tag:blogger.com,1999:blog-60096429280292154942024-03-08T11:18:13.776-08:00North American Value InvestingThis website covers economic, financial and business issues on a global scale, with an emphasis on North American investments.
Contact: navalueinvestor@gmail.comUnknownnoreply@blogger.comBlogger90125tag:blogger.com,1999:blog-6009642928029215494.post-48306808683751851582013-08-03T15:21:00.000-07:002013-08-03T15:21:40.466-07:00Home Capital Group - 2013 Second Quarter Update
<span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";">Home Capital Group recently reported
yet another strong quarter.<span style="mso-spacerun: yes;"> </span>In the
second quarter, adjusted EPS increased 15.6% from a year ago, and first half
results were higher by 16.9%.<span style="mso-spacerun: yes;"> </span>At 23.6%,
return on equity remained high.<span style="mso-spacerun: yes;"> </span>These
stellar numbers weren't the result of deteriorating credit quality, however:
non-performing loans were just 0.31%.<span style="mso-spacerun: yes;"> </span>In
addition, Tier 1 and total capital ratios remained very high.<span style="mso-spacerun: yes;"> </span>As a result, Home Capital Group was able to
increase its quarterly dividend from $0.26 to 0.28, an 8% improvement.</span><br />
<span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";"></span><br />
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";">The company predicted good times to
come, as well.<span style="mso-spacerun: yes;"> </span>In Q2 and in July, demand
increased for all of HCG’s products.<span style="mso-spacerun: yes;">
</span>Fortunately, none of the prominent disasters – acts of god and of man –
will materially affect the firm.<span style="mso-spacerun: yes;"> </span>The
company's loans in Quebec are only advanced in the major centers, so the train
that exploded didn't damage any of its customers' property; there was little
lasting damage from floods in Toronto; and few, if any, houses in Alberta were
abandoned, despite heavy damage to household items (in total, about 20 people
asked for a one month deferment on mortgage payments).<span style="mso-spacerun: yes;"> </span>Home Capital Group won’t even have to set
aside any additional reserves due to the calamities.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";"></span><span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";">On its conference call, management
addressed the short position that was initiated on HCG’s stock in May, largely as
macroeconomic bet against Canadian housing.<span style="mso-spacerun: yes;">
</span>Over many years, shorts sellers have held an average of 800 000 shares
(out of 45 million), but the total recently jumped sharply to 5.5 million.<span style="mso-spacerun: yes;"> </span>The CEO expressed hope that it was the firm's
solid fundamentals that has pushed up the stock in recent weeks, but suggested
that the wild rise in volume over the past few days may have been short-sellers
covering their positions before month end (management cautioned that they
merely have anecdotal evidence that the increase in volume is the result of a
short squeeze; their theory is not based on the more solid stuff of regulatory
filings).<span style="mso-spacerun: yes;"> </span>In any case, the stock is now
at an all-time high.<o:p></o:p></span></div>
<span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";">CEO Gerald Soloway is one of
Canada's finest executives, but he is now well into his seventies, leaving
investors to wonder how long he'll lead Home Capital Group.<span style="mso-spacerun: yes;"> </span>In response to that very question from a
private investor - it's not surprising that this all-important question was posed
not by a near-sighted analyst, but by a far-seeing shareholder of the business
- Soloway said that he'll “probably be around a few more years.”<span style="mso-spacerun: yes;"> </span>In fact, he noted that his mother is still in
good health at 98, leaving greedy stockholders to hope for more than just a few
more years from the genetically fortunate chief executive.<span style="mso-spacerun: yes;"> </span>If not, he also shed light on what will
happen when he's gone: President Martin Reid will become CEO.<span style="mso-spacerun: yes;"> </span>Indeed, he is already deeply familiar with
all aspects of the company, in case he's required to step in on short
notice.<span style="mso-spacerun: yes;"> </span></span><br />
<span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";"><span style="mso-spacerun: yes;"></span></span><br />
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";">Overall, the company logged another
fine quarter, and is very likely to do well in the near - and in the more
distant - future.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";"></span> </div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";"><o:p><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"><strong><u>Disclaimer:</u></strong></span><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"> The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.</span></span></o:p></span></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-16120993691183744302013-07-31T11:30:00.001-07:002013-07-31T11:30:59.848-07:00Uralkali and the Potash Industry<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">The Canadian
government scotched BHP Billiton's proposed takeover of Potash Corp in 2010,
largely due to the mining giant's plans to withdraw from Canpotex, the
marketing arm through which Canada's producers sell and distribute their
products.<span style="mso-spacerun: yes;"> </span>The Saskatchewan government
feared that a weakened Canpotex would mean a weakened price for potash,
reducing royalties and income taxes for the province.<span style="mso-spacerun: yes;"> </span>Today, the potash world saw that those fears
were indeed valid.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Potash producers in
Russia and Belarus have sold over 40% of the world's capacity via BPC, an
institution similar to Canpotex, until Uralkali, a large Russian producer,
abruptly announced that it will withdraw from the marketing body.<span style="mso-spacerun: yes;"> </span>Instead, the company plans to market its own
products, with an emphasis on maximizing volume, rather than withholding supply
for a better price.<span style="mso-spacerun: yes;"> </span>The company itself acknowledges
that this move could reduce potash prices by 25%, to around $300 a tonne, at
least in the short-term.<span style="mso-spacerun: yes;"> </span>The share
prices of all publically traded potash producers instantly fell by 15-25%. </span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">In the long-term,
