufacturer of computer security technology, and Infineon Technologies’ Wireless Solutions business. With the Infineon deal, Intel plans to use this technology in laptops, smart phones, netbooks, tablets, and embedded computers in consumer products. [b]INDUSTRY INFORMATION[/b] In order to understand Intel’s business model, it’s necessary to spend a few moments understanding the basic nature of the technology. Transistors, a form of semiconductor, are integral to all modern active electronics and ubiquitous in our everyday lives. The first patent for a transistor was in 1925; however, it wasn’t until Bell Labs’ work in 1947 where the potential of the transistor became apparent. Texas Instruments produced the first silicon transistor in 1954 and ushered in the age of miniaturization. Up until this point, active electronics used vacuum tubes and computers were massive along with their equally huge magnetic-core memory. Transistors can be packaged as separate, discrete components, or integrated onto integrated circuits (ICs), aka chips, to produce complete electronic circuits. This process is accomplished with semiconductor device fabrication using wafers of silicon in a foundry, or fabrication plant, aka “fab.” An astonishingly low price per transistor can be achieved as transistor densities increase, and microprocessors use a lot of transistors. More transistors generally translates to more powerful processors. Moore’s Law, made famous by co-founder of Intel, Gordon Moore, predicts that transistor density on ICs would double every two years. With each new generation of microprocessor, the envelope has been pushed further and further outward, generally keeping pace with Moore’s Law. However, physics imposes a lower limit on the size of silicon-chip transistors—below a certain size, they’ll produce excessive heat and have their functioning impaired by quantum effects. Experts predict the transistor density wall will come in about 10-20 years. When this happens, we will have reached the limits of silicon-based processor technology—processor speed and performance will plateau at that point, unless a replacement is developed. Carbon nanotube technology has the promise to replace silicon chips and allow computer speeds to continue increasing. Nanotube-based transistors, known as carbon nanotube field-effect transistors (CNFETs), have been made that work at room temperature and are capable of digital switching. However, a major obstacle exists—the technology to mass produce them. Additionally, incorporating nanotubes into logic-gate circuits with the required densities to match transistor performance of the 1970s, let alone modern performance standards, hasn’t been demonstrated yet. The future is unclear for the next dominant microprocessor technology. Additionally, there’s a growing trend to keep in mind—the “cloud.” The cloud is nothing more than the Internet; however, how we use and access it in the future will be changing. With an ever-increasingly connected world with computers and mobile devices, more people and more devices will be accessing the cloud. There’s a growing trend where services and file storage will be offered by the cloud and the consumer will access it, where ever he/she is at, with a cloud-connected device, ie. mobile phone, PC, tablet, etc. In effect, this trend means a transfer of raw computing power to the servers making up the backbone infrastructure of the Internet, or cloud, from the currently powerful desktop computers, as the servers would be the devices managing the requests, executing applications, and crunching data. There’s also a trend for faster and faster data transfer, driven in part by video streaming across the cloud. Not only will end devices need to be fast, but the interconnecting devices and infrastructure will need a build-out to accommodate ever-increasing speeds. [b]BUSINESS MODEL[/b] Intel designs and manufactures computing and communications components, which include microprocessors, motherboards, chipsets, and wired and wireless connectivity devices. Microprocessors account for 15% of the total semiconductor industry’s revenues, and this field is dominated by Intel and AMD. Intel ships over 80% of the world’s microprocessors. The company’s vision is to create a seamless continuum of personal computing experiences based on their proprietary architecture. Achieving this vision, in this increasingly interconnected world with mobile devices, will give consumers a portfolio of secure, consistent, and personalized computing experiences across a range of Internet-connected devices. These devices would then be consistent and interoperable amongst themselves for seamless connections and computing capability both locally and in the cloud. Intel’s goal is to be the preeminent computing solutions company that powers the worldwide digital economy. To achieve this goal they’re transforming from a company with a main focus on the design and production of PC/server semiconductor chips to a computing company that can deliver complete solutions involving hardware, software, and supporting services. Intel’s operations are broken into three main business segments: the PC Client Group (PCCG), the Data Center Group (DCG), and Other Intel Architecture (IA) that produce 74%, 20%, and 4% of revenue, respectively. · PCCG: makes microprocessors and related chipsets for the desktop, notebook, and netbook segments. This group additionally makes desktop motherboards and wireless connectivity products. · DCG: this group’s products includes microprocessors, chipsets, motherboards, and wired connectivity devices used in servers, workstations, storage, and other applications supporting the infrastructure for data centers and cloud computing. · Other IA: this group is made up Intel’s smaller businesses which include the Embedded and Communications Group (ECG), the Digital Home Group (DHG), the Ultra-Mobility Group (UMG). o ECG: produces scalable microprocessors and chipsets for various embedded applications in various market segments, such as industrial, medical, and in-vehicle infotainment. o DHG: makes products used in various consumer electronics that are designed to access and share Internet, broadcast, optical media, and personal content through linked digital devices within a home. o UMG: offers microprocessors and chipsets for mobile Internet platforms, such as the handheld market segment. · Other Operating Segments o NAND Solutions Group: this segment offers NAND flash memory products mainly used in portable memory storage devices, digital cameras, solid-state drives (SSDs), etc. These memory products are made by IM Flash Technologies, LLC (IMFT). o Wind River Software Group: develops and licenses software optimization products for devices, including operating systems, to support the needs of consumers in the embedded and mobile market segments. Intel’s manufacturing operations are mostly integrated. About 61% of their wafer fabrication, including microprocessors and chipsets, was performed in the US at their facilities in Arizona, New Mexico, Oregon, and Massachusetts. The remaining 39% was made outside of the US in plants located in Israel, Ireland, and China. Intel uses third-party foundries to make wafers for certain components, which include networking and communications products. They also use subcontractors to produce board-level products and systems, and buy some communications networking products from vendors in the Asia-Pacific region. To continue to push the density and performance envelopes, Intel incurs significant start-up costs to ready each factory for each succeeding generation of process technology. Although costly, benefits of migrating to each generation includes higher transistor densities, reduced heat output per transistor, and/or increased quantity of integrated features per chip. The net result is higher performing processors which consume less power and cost less to make. Intel products flow from manufacturing to assembly and test. These processes are performed at facilities in Malaysia, China, Costa Rica, and Vietnam. Intel augments capacity using subcontractors to assemble certain products, namely chipsets and networking and communications gear. Intel focuses their R&D on advanced computing technologies, developing new microarchitectures, advancing the silicon manufacturing process technology, delivering the next generation of processors and chipsets, improving platform initiatives, and developing software and tools to support these technologies. They continue to make significant investments to develop systems on chips (SoCs) to enhance growth in areas such as mobile devices, embedded applications, and consumer