the supply-demand equation is likely to remain favorable to producers: in fact,
$300 a tonne pricing will render any greenfield capacity uneconomic, and will
reduce the number of proposed brownfield expansions that go forward, as well.<span style="mso-spacerun: yes;"> </span>Interestingly, Uralkali itself has confirmed
that it will put one of its own expansions on hold because of the move.<span style="mso-spacerun: yes;"> </span>At the same time, lower prices will increase
volumes, eventually raising the price of potash.<span style="mso-spacerun: yes;"> </span>In addition, an industry where only three
sellers - Canpotex, a smaller BPC and a stand-alone Uralkali - account for 70%
of capacity remains a heavily consolidated industry (there's additional, though
less visible, consolidation, as well, since Potash Corp holds significant sway
with the company’s that it holds minority interests in, all of which operate
outside of the main two marketing bodies).<span style="mso-spacerun: yes;"> </span></span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Still, the
industry's future doesn't appear as bright today as it did yesterday.<span style="mso-spacerun: yes;"> </span>If the marketing arrangement is permanently
weakened, the average price of potash is likely to be lower than it otherwise
would've been, and will crash harder in down markets than it has in the past, a
dismal fact of life for producers of most other commodities.<span style="mso-spacerun: yes;"> </span>Not only will producers be less profitable,
it will force them to hold more cash - or take on less debt - than they would
have under the status quo, which will increase a range of opportunity costs.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"> </span></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">There are still
many unanswered questions.<span style="mso-spacerun: yes;"> </span>For one:
Why?<span style="mso-spacerun: yes;"> </span>It's possible that Uralkali is
merely maneuvering against its Belarusian partner, due to reports that one or
both parties have sold product outside of the arrangement.<span style="mso-spacerun: yes;"> </span>Indeed, Uralkali appears no better off in
this brave new world of its own making.<span style="mso-spacerun: yes;">
</span>Its stock, too, fell by about 20%, and even selling at all-out
capacity, the company predicts flat earnings, suspended its stock buyback, and,
as mentioned, put at least one planned expansion on hold.<span style="mso-spacerun: yes;"> </span> </span></div>
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<div class="MsoNormal">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">Economists often use the classic
"prisoner's dilemma" as a model to help explain - and predict - how
players in this sort of situation will behave.<span style="mso-spacerun: yes;">
</span>Uralkali is behaving in a way undreamed of in this formulation: it
"squealed" on the others, but did so with no benefit to itself.<span style="mso-spacerun: yes;"> </span>The prisoner’s dilemma assumes rational people
making informed, disinterested decisions, however.<span style="mso-spacerun: yes;"> </span>In this case, Uralkali may be attempting to
correct a perceived lack of fairness (experiments show that people sometimes act counter to their own interests in the name of fairness) or it could simply be behaving foolishly.<span style="mso-spacerun: yes;"> </span>Or the company may in fact be acting rationally, after all, with the explanation to be found not in an economics textbook, but at the poker
table: this could be a bluff.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">In any case, the
industry appears less attractive than it once was – although it’s also more
appealingly priced.<span style="mso-spacerun: yes;"> </span></span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"><span></span></span><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"><strong><u>Disclaimer:</u></strong></span><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and
indeed expressly disclaims any responsibility or liability for any
losses, financial or otherwise, or damages of any nature whatsoever,
that may result from or relate to the use of this blog. This disclaimer
applies to all material that is posted or published anywhere on this
blog.</span></span></div>
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<br /></div>
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<br /></div>
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<br /></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-21950149760454045652013-07-26T09:56:00.002-07:002013-07-26T09:56:41.911-07:00Potash Corp - 2013 Second Quarter Update
<br />
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">Potash Corp's
second quarter was somewhat weak, and the softness is expected to continue for
the remainder of 2013.<span style="mso-spacerun: yes;"> </span>Indeed, EPS fell
from $0.99 (as adjusted) to $0.72 in the quarter, and full-year guidance was
lowered to $2.45-2.70 from $2.75-3.25.<span style="mso-spacerun: yes;"> </span>However,
some perspective is in order: even at the low end of that range, the company's
return on equity will still be around 20% for the year, despite steadily
growing assets, as its capital expansion continues, and moderate amounts of
debt (an <i>immoderate</i> amount of debt reduces equity, and artificially boosts
ROE).</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">At about 56 million
tonnes, global shipments of potash are expected to be in line with last
year.<span style="mso-spacerun: yes;"> </span>However, because it's requiring a
lower price to keep volumes steady, it cannot be denied that the market has
weakened since last year.<span style="mso-spacerun: yes;"> </span>Realized
potash prices fell significantly in the quarter, from $433 to $356, an 18%
drop.<span style="mso-spacerun: yes;"> </span>Nitrogen and phosphate prices
fell, as well.<span style="mso-spacerun: yes;"> </span>Also contributing to the
weak second half forecast is the lack of a potash contract with China, which
will stall sales in the third quarter, though CEO Bill Doyle predicts an
agreement will be forged before the fourth quarter.<span style="mso-spacerun: yes;"> </span>In addition, currency headwinds are affecting
results: a weaker rupee is part of the reason Indian demand has been soft (the
major cause remains a domestic subsidy that punishes potash purchases relative
to nitrogen), just as a weaker real has offset some of the strength in
Brazil.<span style="mso-spacerun: yes;"> </span>In the latter case, because
Brazil is a major exporter, the economics roughly balance out, since a weaker