electronics. They also invest in wireless technologies, graphics, and high-performance computing. As mentioned previously, Intel operates their technology development on a “tick-tock” schedule which enables them to produce a new processor roughly every two years. Intel has provided leadership in silicon technology over the years, and will be manufacturing products using their new 22nm technology later in 2011. Their leadership in this area has enabled Moore’s Law to become a reality. Their R&D model is built on a global network of organizations that emphasizes collaboration in identifying and developing new technologies, leading standards setting initiatives, and influencing regulatory policies to speed up the adoption of new technologies. Additionally, their R&D is centrally managed, but de-centrally executed--the different internal business groups perform the R&D, but corporate manages cross-business group initiatives to align and prioritize resources and activities across the groups. Lastly, Intel augments their R&D by investing in companies or entering into agreements with companies that have similar focus areas, such as their joint development agreement with Micron for development of NAND flash memory technologies. [b]INTELLECTUAL PROPERTY PORTFOLIO[/b] Intel’s intellectual property portfolio includes patents, copyrights, trade secrets, trademarks, and maskwork rights. Interestingly, up until 1984, US law didn’t recognize intellectual property rights related to microprocessor topology (aka microarchitecture), the layout of transistors in a silicon wafer to achieve a design. The Semiconductor Industry Association (SIA) and Intel pursued these rights eventually resulting in the Semiconductor Chip Protection Act of 1984. Even though patents are integral to Intel’s success over the years, their business isn’t dependent on any single patent. Due to their “tick-tock” development process, their products are typically obsolete before they patents expire. In some cases, products are obsolete before the patent is even granted. Additionally, the bulk of the software Intel generates and distributes is copyrighted, which includes software (aka firmware) embedded in component-level and system-level products. They also protect details relating to their processes, products, and strategies as trade secrets. [b]COMPETITION[/b] The semiconductor industry is cyclical, fluid and marked by rapid technological advances and frequent product introductions. As mentioned in the previous section, the life span of their products is typically short. Intel’s ability to compete rests in their ability to out-innovate and improve products and processes faster than competitors. To accomplish this feat requires a massive R&D budget, which Intel has and they’ve successfully out-performed the competition through the years in what would otherwise be a commoditized product. However, Intel is largely dependent on the success of their microprocessor business, which makes up the bulk of their revenue. Intel’s competitors by product line are:
To expand on the microprocessor segment from above, Intel faces competition with rival architecture designs. IBM (IBM), Sony (SNE), and Toshiba are jointly developing the Cell Broadband Engine Architecture; IBM offers the Power Architecture; Oracle provides the Sun Scalable Processor Architecture (SPARC); and ARM Limited developed the ARM Architecture, which is a 32-bit reduced instruction set computer (RISC) design. ARMS stands for Advanced RISC Machine. Additionally, NVIDIA began developing ARM-based processors to merge with their graphics processors, which offloads some of the traditional workload from a microprocessor to a graphics processor. ARM processors were originally intended to be used in desktop personal computers; however, this market is now dominated by Intel’s x86 family of processors used extensively in IBM PC-compatible and Apple Macintosh computers. ARM processors are inherently simple and are viable in low-power applications, a feature which has made them dominant in the mobile phone and embedded electronics markets. In 2005, roughly 98% of the mobile phones used at least one ARM processor. As of 2009, about 90% of all embedded 32-bit RISC processors were ARM designs, which are found predominantly in PDAs, mobile phones, digital media/music players, hand-held games, calculators, hard drives, routers, etc. ARM doesn’t manufacture processors. They design, patent, and license the technology intellectual property and offer supporting software and services—a high gross margin enterprise. Intel’s ability to compete with ARM lies in their ability to design and manufacture high-performance, low-power, processors at competitive prices. The Intel Atom processor is their foray into this market. Additionally, Intel’s ability to compete and maintain leadership in the PC/server microprocessor space, depends on their talent to continue to out-innovate, and out-market AMD. This’ll require them to continue to push the boundaries of Moore’s Law, of which the ceiling is approaching in the next 10-20 years. Although AMD has shown up Intel occasionally in a single-generation of processor design, they’ve demonstrated a continuous inability over history to upset Intel. [b]RISKS TO BUSINESS MODEL[/b] Besides the usual risks listed in a 10-K with respect to competition, litigation, margin compression, tax rates, currency exchange, etc., there are a few additional risks from my perspective going forward. [u]Moore’s Law:[/u] as mentioned previously in the Industry Information section, the upper limit for silicon transistor density in an integrated circuit will be coming in the next 10-20 years. This means we can expect another 5 to 10 generations of silicon-based microprocessors. However, unless a new technology appears, microprocessor power and speed will plateau at that point. To date, carbon nano-tube technology may hold promise; however, it’s not viable as a commercially available, mass-produced technology. Converting semiconductor foundries over to carbon-based methods would obviously be quite expensive for Intel in the beginning. The change would incur a learning curve, as there was for silicon, in order to evolve the technology, increase densities and performance, and lower manufacturing costs. If Intel went to this expense, it would create cannibalization of sales, at least initially, as consumers convert from the old technology to the new. If Intel doesn’t make the switch, either another firm will create it or the microprocessor industry will stagnate and Intel’s designs will eventually become commodity products. Due to the time required to design and build a foundry, Intel must decide soon when it intends to switch. [u]Change in business model:[/u] Intel’s goal is to be the preeminent computing solutions company that powers the worldwide digital economy. This fact represents a shift in business model from a pure-play microprocessor producer (which represents 75% of their revenue) to a model that’s akin to IBM’s. When companies diversify beyond their area of expertise, the results are usually dismal and they later divest themselves of the non-core business area(s). Additionally, it’s unclear how Intel’s competitive positioning, revenue growth, and earnings growth will fare under this new model. Although not mentioned in the annual report, I believe this shift is related to the above issue with Moore’s Law. [u]Mobile Phone Processors:[/u] ARM Holdings has a virtual monopoly in the mobile phone processor space—the majority of these devices use processors built and licensed on ARM’s designs. Intel is dipping their toes in the water with their Atom chip, but I believe it’ll be a few years before Intel competes in any significant way with ARM. However, I believe this aspect is not as dire as it seems—Intel will still benefit even if they never make it to market in this segment. As more and more mobile devices appear and connect to the cloud and demand more data and more services, the cloud build-out will need to occur. This activity would then have beneficial side-effects for Intel as more powerful servers and a higher quantity of servers gets used which will obviously need their microprocessors. [b]THE $1 PREMISE[/b] In Warren Buffet’s 1983 Owner’s Manual for Berkshire shareholders he stated that earnings retention must, in the long run, deliver at least $1 of market value for every $1 retained in the business. To the extent a business is capable of meeting this test, they’re creating value. Otherwise, earnings retention isn’t being invested wisely and the business, or the management, is value-destructive. It’s a simple and easy acid test to apply.