real means higher US dollar prices for goods sold. </span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">While the softness
in the potash market has lingered longer than many investors and analysts had
expected - and may persist for the short or even medium-term - the industry's
long-term strength remains intact.<span style="mso-spacerun: yes;"> </span>People
must eat.<span style="mso-spacerun: yes;"> </span>In fact, the <a href="http://esa.un.org/unpd/wpp/index.htm">latest estimate</a>
of how many people are going to be eating in the decades to come was recently
revised upward, from 10 billion, to a staggering 11 billion, by
2050.<span style="mso-spacerun: yes;"> </span>While eventually there will be
greenfield supply to meet growing demand, little is likely to come on-stream
over the next decade.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">Potash Corp shares
trade for under $40, but the company's stock market investments are worth $8
per share.<span style="mso-spacerun: yes;"> </span>Even after adding back a
little over $3 per share in debt (net of cash), the "all in" cost of
a POT share is $34-35.<span style="mso-spacerun: yes;"> </span>This means that
Potash Corp shares are trading at just 13-14 times 2013 earnings, using the
mid-point of the newly announced guidance.<span style="mso-spacerun: yes;">
</span>Happily for shareholders, management announced a $2 billion share
repurchase that will retire up to 5% of shares outstanding over the next
year.<span style="mso-spacerun: yes;"> </span>This may be increased next year,
management noted, as capital expenditures fall, and the already significant
dividend could be upped, too.<span style="mso-spacerun: yes;"> </span>Investors
may want to follow the company’s lead and buy some Potash Corp stock at today’s
low prices.</span><span lang="EN" style="mso-ansi-language: EN; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;"><o:p></o:p></span></div>
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"><strong><u>Disclaimer:</u></strong></span><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"> The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.</span></span>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-85635474666587386972013-07-13T10:36:00.001-07:002013-07-13T10:38:41.841-07:00Leucadia National - 2012 Letter to Shareholders<br />
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">The end of an era
at Leucadia National was announced late last year and made official earlier
this year when shareholders voted in favor of a merger with Jefferies, a
leading mid-sized investment bank.<span style="mso-spacerun: yes;"> </span>Alas,
the long-time duo at Leucadia's helm recently penned their <a href="http://leucadia.com/c-p_letters/luk_c-p2012.pdf">final letter to shareholders</a>.<span style="mso-spacerun: yes;"> </span>Warren Buffett's annual
letter is the gold standard in the corporate world, but Ian Cumming and Joseph
Steinberg's co-written communication is not far behind.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">This year's piece
strives to do two things: make the case that the new incarnation of the company
will be a success, and recap what's happened over the past three and a half
decades.<span style="mso-spacerun: yes;"> </span>Cumming and Steinberg met Rich
Handler, Jefferies' CEO and the incoming chief executive of Leucadia, more than
25 years ago, and have been doing business with him ever since.<span style="mso-spacerun: yes;"> </span>Jefferies returned an exemplary 22% per year
for the 23 years ending in 2012.<span style="mso-spacerun: yes;">
</span>Importantly, not only did Jefferies survive the recent financial crisis,
it flourished, using the upheaval as an opportunity to almost triple revenues
between 2008 and 2011.<span style="mso-spacerun: yes;"> </span>Put simply,
Jefferies is in sure hands, and it’s likely that Leucadia is too. </span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">Rather than merely
discussing the year that was, though, the CEO and President recap their 35-year
run, which investors would be wise to read.<span style="mso-spacerun: yes;">
</span>Starting at a small firm, ironically named Carl Marks, they navigated
booms and busts, invested in a wide range of businesses, suffered some failures
and hard luck, enjoyed some great good fortune and came through it all far
ahead of where they were at the beginning.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">Leucadia's future
will almost certainly not be as dazzling as its past.<span style="mso-spacerun: yes;"> </span>There's an unfortunate Catch-22 in investing:
every year of above average gains makes it more difficult to outperform the
market in the future, because increased size shrinks the number of potential
investments.<span style="mso-spacerun: yes;"> </span>In 1979, Leucadia's book
value was $22 million; by the end of 2012, it had grown to $6.8 billion (and
now stands at $9.8 billion).<span style="mso-spacerun: yes;"> </span>Cumming and
Steinberg note that good investments have become harder to find these past few
years, but blame increased competition from hedge funds and private equity,
rather than the constraints of being an elephant.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">Still, there's a
good chance that Leucadia 2.0 will be able to outperform the market for years
to come, though by a narrower margin.<span style="mso-spacerun: yes;">
</span>Handler and number-two Brian Friedman will likely continue their very
fine work at Jefferies, and Leucadia's handful of long-serving senior executives,
minus only the retired Ian Cumming, remain on board.<span style="mso-spacerun: yes;"> </span>It's worth noting that Leucadia has
successfully navigated the pitfalls of global investing, rather than focusing
only on the US.<span style="mso-spacerun: yes;"> </span>This brings many risks,
but also greatly increases the pool of possible investments, which should
somewhat counteract the "Elephants-can't-dance" problem.<span style="mso-spacerun: yes;"> </span>Now may not be a bad time to buy, either,
since Leucadia's share price is trading at less than book value.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"><strong><u>Disclaimer:</u></strong></span><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"> The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.</span></span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><o:p></o:p></span> </div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-59431453526177733082013-06-17T16:52:00.000-07:002013-06-17T16:52:16.374-07:00Costco - Culture and Competitive Advantage<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">An enduring competitive
advantage is a must in any would-be investment.<span style="mso-spacerun: yes;">
</span>Generally, there are just a few kinds of "moats" including a
low-cost position, high switching costs, high barriers to entry and network
effects.<span style="mso-spacerun: yes;"> </span>In rare cases, a corporate
culture can be included on this list.<span style="mso-spacerun: yes;">
</span>Part of the reason investors ought to be wary of investing in a company
based on its culture is because it's inherently difficult to measure, particularly
for outsiders.<span style="mso-spacerun: yes;"> </span>Nearly all companies
insist in public that they have a one-of-a-kind culture, and the loyal,
motivated staff that goes with it, but usually it's not true.<span style="mso-spacerun: yes;"> </span>In addition, while a winning culture only
exists if it has spread throughout an entire organization, it takes just one
imperious, foolish or unethical CEO to destroy it, so even if it exists today,
it may be gone tomorrow.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">A recent BusinessWeek
<a href="http://www.businessweek.com/articles/2013-06-06/costco-ceo-craig-jelinek-leads-the-cheapest-happiest-company-in-the-world">article</a> makes a compelling case that Costco belongs to the very short list of
companies with a culture so favorable to employees that it gives the company a
competitive advantage, and is so ingrained that it's almost certain to endure
over many decades.<span style="mso-spacerun: yes;"> </span>In general, and
unlike many of its competitors, Costco sees workers as an asset to invest in,
rather than a cost that must be reduced.<span style="mso-spacerun: yes;">
</span>(Costco's unique culture also includes a genuinely customer-friendly
approach, and a commitment to keeping costs low that’s double-stitched into the
company's DNA, but this particular article focuses on employee relations.)</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">In the US, Costco
pays workers an average of nearly $21 per hour, almost three times the minimum
wage and about twice what most notable competitors pay.<span style="mso-spacerun: yes;"> </span>In addition, the company's health care
package is far more attractive than what rivals typically offer.<span style="mso-spacerun: yes;"> </span>In fact, many competitors are cutting
workers' hours to below 30 per week, the threshold at which Obamacare would
force them to offer coverage.<span style="mso-spacerun: yes;"> </span>The
company insists that its generosity isn't charity, but is motivated by
bottom-line results.<span style="mso-spacerun: yes;"> </span>Not only does a
generous approach lower turnover and training costs, the company notes, it
increases loyalty and productivity.<span style="mso-spacerun: yes;">
</span>There's much truth to this claim.<span style="mso-spacerun: yes;">
</span>Turnover is a mere 5% for workers who've been with Costco over a year,
and a vanishingly small 1% for executives.<span style="mso-spacerun: yes;">
</span>These saving indeed hit the bottom line: net income was $1.7 billion in
the year ended 2012, up 33% from 2008, despite a stagnant economy.<span style="mso-spacerun: yes;"> </span></span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">However, it's clear
that there's a moral element to Costco's approach.<span style="mso-spacerun: yes;"> </span>The CFO acknowledges that the company could
make more money if wages were lower by a few dollars an hour, but says simply
"We're not going to do it."<span style="mso-spacerun: yes;"> </span>In
short, the company simply believes that it's the right way to behave.<span style="mso-spacerun: yes;"> </span>Jim Sinegal, Costco's long-time CEO and head
culture-maker, recently retired.<span style="mso-spacerun: yes;"> </span>This
represented a rare occasion where, if handled poorly, the company's principles
could have been undermined.<span style="mso-spacerun: yes;"> </span>It didn't
happen.<span style="mso-spacerun: yes;"> </span>The new CEO believes the same
things as his predecessor.<span style="mso-spacerun: yes;"> </span>It doesn't
hurt that the board includes Berkshire Hathaway's Charlie Munger, who, along
with Warren Buffett, has been instrumental in building one of the business
world's most unique and impressive corporate cultures.</span></div>
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<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">While its culture
is likely to give Costco an ongoing edge over its brick-and-mortar rivals, a
long-term competitive threat exists online.<span style="mso-spacerun: yes;">
</span>Amazon and similar firms have largely cut out workers, since they've cut
out the physical retail channel altogether, and sales over the internet are
growing significantly faster than in-store buys.<span style="mso-spacerun: yes;"> </span>However, the faster growth is happening from
a very small base, and Costco's large scale will allow it to offer low-priced
wares online just as it does in the physical world.<span style="mso-spacerun: yes;"> </span>In summary, Costco has a wide, shark-infested
"moat" that's likely to ensure stellar long-term performance.<span style="mso-spacerun: yes;"> </span>Currently, the stock is trading at a designer
price, not at a discount, but Costco possesses all of the other elements of a
superb investment.<span style="mso-spacerun: yes;"> </span></span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"><span>Source: <a href="http://www.businessweek.com/articles/2013-06-06/costco-ceo-craig-jelinek-leads-the-cheapest-happiest-company-in-the-world">www.businessweek.com/articles/2013-06-06/costco-ceo-craig-jelinek-leads-the-cheapest-happiest-company-in-the-world</a></span></span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"><span></span></span><b><u><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">Disclaimer:</span></u></b><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
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losses, financial or otherwise, or damages of any nature whatsoever,
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-26175473365370403742013-06-05T16:57:00.000-07:002013-06-05T16:57:28.596-07:00A Summary of James Surowiecki's "Boom or Bubble"<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Warren Buffett has
noted that two highly important data points have a gravity-like effect on the
stock market: the price/yield of bonds, and the ratio of corporate profits to
GDP.<span style="mso-spacerun: yes;"> </span>He remains bullish on stocks, explaining
that they are attractive compared to bonds.<span style="mso-spacerun: yes;">
</span>In the past, Buffett would likely be cautious about the second number,