Upon initial review, it would appear over the last decade Intel hasn’t created shareholder value according to Buffett’s test. The data indicates they’ve destroyed $14 in market value for every $1 retained. Re-examining this metric on the assumption the market cap was still immensely overvalued from the tech bubble of the late 1990s, the table below starts in 2006 which was a cyclical low point in their earnings and covers a sufficiently minimum amount of time:
On this basis, Intel has created shareholder value on the order of $3 in market value for every $1 retained in the business. [b]CAPITAL STRUCTURE[/b] Intel is capitalized with 5.7B shares of common stock with a current market cap of approximately $120B. They also issued in 2005/2009 junior subordinated convertible debentures of $1.9B, in addition to $128M of bonds from Arizona due in 2035/2037. Their total long-term debt is approximately $2B. Intel’s liquidity predominantly comes from their cash flow generating abilities. As of the end of 2010, they held $21.5B on the books in cash, cash equivalents, marketable debt, and short-term investments. The Board has an approved, ongoing authorization allowing Intel to borrow up to $3B. Maximum borrowings under this program in 2010 were $150M. A review of their investments doesn’t reveal anything odd. Their portfolio includes a variety, including government bonds, commercial paper, corporate bonds, bank deposits, marketable equities, asset-backed securities, and money markets. Their marketable equities include: Micron (MU), Imagination Technologies Group PLC (IMG), VMWare (VMW), and Clearwire (CLWR). The company has additional non-marketable equity investments which include: a 49% interest in IM Flash Technologies (IMFT) and a 22% interest in IM Flash Singapore (IMFS); a 45% stake in Numonyx B.V.; and a $1B investment in Clearwire LLC, a wholly owned subsidiary of CLWR. IMFT and IMFS are a joint venture formed with Micron to produce NAND flash memory. In 2008, Intel divested their NOR flash memory business in exchange for their interest in Numonyx. To a smaller extent, the company invested in the SMART Technology (SMT) IPO later selling one-third of the position for a gain. Lastly, they created an equal-ownership, joint venture with GE in the healthcare industry called Intel-GE Care Innovations, LLC, and was formed by combining GE’s Home Health division and Intel’s Digital Health Group. Intel’s use of derivatives appears run-of-the-mill and not exotic. They maintain derivatives for hedging against risk is currency exchange, interest rates, commodity prices, and equity markets. Lastly, Intel has a share buyback program. They’ve reduced the share count from 6.88B shares in 2001 to the current 5.7B shares. [b]REVENUE, PRE-TAX PROFIT, AND OWNER EARNINGS[/b] A visual review of Intel’s sales, pre-tax profit, net income, and owner earnings curves on a logarithmic graph will quickly illustrate the stability of its operations. Owner earnings are charted along with GAAP accounting earnings (net income), as it is the cash that a business can [i]actually[/i] generate for its owners. If there are any accounting shenanigans going on, there’d be a visual divergence in the two curves. Owner earnings is calculated as: [i]Owner Earnings = Net Income + Depreciation & Amortization + Non-cash charges – Capex[/i] Since owner earnings and net income track each other fairly well, one can conclude Intel is honest in their accounting. A “wonderful” company with excellent business economics will have straight curves on this chart that parallel each other and rise to the right—a visual indication of excellent management, cost control, and the presence of a competitive advantage. A not-so-wonderful company (ie. those built on commoditized products) will have choppiness in these financial figures, and the curves will be erratic, bouncing up and down. [img]http://www.gurufocus.com/ic/attachment/201105/5/74130_1304594902B55c.png[/img] The semiconductor industry is notoriously cyclical, and many of the chips are essentially commodity products, including microprocessors. As can be seen from the chart above, even though the industry is cyclical, Intel has been able to achieve fairly consistent, “secular-style” revenue growth, in spite of it. However, the cyclicality does affect its underlying cost structure which can be visualized by the pre-tax profit curve. The company’s “tick-tock” processor development model is a major determinant as it causes capital expenditures to increase every couple of years as they ramp up new fabrication processes for their new technology. Turning to growth rates, the company has enjoyed strong cash flow generation and a massive R&D budget. It’s this budget that allows them to carve a competitive advantage and push processor performance and lower manufacturing costs at a quicker pace than AMD and others that use third-party foundries instead of being vertically-integrated as Intel is. In the last year, owing to a rebounding economy, Intel enjoyed massive net income and owner earnings growth. However, over the long-term revenue growth has roughly kept pace with inflation—about 3%. Intel has steadily grown book value, and tangible book value, from $5.34/share in 2001 to $9.01/share in 2010—just under 5% CAGR.
[b]REVENUE AND COST STRUCTURE[/b] As can be seen from the table below, Intel generates the majority of their revenue, approximately 93%,from microprocessors supporting the PC Client Group and Data Center Group—basically the PC and server markets. The company has a growing revenue volume in the Asia-Pacific region (57%). Revenue in the Americas and Japan over the last few years has been steady at 20% and 10%, respectively. The European market has decline from 19% in 2008 to 13% currently.
The table below summarizes Intel’s recent gross and net margins. Considering the cyclical nature of the industry, Intel has been able to increase gross margins from 49% a decade ago to the current 65% in 2010. Net margin 10 years ago was 4.9% and has additionally trended upward over the last decade. Intel’s average capex over the last 10 years is $5.1B, or about 15% of revenue.
The table below summarizes Intel’s recent history in operating expenses. In order for the company to maintain its technological superiority, they’ll need to continue to invest 15%, or more, of revenue in R&D.
[b]MANAGEMENT EFFECTIVENESS[/b] The table below summarizes a variety of metrics to illustrate management performance and competence in making money for their shareholders. It helps us answer the question: are they efficient allocators of capital? Cash Return on Invested Capital (CROIC) tells us how efficiently a business’ operations and management can allocate capital into the business to create even more cash for other re-investment projects. In the short-term growth can happen at any rate. But over the long-term, a business will generally grow at the rate it can generate owner earnings. This growth depends on how much cash it generates based on total cash invested by shareholders and bondholders. In short, it can be viewed as the sustainable [i]upper[/i] limit to a company’s growth.