though, given that corporate profits now stand at over 10% of GDP, far higher
than the 6% it has averaged in the past.<span style="mso-spacerun: yes;">
</span>Yet he remains upbeat on the value of stocks, and <a href="http://navinvesting.blogspot.ca/2012/08/profile-james-surowiecki.html">James Surowiecki</a>
explains why.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">In "<a href="http://www.newyorker.com/talk/financial/2013/05/27/130527ta_talk_surowiecki">Boom or Bubble</a>," Surowiecki explains that three secular shifts have boosted
corporate profits, and why those inflated earnings are here to stay.<span style="mso-spacerun: yes;"> </span>First, the average corporation paid a tax
rate of nearly 50% in 1951, over 30% in 1965, but now pay only 20% or so.<span style="mso-spacerun: yes;"> </span>As corporate tax rates have fallen almost everywhere
in the past few decades, any movement from here will almost certainly continue
in a downward direction.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Second, the
denominator - US GDP - is no longer as relevant as it was in the past.<span style="mso-spacerun: yes;"> </span>Due to globalization, a third of corporate
profits now come from abroad, compared no almost nothing a few decades
ago.<span style="mso-spacerun: yes;"> </span>Moreover, the mature US economy
will grow at a significantly slower pace than the economies of the developing
world, so the non-US portion of profits is sure to grow over time.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Third, the decline
of unions combined with a sluggish job market has led to a much diminished labor
force.<span style="mso-spacerun: yes;"> </span>For years wages have risen
slowly, if at all, and every dollar not spent on salaries and benefits boosts a
firm’s bottom line.<span style="mso-spacerun: yes;"> </span>Even as the labor
market strengthens, Surowiecki suggests, increased sales will likely counteract
any pressure from squeezed margins.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Anticipating the predictable
response - that people always claim that "This time is different" as
bubbles inflate - Surowiecki argues convincingly that this time is indeed
different.<span style="mso-spacerun: yes;"> </span>Wary investors should step
off the sideline and into the game, because US stock markets are likely to keep
setting records for years to come.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"></span><b><u><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">Disclaimer:</span></u></b><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and
indeed expressly disclaims any responsibility or liability for any
losses, financial or otherwise, or damages of any nature whatsoever,
that may result from or relate to the use of this blog. This disclaimer
applies to all material that is posted or published anywhere on this
blog.</span></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-48852014091133121222013-05-16T16:48:00.000-07:002013-05-16T16:48:10.529-07:00Home Capital Group - 2013 First Quarter Update<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Amid a weakening
housing market, Home Capital Group recently reported adjusted EPS that grew
19.1% in the first quarter of 2013.<span style="mso-spacerun: yes;"> </span>Over
the same time frame, Canadian home sales fell 15% year over year, though prices
have increased modestly.<span style="mso-spacerun: yes;"> </span>Despite the
doom-and-gloom predictions in the media, HCG sees a fairly balanced
relationship between supply and demand, however.<span style="mso-spacerun: yes;"> </span>Sales trends have improved in the early
second quarter, and new listings have increased as well, while prices have
remained fairly flat.<span style="mso-spacerun: yes;"> </span>Overall,
management sees no bubble in Canada's housing market.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">The company's
return on equity remained high at 24%, though that figure has been falling
somewhat in recent quarters.<span style="mso-spacerun: yes;"> </span>Still, it
stands at about twice the level of the average North American business, and the
company is able to redeploy the vast majority of its earnings at that
level.<span style="mso-spacerun: yes;"> </span>In addition, non-performing loans
remained low, despite the usual upward blip in the first quarter, due to
customers that tend to be recovering from Christmas expenses and seasonal
layoffs.<span style="mso-spacerun: yes;"> </span>Since customers’ average Beacon
score is improving, this trend is likely to continue.<span style="mso-spacerun: yes;"> </span>CEO Gerald Soloway reaffirmed full-year 2013
guidance, and pledged that if he ever doubted Home Capital Group's ability to
deliver on it, he would say so.</span></div>
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<br /></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Mr. Market,
however, isn't impressed.<span style="mso-spacerun: yes;"> </span>In fact, HCG's
stock has swooned by more than 15% from its recent peak, with much of that fall
occurring over only a few recent trading days.<span style="mso-spacerun: yes;">
</span>Several prominent investors are short the stock - a remarkable 23%
Home's shares outstanding were held by short sellers as of May 14 - mostly as a
macroeconomic bet that Canada's housing market is overvalued.<span style="mso-spacerun: yes;"> </span>While it’s likely that home prices are
overvalued by 10%-15%, it’s unlikely that Canada will see a US-style
crash.<span style="mso-spacerun: yes;"> </span>After all, 70% of Canada's aggregate
home value is equity, a significant proportion of home owners have fixed rate
mortgages, the jobs market has grown slowly but steadily since 2009, and
regulators have taken responsible measures to prevent excess.<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Even if Canada's
housing market falls harder than expected, it's unlikely that Home Capital
Group would suffer adverse consequences.<span style="mso-spacerun: yes;">
</span>The company has a long history of careful lending, and has avoided risky
areas of Canada's mortgage market, such as condominiums and high-priced
neighborhoods.<span style="mso-spacerun: yes;"> </span>As a further safety net,
HCG insists on meaningful down payments, and its borrowers tend to have
significant equity in their homes.</span></div>
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<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Assuming growth at
the low end of its guidance – the company has given a range of 13%-18% for the
year - Home Capital Group is currently trading at just 7 times 2013 earnings. <span style="mso-spacerun: yes;"> </span>There's no guarantee that the stock can't fall