Intel generates copious cash and has the management acumen to generate double-digit, albeit cyclical, ROE & CROIC. For every $100 invested, Intel generated $15 in owner earnings, on average. [b]BASIS OF COMPETITIVE ADVANTAGE[/b] Intel benefits from a competitive advantage, or moat, working in its favor. Their extensive patent portfolio and brand recognition help; however, the bedrock of this advantage is based on their R&D budget which creates their ability to innovate continuously, push the envelope of performance, and keep manufacturing costs low with a vertically-integrated foundry process in their business model. Additionally, through the creation of chipsets, they achieve product differentiation as their chips are optimized to work with their processors. [b]VALUATION[/b] This section will value Intel based on two methods: a discounted cash flow (DCF) model, and an Equity-Bond approach. No valuation method is exact since the future is unknowable, we only have history and our sense of the future to make a judgment. The more consistent a company is, the closer the estimate will be. It’s better to be approximately right than precisely wrong and overpay. To begin, [url=http://www.gurufocus.com/StockBuy.php?GuruName=Warren+Buffett]Warren Buffett[/url] described the concept of owner earnings as the cash that a business can generate for its owners. He additionally considered owner earnings, not accounting earnings, to be the relevant item for valuation purposes. If one owned the business completely, the amount of cash, or owner earnings, that could conceivably be pulled out of the business without hurting its competitive position or ability to maintain operations is what’s of value. [u]DCF Model[/u] To value Intel with DCF, we’re interested in our expectation of future owner earnings through a period of time, an appropriate growth rate, and a discount rate (or our required rate of return based on those expected owner earnings cash flows). The basic DCF equation is: [i]Fair Value = Growth Value (Years 1-10) + Terminal Value (Years 11-20) + Tangible Book Value[/i] Due to the uncertainty presented by Moore’s Law beyond the next decade, it’s reasonable to assume Intel will perform close to their historic performance for the next 10 years and grow at their book value rate. The model slows growth by 10% every few years in the first decade. However, in the subsequent decade, since there’s a change in business model in addition to processor technology uncertainty, this model will assume no growth during that period. Lastly, since 2010 was a very good year for revenue and owner earnings growth, to account for cyclicality this model will start with 2010 owner earnings at the mid-point between 2009 and TTM owner earnings. The following assumptions are used: · Growth-Years 1-3 = 5% (in-line with 10-yrear book value growth) · Growth-Years 4-7 = 4.5% (10% decay rate) · Growth-Years 8-10 = 4.1% (10% decay rate) · Terminal-Years 11-20 = 0% (see paragraph above) · Discount rate = 9% (required rate of return) · Margin of Safety = 25% · Initial Owner Earnings (2010) = $7900M (see paragraph above) · Tangible BV (2010) = $44899M [b]Projection of future Owner Earnings[/b]
[Note: all figures in $Millions] [b]DCF Fair Value = $25 [/b](Current price = $22.80) [u]Equity-Bond Model[/u] To value Intel based on an Equity-Bond model, the company’s owner earnings, compared to the price paid for those earnings (aka Owner Earnings Yield), are evaluated against the risk-free investment—the 10 year T-bill. In this view, a stock can be compared against a bond. The stock would have a growing “coupon” (owner earnings) through time roughly at the book value growth rate (5%), whereas a bond would have a static coupon. The Owner Earnings Yield is calculated as: [i]Owner Earnings Yield (OEY) = Owner Earnings (TTM) / Market Cap[/i] [b]OEY = 8.7% [/b](by comparison, 10-year T-bill = 3.4%) The DCF analysis indicates Intel is fairly valued. The Equity-Bond analysis indicates it is undervalued relative to the 10-year T-bill—by almost 2.5:1. This appears to be a fair price to pay for Intel’s growth going forward. [b]CATALYSTS[/b] Intel has many opportunities ahead of it to capitalize on and provide opportunities for growth. They have a culture of innovation and have been able to fuel each technological change in microprocessors, pushing the envelope of Moore’s Law and IC density every two years. Catalysts for continue growth include: · Higher enterprise information technology spending · Improved consumer spending · Increasing Internet use · Proliferation of wireless communications devices · Increasing semiconductor penetration in consumer electronics [b]DISCLOSURE[/b] The author has no position in INTC. [b]SOURCES:[/b] SEC Form 10-K, Intel (INTC), Fiscal Year ended December 25, 2010 Intel CFO Commentary on First-Quarter 2011 Results Standard & Poor’s Report, Intel Corp (INTC), March 26, 2011 Morningstar Report, Intel Corporation (INTC), April 20, 2011 Morningstar Financial Data, Fiscal Years 2001-2011 |
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| Joel Greenblatt
Apr 20, 2011 TALBOTS INC WT EXP 040915 () - $0 others |
[url=http://www.gurufocus.com/StockBuy.php?GuruName=Joel+Greenblatt]Joel Greenblatt[/url]’s “Magic Formula” has proven to be one of the most popular (and successful) mechanical value investment screens. By finding stocks with above average earnings yields and returns on invested capital, the magic formula consistently outperforms the market. However, the magic formula has one blind spot: “micro-cap” stocks, specifically those under $50 million in market cap. The Micro-Cap Magic Formula Newsletter will capitalize on that blind spot by digging through stocks too small to make the official magic formula screen. This is the link to download the special report: [url=http://www.gurufocus.com/newsfiles/special/magicNLApril2011.pdf][img]http://www.gurufocus.com/images/download-icon.gif[/img][/url] |
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Mar 28, 2011 TALBOTS INC WT EXP 040915 () - $0 others |
[url=http://www.gurufocus.com/StockBuy.php?GuruName=Warren+Buffett]Warren Buffett[/url]’s teacher, Ben Graham, liked to diversify across lots of obviously cheap stocks. The easiest years of stock picking for Ben Graham were the 1930s and 1940s. Japanese stocks of 2011 look a lot like American stocks of the 1930s and 1940s. The stocks have underperformed for years. The economy has underperformed for years. There are no clear catalysts. The big picture looks hopeless. But the [b]prices[/b] are right. These are Ben Graham bargains. This report was prepared on March 21st, 2011. It was prepared using stock prices as of March 21st, 2011. The report focuses on 15 Japanese net-nets. A net-net is a stock selling for less than the value of its current assets – cash, receivables, and inventory – minus all liabilities. Basically, it’s a stock selling for less than its liquidation value. In true Ben Graham fashion, all 15 of these Japanese net-nets are small, obscure stocks. They are not well known inside Japan. And they are completely unknown outside Japan. None of these stocks trade in the United States. There are no ADRs for these shares. If you want to buy these stocks, you need to get your broker to place trades in Japanese Yen on Japanese stock exchanges. If you don’t know how to do that – or you’ve never done that before – you’ll want to check with your broker before buying this report. Like a lot of Ben Graham bargains, these are also small stocks. These 15 Japanese net-nets range in size from a market cap of about $30 million U.S. to about $120 million U.S. If you don’t know how to buy stocks that small – or you’ve never done that before – you’ll want to check with your broker before buying this report. The key concept you need to understand is a “limit” order. You should never place “market” orders for any of these stocks. You can not tell your broker simply to buy these stocks. You absolutely must name the price you are willing to pay. To recap, this report is a very useful list of 15 of Japan’s best Ben Graham bargains. However, this report is only useful for some investors. You need to know how to buy stocks in Japan – or have a broker who can help you do this – and you need to know how to buy small, illiquid stocks. Obviously, you will also need to convert your home currency – such as U.S. dollars – into Japanese Yen to buy these stocks. All of these stocks are only available for purchase in Japan using Japanese Yen. That’s a lot to ask. But for those investors who feel comfortable buying small, illiquid Japanese stocks – this is a great opportunity. The report lists 15 Japanese net-nets. All 15 of these Japanese net-nets are higher quality businesses than virtually all of the net-nets currently available in the United States. These 15 Japanese net-nets are profitable. Many have been consistently profitable for the last 10 years. For patient value investors who can buy and hold small, illiquid Japanese stocks – these are true Ben Graham bargains. But it’s very important that you understand what it takes to profit from the information in this report. Individual investors who have never bought a stock on a foreign country’s stock exchange should think long and hard before buying this report. It takes a little extra work on your part just to track these stocks down and get your broker to buy them. Make sure you’re willing to do that work before you buy this report. If not, you can always check out GuruFocus' [url=http://www.gurufocus.com/grahamncav.php]Ben Graham Net-Net Screener[/url] and the [url=http://www.gurufocus.com/newsletters.php#nl1]Monthly Net-Net Newsletter[/url]. This is the link for download the special report: [url=http://www.gurufocus.com/newsfiles/special/15_Japanese_Net_Nets_March2011_dxcft.pdf][img]http://www.gurufocus.com/images/download-icon.gif[/img][/url] |
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Mar 20, 2011 (LFRGY) - $ others |
Lafarge (PAR: LG, PINX: LFRGY), driven by housing and infrastructure demand, is one of the world’s largest building groups with operations in 78 countries. It is the world’s largest cement manufacturer by mass. Its headquarters are based in Paris, France and the CEO is Bruno Lafont, whom was appointed on 1st January, 2006. The company was founded in 1833 to exploit a limestone quarry. Lafarge signed its first international order in 1864 for the delivery of 110,000 tonnes of lime. At a global level Lafarge is number one in cement, number two in aggregates, number three in concrete and number three in gypsum. The business is roughly spread at 60% cement, 32% aggregates and concrete and 8% Gypsum. Operationally Lafarge operates in a cyclical industry and an obvious investment technique would be to invest during the low cycle and sell out during the high cycle. Capital expenditure costs are high in this industry and large asset investment would be needed in order to substantially increase sales. [b]Sales: [/b]At the end of 2009 sales were divided as follows:
See the table at end of report for a detailed breakdown of cement plant, grinding plant, capacity and market share per country. Global cement ‘hotspots’ include China, India, Turkey and South Africa. Brazil, too, is experiencing fast paced growth with cement sales more than doubling since 2007. Special mention must be made regarding China whose market alone consumes more than half of the worlds cement consumption. It is also the world’s second largest plasterboard market. At the end of 2009 Lafarge was a top ten player in China and had facilities consisting of 28 cement manufacturing sites, 5 concrete batching plants and 4 plasterboard plants. Lafarge has an ambitious target of growing capacity to 50m/t per annum by 2012/2013. Given that the Chinese government is closing down smaller rural and inefficient plants Lafarge just may reach their target. Lafarge entered China in 1994. [b]Earnings[/b] Historical and forecasted revenue, pre-tax profits, EPS and dividends paid are as follows:
As can be seen earnings are somewhat erratic with return on retained earnings being negative over any substantial period of time. This is due to the company operating in a very cyclical sector and is typical for the industry. CRH and Holcim etc all have similar figures. The current market capitalisation for Lafarge is around Euro 11.8bn. [b]Finances[/b] For the year 2010 Lafarge generated Euro 2.2bn in free cash flows though net debt increased by 1% to Euro 13.99bn. ROCE came in at 5.8%. Net income increased by 12% and represented a net margin of around 5%. The operating margin came in at 15.1% a fall of 50 basis points from 2009. The company successfully refinanced Euro 2.7bn during 2010 with an average interest cost of 4.5% and an average maturity of 6.5 years. Cash and equivalents plus unused lines of credit are sufficient to cover short-term obligations. ‘Strict Working Capital in Days of Sales’ has been reduced from 53 days in 2007 to only 30 days in 2010. This reduction has resulted in more than Euro 350 additional cash flows in 2010. Lafarge has cash and cash equivalents of Euro 3.3bn and no financial covenants on any credit facility. [b]Costs[/b] Two of the largest operating costs for the sector are electricity and cement. Electricity prices will vary according to regulation allowances in the areas that the company operates but Lafarge is forecasting an 8% increase in electricity costs for 2011 which is equivalent to 1 Euro per tonne. Gross cost of debt is forecasted to be 5.7% and the tax rate is estimated to come in at 26%. Capital expenditure is forecasted to come in at Euro 1bn split into 50/50 between expansionary and maintenance capex. The group exceeded its cost cutting target for 2010. It is important to note that inventory loss is usually small for the sector as cement, if stored properly, will hold its value as cement prices are usually stable over time. [b]Pricing Power and Competitive Advantage[/b] Building companies typically have little pricing power although they can raise prices in order to combat inflation which is what Lafarge is planning during 2011. Although price rises may not offset inflation combined with cost cutting is provides a satisfactory form of protection. Cement and aggregates are a commodity product therefore there is no pricing power, under normal production costs, which can gain market share when increasing prices beyond that of competitors. Lafarge’s competitive advantage lies in economies of scale. Other competitive advantages are best viewed from a local perspective. Those plants situated very near lime quarries save on transport costs. A strong advantage also is if a plant is situated in a monopoly area such as a location that is surrounded by a mountain range and makes transportation costs for competitors unviable. [b]The Board of Directors[/b] The Board consists of 18 members, 11 of whom are independent. The position of Vice-president of the Board is reserved for an independent director. Directors are appointed for a period of 4 years. Management remuneration is in-line with the industry. Bonuses are awarded for a combination of corporate, environmental and social targets. [b]Some Characteristics of the Cement Industry[/b] The cost of building cement plants is often higher than $220m per million tonnes of annual capacity. Usually such a plant is akin to 3 years worth of revenue. Plant modifications are very expensive too thus the cement industry is one of the most capital intensive industries that one can find. Around 60 -120 kilograms of fossil fuel is required in order to produce one tonne of cement as well as 105KWh of electricity. The industry features low labour intensity due to the advent of process machinery. Globalisation has benefitted the cement industry, or more specifically, bulk shipping has. It is now cheaper to ship 25,000 tonnes of cement across the Atlantic Ocean than it is to drive it 400 kilometres. [b]Risks[/b] The company lists the following risks: market risks, interest rate risk, commodity risk, exchange rate risk, counterparty risk for operations, liquidity risk and equity risk. Since these risks are standard for most multinationals I will not go into them in detail here. [b]Egypt[/b] Egypt represented 4% of company turnover in 2010. At the 18th, February, 2011 Lafarge’s operations in Egypt had 7 days of sales disruption in total. Sales have resumed since February, 5th, and are back to normal levels (this information was accurate at the 18th of February). The long term potential of Egypt is very important as it’s the largest growing population in the Middle East thus there is significant demand for housing and infrastructure. [b]Joint Venture[/b] Lafarge has created a joint venture with Tarmac (Anglo American) to form a group with combined revenues of Euro 1.5bn and EBITDA of Euro 235m. The 50/50 cash neutral deal features a wider range of products for customers including larger ranges of cement, aggregates, ready-mix concrete and asphalt & paving. The JV should generate Euro 70m worth of annual synergies and is accreditive to Lafarge shareholders. [b]Outlook[/b] The group is aiming to accelerate deleveraging and to reduce debt by at least Euro 2bn during 2011. Cement volumes increased during Q4, 2010 and this trend looks set to continue with cement demand in its markets forecasted to grow by between 3 – 6% compared to 2010. The two regions expected to post the largest growth are Latin America (forecasted to grow by between 7 – 10%) and Asia (with 5 - 8 %.)The main drivers of growth are the emerging markets with developed markets expected to recover slowly. Overall pricing is expected to move higher although this will vary by market. [b]The Latest News[/b] Revenues surged for Lafarge Zimbabwe for the year ending 31 December, 2010 due to a strengthening economy. However profits remained flat due to payment of a large once-off tax payment. [b]Valuation[/b] At the time of writing Lafarge’s share price was Euro 41.42. On this basis, working from the forecasts tabled above, Lafarge is trading on a multiple of 11.3 with a dividend yield of 3.4%. Sector comparisons include CRH (multiple 17.2, dividend 4.2%), Heidelberg (multiple 12.2, dividend 1.5%) and Anhui Conch (multiple 15.8, dividend 1.3%) amongst others. Therefore Lafarge looks somewhat attractive against the peers listed in this regard with a nice dividend to boost. The company ended 2008 on a multiple of 5.2 (dividend yield of 5.2%) and the year 2005 on a multiple of 7.1 (dividend yield of 4.6%). These figures show that there is significant downside risk with only moderate upside reward. In the authors opinion it is better to invest in a cement play with major competitive advantages such as the company listed in the paragraph below. [b]A Different Option than Lafarge[/b] An undervalued Chinese cement company is West China Cement (HK: 2233) listed on the Hong Kong stock exchange. The company is expanding nicely, financed by an IPO on the Hong Kong market after delisting from London’s AIM market where management felt the company was undervalued. Further capital was raised in a recent bond offering. Operationally West China Cement benefits from the competitive advantages listed in the article above – mines surrounded by mountain ranges creating a monopoly situation, lower transport costs than competitors resulting in higher margins. There are expansion plans to which should see annual capacity more than double. The company is trading on a single digit multiple versus double digit multiples from its peers yet, West China has greater margins and much higher growth. For further research the company website is here: [url=http://www.westchinacement.com/eng/global/home.htm]http://www.westchinacement.com/eng/global/home.htm[/url] [b]Lafarge: A Breakdown per country of cement plants, grinding plants, capacity and market share:[/b]
(a) The Indonesian plant was damaged during the 2004 Tsunami and is under reconstruction. (b) Depending on region (c) For the North East region [i]Value investing is my hobby as well as my vocation. I am a director at [url=http://www.shareladder.com/]www.shareladder.com[/url] and have written a value based newsletter for the site since May, 2010. The portfolio based on my newsletter is up just under 40% during that time.[/i] |
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Mar 18, 2011 Fairfax Financial Holdings Ltd. (FFH) - $0 others Berkshire Hathaway Inc. Cl A (BRK.A) - $119800 Property & Casualty Insurance Berkshire Hathaway B (BRK.B) - $80 Property & Casualty Insurance |
Fairfax Financial Holding Company ( [url=http://www.gurufocus.com/StockBuy.php?symbol=ffh&rec=1&subs=Go]FFH[/url]) is a holding company with a primary focus on property & casualty (P&C) insurance, reinsurance, and the corollary investment management business (a la Berkshire Hathaway ( [url=http://www.gurufocus.com/StockBuy.php?symbol=BRK.A&rec=1]BRK.A[/url], [url=http://www.gurufocus.com/StockBuy.php?symbol=BRK.B&rec=1]BRK.B[/url]). The company’s insurance businesses compete in multiple markets around the world, including Canada (Northbridge Financial: P&C), the United States (Crum & Forster: commercial P&C, and Zenith: workers’ comp insurance), Asia (First Capital: P&C in Singapore, and Falcon Insurance: P&C in Hong Kong) and Brazil (Fairfax Brasil). There are also four additional insurance groups under the corporate umbrella related to the reinsurance business (the most well known being OdysseyRe). Finally, they own one insurance company (RiverStone Group) in run-off, which refers to companies that are not writing new business but remain registered in order to honor any outstanding claims. The company also owns a wide assortment of investments, which will be discussed in the analysis. Much like Berkshire, management at Fairfax has a corporate objective of building long term shareholder value by achieving a high rate of compounded growth in book value per share; as indicated by this metric, they are doing a fantastic job. As will become evident, volatile short term earnings are not very indicative of the business results; as noted by CEO [url=http://www.gurufocus.com/StockBuy.php?GuruName=Prem+Watsa]Prem Watsa[/url] (and which will become apparent when we look at the investment portfolio), “With the introduction of IFRS accounting standards in 2011, mark-to-market accounting will make our earnings very volatile – more the reason for you our shareholders to focus on our book value growth over the long term.” The chart below shows the results in incremental periods, and for the full 25 year period that the current management team has been in control: (NOTE: all numbers/figures are based on year end 2010 data for FFH)
During the past quarter century, a lot of progress (and growth) has occurred at Fairfax. What started as one insurance company in Canada with $10 million in premiums is now a worldwide corporation operating in over 100 countries and with more than $5 billion in premiums. The stock price has moved in tandem with BV, increasing by 21.3% per annum over the 25 year period (slight difference due to the fact that book value is in US dollars, while stock price is in Canadian dollars; change in exchange rate over time has created the slight variation). In 2010, book value increased 5% to $379.46 per share, meaning that at the current price ($360.01), the stock currently trades at a 5.4% discount to book value. [b]MANAGEMENT [/b] Since 1985, V. Prem Wasta has been the Chairman and CEO of Fairfax Financial. Over time, the successful mix of consistently strong investment returns on float and expanding insurance operations (which are similar to Berkshire Hathaway) has led to Mr. Wasta being nicknamed “Canada’s [url=http://www.gurufocus.com/StockBuy.php?GuruName=Warren+Buffett]Warren Buffett[/url]”. Much like Warren, Prem has the significant majority of his wealth (99%) invested in his company’s own stock. As he noted in the 2010 shareholder letter, “even on my death I expect my controlling