further, but investors should keep in mind both of Ben Graham's two most
important ideas.<span style="mso-spacerun: yes;"> </span>First, the
aforementioned Mr. Market is there to serve patient investors, not to frighten
them.<span style="mso-spacerun: yes;"> </span>Second, the lower the price of a
stock, the higher the margin of safety - which offers both downside protection,
and upside opportunity.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">My original investment analysis of Home Capital Group is <a href="http://navinvesting.blogspot.ca/2012/11/home-capital-group-investment-analysis.html">here</a>. </span></div>
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<b><u><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">Disclaimer:</span></u></b><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and
indeed expressly disclaims any responsibility or liability for any
losses, financial or otherwise, or damages of any nature whatsoever,
that may result from or relate to the use of this blog. This disclaimer
applies to all material that is posted or published anywhere on this
blog.</span></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-27910591101183825352013-04-21T12:42:00.000-07:002013-04-21T12:42:05.879-07:00Jim Tisch - A Friend to Shareholders<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">In <i>The Office,</i>
Steve Carrell's Michael Scott, branch manager at dying paper company Dunder
Mifflin, hosts the "Dundies," an annual award ceremony put on to
recognize the staff's accomplishments.<span style="mso-spacerun: yes;">
</span>In that same spirit, this writer will award a "Friendly" to
acknowledge behavior that is beneficial to shareholders, whether it comes from
managers, investors, members of the media, or elsewhere.<span style="mso-spacerun: yes;"> </span>These prestigious awards will be handed out
from time to time, rather than annually, and without the accompanying evening
at Chili's, where the not-so-grateful employees of Dunder Mifflin met to receive
their awards.</span></div>
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<i><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">And the award goes
to...</span></i><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Jim Tisch, and the
rest leadership team at Loews</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Loews, a
conglomerate controlled by the Tisch family, recently decided to reach out to
shareholders in a creative way.<span style="mso-spacerun: yes;"> </span>Rather
than communicating in one of the usual forms - annual reports, press releases,
television interviews etc. - the company released a short <a href="http://www.loews.com/loews-content/uploads/2013/04/L_AR12_Graphic_Novel_v12.pdf">graphic novel</a> that
illustrates – literally – its story.<span style="mso-spacerun: yes;">
</span>Given that the value of Loews lies in several businesses - both wholly
owned firms and common stock positions - many would-be shareholders are put off
by the complexity.<span style="mso-spacerun: yes;"> </span>The graphic work
intends to simplify the story. </span></div>
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<br /></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">The 16-page effort
tells the story of its major businesses, which include large stakes in
publically traded firms such as insurer CNA and Diamond Offshore.<span style="mso-spacerun: yes;"> </span>The piece also mentions that Loews is
undervalued.<span style="mso-spacerun: yes;"> </span>In fact, readers learn that
(at the time of publication) the stock is trading at about $48 per share, yet
its "sum of the parts" amount to $50, which doesn't include the value
of dozens of high-end hotels, various pipeline properties, or Highmount, an
energy exploration and production company.<span style="mso-spacerun: yes;">
</span>Readers are reminded that the company has trounced the market over 50
years, returning 16% per year, compared to about half that for major
indexes.<span style="mso-spacerun: yes;"> </span>In addition, the company
re-affirms its core philosophical convictions, including patience, a focus on
the downside rather than the upside, and thinking like owners.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Art Spiegelman,
surely the world's most influential graphic novelist, dismissed Loews' effort
as an artistic failure.<span style="mso-spacerun: yes;"> </span>His criticism
isn't self-serving, either: the work, starring investigator "Lotta
Value," with recurring appearances from "Rich Stockman," will
not be confused with <i>Maus</i>, Spiegelman's two-part masterpiece of the
graphic novel form.<span style="mso-spacerun: yes;"> </span>However, it remains
a worthwhile effort at reaching both existing and potential shareholders.<span style="mso-spacerun: yes;"> </span>It's possible that Loews' short work will
reach most shareholders because of the form, not the content; thanks to the
event itself, rather than its subject.<span style="mso-spacerun: yes;">
</span>In other words, it may be more about the meta than the message.<span style="mso-spacerun: yes;"> </span>Speigelman may appreciate that aspect of it,
at least.<span style="mso-spacerun: yes;"> </span>In 2011, he released a graphic
novel about the original <i>Maus</i> experience - the work's creation, its
critical reception, and its implications for his own personal life.<span style="mso-spacerun: yes;"> </span>The book's name?<span style="mso-spacerun: yes;"> </span><i>MetaMaus</i>.</span></div>
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<br /></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"><a href="http://navinvesting.blogspot.ca/2013/04/an-interview-with-jim-tisch-and-joe.html">Here</a> is other coverage of Jim Tisch, and <a href="http://navinvesting.blogspot.ca/2013/03/warren-buffett-friend-to-shareholders.html">here</a> is another "Friendly," won by Warren Buffett </span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"></span><b><u><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">Disclaimer:</span></u></b><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and
indeed expressly disclaims any responsibility or liability for any
losses, financial or otherwise, or damages of any nature whatsoever,
that may result from or relate to the use of this blog. This disclaimer
applies to all material that is posted or published anywhere on this
blog.</span><span lang="EN" style="mso-ansi-language: EN; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;"></span></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-29875371147559369722013-04-16T11:59:00.001-07:002013-04-16T11:59:47.640-07:00Joseph Stiglitz and Bruce Greenwald on Productivity and the Great Depression<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">An <a href="http://navinvesting.blogspot.ca/2013/04/robert-gordon-on-productivity.html">earlier article</a>