interest will not be sold (my children are in tears!), so that Fairfax can continue uninterrupted in building long term value for you, our shareholders.” In mid-2007, a couple weeks after the Dow Jones Industrial Average (DJIA) crossed over 13,000 for the first time ever, [url=http://www.gurufocus.com/StockBuy.php?GuruName=Prem+Watsa]Prem Watsa[/url] had this to say: “There’s a possibility of a one-in-50 or one-a-100 year storm coming; when the music stops, it ends very quickly.” By the time of the first big drop in the Dow (over 400 points on July 26, 2007), Mr. Watsa was ready: he had moved the large majority of the portfolio out of equities and into treasury bonds and cash. He also used credit default swaps ($341 million invested) as a wager on U.S. credit markets; before all was said and done, that investment was worth more than $2 billion in profit. After the collapse, Prem moved quickly to position the portfolio in response to the market’s overreaction, investing $2.3 billion on shares in equities at bargain bin prices (while still remaining 25-30% hedged). As a result, Fairfax’s book value per share increased by 53%, 21%, and 33% in 2007, 2008, and 2009 (respectively), compared to returns during the same time period of 5.61%, -37%, and 26.5% for the S&P 500. One of the big moves at the top of Fairfax in the past year was the promotion of Andy Barnard to the position of President and COO of our Fairfax Insurance Group, who will “oversee all of Fairfax’s insurance and reinsurance operations and to work with our presidents on strategy and coordination”. Mr. Watsa had this to say in the annual letter: “Andy has built over 15 years one of the most successful reinsurance companies in the world. When Andy joined OdysseyRe (the old Skandia Re) in 1996, it wrote $200 million in premiums, operated only in the U.S. and had shareholders’ capital of $315 million. With a few acquisitions, Andy has built OdysseyRe into a nimble, worldwide reinsurance operation focused on serving its customers while achieving an underwriting profit with good reserving. OdysseyRe wrote premiums of $1.9 billion in 2010 with shareholders’ capital of $3.7 billion – after returning net capital to its shareholders of $247 million. OdysseyRe compounded its book value per share since it went public in 2001 at 20.4% per year – the best track record in the reinsurance business that I know of.” Much like with the future of Berkshire Hathaway without [url=http://www.gurufocus.com/StockBuy.php?GuruName=Warren+Buffett]Warren Buffett[/url] and [url=http://www.gurufocus.com/StockBuy.php?GuruName=Charlie+Munger]Charlie Munger[/url], the future of Fairfax Financial without [url=http://www.gurufocus.com/StockBuy.php?GuruName=Prem+Watsa]Prem Watsa[/url] is frightening; in both situations, I think the men in charge have instilled a corporate culture and placed a team of people around them who are capable of picking up where they leave off, and understand the importance of driving long term shareholder value. (An important side note: the company has pending litigation against a group of hedge funds, and is seeking $6 billion in damages; a favorable outcome would materially affect Fairfax considering the current market cap. See link at in sources at end of document for a comprehensive article of the situation.) [b]BUSINESS QUALITY & OPERATING RESULTS[/b] An important metric used by insurance companies is the combined ratio, which is a measure of profitability that indicates the effectiveness of operations. The general benchmark is a combined ratio below 100%, which indicates the company is making an underwriting profit and is holding the float at no cost. On the other hand, a ratio above 100% indicates the company is paying out more in claims than they are bringing in through premiums. In situations where the combined ratio exceeds 100%, the float being invested is similar to a loan with interest payments that need to be made; subpar investment results that don’t cover the “interest” expense will result in overall losses for the company. The results of Fairfax’s major subsidiaries (shown below) reflect the impact of soft insurance markets (low premiums, intense competition, and dwindling profits). The consolidated combined ratio for Fairfax in 2010 was 105.2%, which resulted in an underwriting loss of $236.6 million (of which Zenith accounted for $101.7M) and a cost of 2.3% on the float ($10.43 billion). The overall ratio was affected by short term issues at Zenith National, where premium cuts (due to “wildly competitive market behavior”) and additions to loss reserves (which added 9.1 combined ratio points) negatively impacted full year results. As noted by Mr. Watsa, “We expect it is only a question of time before Zenith’s 30 year average combined ratio of 95% comes back.” The overall increase of in the combined ratio by 5.4 points year over year was due to 2.5 points due to expenses, and 3.5 points from catastrophe losses. The elevated expenses are a result of shrinking premiums during a soft market (rather than writing too much business at the wrong time); as noted in the 2009 Annual Report, “We are not focused on the top line (market share) but on underwriting profitability and the bottom line.”
Besides Zenith National (which was discussed above), the other insurance subsidiaries performed well in 2010 (combined pushing 110% aside). When we look at longer term results (2002-2010), the numbers suggest conservative long term underwriting, much like BRK.A:
These four companies represent the core operations of Fairfax (with Zenith entering the equation in May 2010), and have been the driver of growth for the company over the past nine years as indicated by compounded growth rates averaging 19.55% since 2001. As noted in the shareholder letter, “Our long term goal is to increase the float at no cost. This, combined with our ability to invest the float well over the long term, is why we feel we can achieve our long term objective of compounding book value per share by 15% per annum over the long term.” For investors, the focus is on two areas: 1) growing no cost float, and 2) strong returns on investment. Full year results for 2009 and 2010 clearly lay out the accounts that drive free cash flow generation at Fairfax. In 2009, a small underwriting profit ($7.9M), interest and dividends of $557M, and net gains on investments of $668M were the key drivers in net earnings of $990 million. In 2010, underwriting losses of $236.6M and a decline in net gains on investments to $215.4M resulted in net earnings decreasing by more than 50% to $471.2 million. As evident in these figures, mark-to-market accounting will create lumpy earnings at Fairfax over the coming years (based on the current investment portfolio). [b]FLOAT & INVESTMENTS: THE KEY TO GROWTH[/b] As noted previously, successful investment of float (average of $10.43 billion, up 10.6% in 2010) is fundamental in the insurance business. From 2007-2009, the investment portfolio at Fairfax gained nearly 50%, compared to a 23% loss for the S&P 500 over the same period. However, relative results weakened in 2010, with a 3.9% return at Fairfax compared to 11.6% for the index. This underperformance is rooted in two key factors, which warrant further discussion. The first factor was a decrease in the municipal bond portfolio by $220.6 million (4%), due to higher municipal bond interest rates. As noted by Mr. Watsa, “We do not think that general concern is a valid concern for our portfolio of muni bonds, as almost 65% of our muni bond portfolio is insured by Berkshire Hathaway, and essentially all of the rest of our muni bonds are from essential services like large airports or transportation systems, or from large states like California.” The second factor is that the equity portfolio is hedged nearly 100%. While the company had a combined realized and unrealized gain on equities of $956.5 million in 2010, they had nearly identical hedging losses of $936.6 million ($45.61/share); in aggregate, hedging