addressed Robert Gordon's grim forecast that America may face a low-growth
future, just as all economies suffered pre-1750, before the Industrial
Revolution.<span style="mso-spacerun: yes;"> </span>If he's correct, it'll mean
that standards of living in America will increase only slowly in the decades to
come, though thankfully, given the immense wealth of the US economy, it'll
increase from a high base.<span style="mso-spacerun: yes;"> </span>Nobel Prize
holder Joseph Stiglitz, along with his Columbia University colleague Bruce
Greenwald, have contemplated the opposite dilemma: when living standards fall
even in periods of high productivity growth - indeed, <i>because of</i> steep
increases in productivity.<span style="mso-spacerun: yes;"> </span>The period
that these brave revisionists consider is one that many have sought to
understand: the Great Depression.</span></div>
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<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">In a <a href="http://www.vanityfair.com/politics/2012/01/stiglitz-depression-201201">Vanity Fair article</a>, Stiglitz lays out their findings.<span style="mso-spacerun: yes;">
</span>He notes that at the beginning of the twentieth century, a large
fraction of the US labor force was required to toil on farms just to feed the
nation.<span style="mso-spacerun: yes;"> </span>However, rapid improvements in
seed quality, fertilization, farming methods and mechanization, combined with
the absence of similar increases in demand, depressed farm incomes by half to
two-thirds between 1929 and 1932.<span style="mso-spacerun: yes;"> </span>This
abrupt drop in income, he argues, is what caused the Great Depression.<span style="mso-spacerun: yes;"> </span>Not only did it flow from rural areas of the
economy into cities - less wealth on farms meant decreased purchases of
city-made manufactured goods, for instance - but it jumped from the so-called
"real" economy into the financial sector: farmers simply could not
meet their obligations, and the financial markets were hit hard as a
result.<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">This wasn't a
problem that could be solved by monetary policy: only the massive, if accidental,
fiscal stimulus that occurred in preparation for the Second World War, he argues,
saved the US from the long-running horrors of the Great Depression.<span style="mso-spacerun: yes;"> </span>These large outlays raised the price of
crops, and drew surplus rural labor into newly productive urban factories.<span style="mso-spacerun: yes;"> </span>Keynesianism worked.</span></div>
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<br /></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">In case anybody had
forgotten, this hypothesis is a reminder that Joseph Stiglitz is one of the
world's premiere economists, and Bruce Greenwald is among the finest investment
and business minds currently working in academia.<span style="mso-spacerun: yes;"> </span>Momentous amounts of energy and brains have
been marshaled to understand and to learn from the Great Depression, and justifiably
so.<span style="mso-spacerun: yes;"> </span>That these two men were able to
offer such a novel - and convincing - interpretation of the most carefully
studied episode in economic history, and one that occurred 80 long years ago,
is very impressive.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"></span><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"><b><u>Disclaimer:</u></b></span><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and indeed
expressly disclaims any responsibility or liability for any losses, financial or
otherwise, or damages of any nature whatsoever, that may result from or relate
to the use of this blog. This disclaimer applies to all material that is posted
or published anywhere on this blog.</span></span></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-90395948648557054002013-04-16T11:51:00.000-07:002013-04-16T11:51:06.498-07:00Robert Gordon on Productivity<!--[if gte mso 9]><xml>
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<br />
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Many consider
economic growth a given, practically a law of nature.<span style="mso-spacerun: yes;"> </span>It isn't.<span style="mso-spacerun: yes;">
</span>In fact, before 1750, there was effectively no growth, and scant
improvement in living standards.<span style="mso-spacerun: yes;"> </span>In a
<a href="http://av.r.ftdata.co.uk/files/2012/08/IS-U.S.-ECONOMIC-GROWTH-OVER-FALTERING-INNOVATION-CONFRONTS.pdf">paper published in 2012</a>, Robert Gordon, an economist at Northwestern University,
wonders whether the period from 1750 to the present was merely a one-time
episode in human history, thus dooming us to return to the low-growth
past.<span style="mso-spacerun: yes;"> </span>He suggests that annual growth -
for most of the population, at least - could fall to just 0.5% in the coming
decades, down sharply from the 1.9% that we've enjoyed for more than a
century.<span style="mso-spacerun: yes;"> </span>(He is specifically focusing on
the US economy, which may or may not reflect subdued growth in the rest of the
world).</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Productivity growth
- "productivity" broadly measures the ratio of output per unit of
input, in this case GDP per man hour worked - is what leads to improved
standards of living, and Gordon breaks the post-1750 period into three
Industrial Revolutions.<span style="mso-spacerun: yes;"> </span>The first,
lasting from 1750 to 1830, included inventions such as the steam engine,
railroads and cotton spinning, with the economic effects lasting at least until
1900.<span style="mso-spacerun: yes;"> </span>The second and most productive,
spanning three astonishingly fruitful decades from 1870 to 1900, saw the
arrival of electricity, petroleum, chemicals, the internal combustion engine,
indoor plumbing, the telephone, phonograph and motion pictures.<span style="mso-spacerun: yes;"> </span>The third IR, beginning in 1960 and running
to the present, includes all of the wonders of the information age, such as
computers, the internet and mobile devices.</span></div>
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<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">While the
inventions and innovations of the second IR arrived in the short span of just
thirty years, the follow-on inventions (air travel, reliable indoor heating and