cost Fairfax 4.2% in total returns for the year. The four “very long term” equity positions in the portfolio are Wells Fargo (cost basis - $19.36, market value - $620M), Johnson & Johnson ($61, $469M), US Bancorp ($16.27, $428M), and Kraft Foods ($26.56, $344M). In aggregate, portfolio investments (between bonds, preferred, common, derivatives, etc) are worth nearly $22 billion. While the one year results disappointed, it is important to look at the overall picture, not just a split image. Historical results indicate that the investment portfolio has consistently beaten the market. Over the past 15 years, the common stock investment (including equity hedging) has returned 17.2% per annum, compared to 6.8% for the S&P 500 over the same time period. Taxable bonds have had relatively strong returns as well, with a 15 year average of 10% per annum, compared to 6.2% for the Merrill Lynch U.S. corporate (1-10 year) bond index. An annual outperformance of more than 10% per annum in over the past 15 years in equity investments shows the true genius behind the team at Fairfax. As noted previously, mark-to-market accounting with the current investment portfolio creates volatile quarterly EPS results (“lumpy”) that are not reflective of the operating results (2010 EPS by quarter: $14.02, $15.49, $10.24, $(18.43)). For this reason, it is imperative (as long term investors) that we focus on other metrics (like book value) as a proxy for intrinsic value. [b]FINANCIAL STRENGTH[/b] The balance sheet as of December 31, 2010, shows $1.47 billion in cash & equivalents, compared to $2.73 billion in total debt, which is equal to a net debt position of $1.26 billion. While the overall cash position in negative (net debt), the company is financially healthy, with debt/equity of 14.4%, debt/total capital of 23.8%, and interest coverage of 2.8x. As far as the insurance businesses are concerned, management has patiently waited for hard markets to return, which is evident in the numbers. Based on year end 2010 figures, the company was averaging about 0.5x net premiums written to statutory surplus. This compares to an average closer to 1.5x during the hard markets from 2002-2005. For the time being, waiting for greener pastures has led to sound and conservative financial strength in the insurance businesses. [b]VALUATION[/b] At today’s price, you are buying Fairfax for less than book value. If historical results are any indication (24.7% per annum over the past 25 years), investors will continue to outperform market returns through FFH if it continues to advance at the rate as the past quarter century. In my mind, the opportunity to buy an insurance company at book that has expanded BV at such a high rate of return over a long period of a time is very attractive. Think about that in this sense: In the shareholder letter, [url=http://www.gurufocus.com/StockBuy.php?GuruName=Prem+Watsa]Prem Watsa[/url] wrote, “At the end of 2010, we had approximately $641 per share in insurance and reinsurance float. Together with our book value of $379 per share and $119 per share in net debt, you have approximately $1,139 in investments per share working for your long term benefit – about 7% higher than at the end of 2009.” For a cost of $360, you have $1,139 in investments working for you, in the hands of someone who has beat the market by more than 10% per annum (on average) over the past 15 years, and who has 99% of their personal wealth invested with you (no 2 and 20 like at hedge funds); in my mind, this sounds like a formula for success with little/no risk. In the past five years, average annual earnings were equal to roughly $820 million, for an earnings yield (on the current market cap of $7.82B) of more than 10%. However, this figure includes 2008 investment gains of more than $2 billion from credit default swaps, which are certainly a one time (or at least not reoccurring) gain. With that removed from the calculation (and other “one time” items), the normalized earnings yield would be closer to 6-7%, or a P/E around 14x-16x. In my opinion, these results indicate that under normal market conditions, FFH is a safe investment, but not a screaming buy; however, the real benefit of owning Fairfax is as protection against the “worst case scenario”. [b]CATALYSTS: A HEDGE AGAINST DEFLATION[/b] In 2007, [url=http://www.gurufocus.com/StockBuy.php?GuruName=Prem+Watsa]Prem Watsa[/url] was spot on with his diagnosis; as a result, FFH has advanced 75-80% from 2007-2011, while the major indices in the United States are still in the red. Part of the logic behind an investment in Fairfax Financial at this time is a hedge against deflation. Mr. Watsa, who likely wouldn’t argue with being called a contrarian, believes that we may still experience a time period like the US in the 1930’s or Japan since 1990, when nominal GDP was flat for 10-20 years, and bouts of deflation occurred (for his full discussion, see page 15 of the shareholder letter). As he notes, in the 1930’s in the US and during the past ten years in Japan, cumulative deflation was approximately 14%. Based on his deflationary concerns, Mr. Watsa has invested in CPI-Linked Derivative Contracts, which are ten year contracts that are linked to the consumer price index of specific countries/regions. The payoff on these are linked to the purchase price on the correlated index, with the payout equal to the percentage below the index price at the time of purchases times the nominal value. Here are the company’s holdings, which will help with an example:
Let’s assume that in 9.4 years (remaining average term on the contracts), Mr. Watsa ends up being correct; across the board, we see 14% deflation (equal to US in 1930’s and Japan in 2000’s). Based on that price, the payoff would be 14% of $34.2B, or $4.79 billion. Assuming that we live in a world where the only potential results are 14% deflation or no payoff (conservative estimates because it eliminates the probability of payoffs from 0-14%), the pricing on this contract ($302.3 million) assumes that this event has a (simplified) probability of 6.3%. Is it likely that this outcome would occur once if we played out the global environment 15 times? [url=http://www.gurufocus.com/StockBuy.php?GuruName=Prem+Watsa]Prem Watsa[/url] thinks so, and has positioned himself accordingly. As an investor with only long equity positions (which comprises most individual investors), I think that investments in Fairfax have merit as a hedging tool. At the same time, Fairfax has limited risk from the contracts, and will be financially sound even if they expire worthless. I view this as a hedge that pays off handsomely in the event of a downturn, and that possibly lags (while the rest of your portfolio advances) in the event of a global recovery. In essence, Fairfax acts as insurance, and is well worth a couple percentage points of excess return (if historical results are indicative, it won’t even cost you that) on the upside for protection from deflation. As long term results suggest, Fairfax has consistently outperformed the market. For the time being, the company has reverted to conservative insurance (due to soft markets) and investment (100% equity hedging) practices in anticipation of future events. As [url=http://www.gurufocus.com/StockBuy.php?GuruName=Prem+Watsa]Prem Watsa[/url] noted on the Q4 2010 Conference Call, “we’re focused on protecting our capital from worst case events.” For most individual investors, I believe Fairfax is an intelligent addition to their portfolio due to the strong long term growth characteristics, a current P/B of less than one, and as a hedge against deflation in key global markets. Sources & Key Documents for Consideration: 2010 Annual Report: http://www.fairfax.ca/Assets/Downloads/AR2010.pdf 2010 Shareholder Letter: http://www.fairfax.ca/Assets/Downloads/110304ceo.pdf 2009 Annual Report: http://www.fairfax.ca/Assets/Downloads/AR2009.pdf Litigation: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aELPTSNhAMkQ |