air conditioning, sewer systems, electrical and indoor appliances, highways)
and the long period of time it took to bring all of these enhancements across
America, meant that the period of blazing growth lasted from about 1890 to
1972.<span style="mso-spacerun: yes;"> </span>Since then, alas, growth has
slowed considerably.<span style="mso-spacerun: yes;"> </span>While the
electronic age has brought amazing, gee-whiz additions to daily life, its
effect on growth have so far have paled in comparison to the earlier
period.<span style="mso-spacerun: yes;"> </span>Allowing users the ease to
consume anytime, anywhere is appreciated, but it doesn't bring many new labor-saving
benefits.<span style="mso-spacerun: yes;"> </span>Interestingly, the largest
increase in productivity brought about by computers occurred <i style="mso-bidi-font-style: normal;">before</i> the arrival of the internet, when
a number of clerical and administrative tasks were automated, thanks to calculators,
bar-code scanners, word processors, ATMs, and other electronic marvels.</span></div>
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<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Gordon points out
that the major reason that IR #2 will be difficult to one-up is the one-time
nature of many of the improvements.<span style="mso-spacerun: yes;">
</span>There's a stark difference between travelling by horse or ship one
decade, and by automobile and airplane soon afterward.<span style="mso-spacerun: yes;"> </span>However, there's no practical difference
between flying at 500 miles an hour or 700.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Moreover, it's easy
to overlook the vast improvements that occurred as indirect consequences of
changes in transportation, notably the gains to public health that came from
replacing disease-carrying manure from horses by cars and roads, and from
cleaning up the smoky, poisoned interiors that prevailed before electricity.<span style="mso-spacerun: yes;"> </span>Similarly, once heating and cooling achieves
a constant temperature in most houses, there's nowhere to go but sideways.<span style="mso-spacerun: yes;"> </span>Other one-time changes include the mass
migration from rural to urban centers, the elimination of most "brute force"
manual labor, and the filling of homes with work-saving modern appliances. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">In addition, there
have been a number of non-repeatable changes since the dawn of IR#3 that are
already behind us, such as moving physical card catalogues onto internet-accessible
databases, and the ability to read material on-screen rather than on dead
trees.<span style="mso-spacerun: yes;"> </span>Gordon speculates that the fall
in growth from IR#2 has more than offset any gains that have been made since.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">There are potential
problems with Gordon's work.<span style="mso-spacerun: yes;"> </span>As he
freely admits, during the glorious bonanza of IR#2, there was a long period of
slow growth from 1906 to 1928, a period that coincided with the accelerated
roll-out of electricity, automobiles, roads and plumbing.<span style="mso-spacerun: yes;"> </span>While this may reflect difficulties with data
collection and measurement, it could also suggest a certain lumpiness in the
process of improving the economy, and the current slower growth period could be
a trough on the way to a new peak.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">And, as Yogi Berra
wisely noted, predictions are difficult - especially about the future.<span style="mso-spacerun: yes;"> </span>A futurist in 1945 who didn't foretell the
invention of the transistor a few years later also could not have predicted the
rise of the electronic age.<span style="mso-spacerun: yes;"> </span>Now, as
then, it's nearly impossible to know what innovations the future holds.<span style="mso-spacerun: yes;"> </span>Paul Krugman, for one, is more optimistic
about the potential of <a href="http://krugman.blogs.nytimes.com/2013/01/25/look-ma-no-human-hands/">self-driving cars</a> and speech recognition software to
significantly raise productivity growth.<span style="mso-spacerun: yes;">
</span>However, Gordon is not closed-minded about these possibilities and
points to several notable examples of predictions that turned out to be
laughably pessimistic.<span style="mso-spacerun: yes;"> </span>On the other
hand, there are counter-examples of unfulfilled hope.<span style="mso-spacerun: yes;"> </span>Who knows?</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Even if Gordon's
downbeat forecasts are correct, they must be kept in perspective: real GDP per
capita in the US would still <i>double </i>by 2100.<span style="mso-spacerun: yes;"> </span>Considering how extraordinarily well the
average American lives, a 100% increase from the current standard of living,
even if it takes nearly a century to attain, is nothing to sneeze at, and would
be far higher than almost all of human history.</span></div>
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<br /></div>
<div class="MsoNormal">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"></span><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"><b><u>Disclaimer:</u></b></span><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and indeed
expressly disclaims any responsibility or liability for any losses, financial or
otherwise, or damages of any nature whatsoever, that may result from or relate
to the use of this blog. This disclaimer applies to all material that is posted
or published anywhere on this blog.</span></span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-31529386406618717982013-04-14T13:06:00.000-07:002013-04-14T13:06:06.928-07:00An Interview with Tom Russo<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">In a Spring 2012
interview with the <a href="http://www.grahamanddoddsville.net/">Graham & Doddsville</a> newsletter, Tom Russo offered his
thoughts about investing.<span style="mso-spacerun: yes;"> </span>He explains an
interesting quality that he looks for in management: "the capacity to
suffer."<span style="mso-spacerun: yes;"> </span>What he means is that he
admires managers that ignore short-term results - or at least don't always feel
the need to completely maximize every penny of earnings in the current quarter
or year - while investing for the long-term.<span style="mso-spacerun: yes;">
</span>For example, consumer products companies presently making investments in
fast-growing areas like Africa, which do not earn stellar - or, in some cases,
any - returns now, but are likely to in the future.<span style="mso-spacerun: yes;"> </span>Rather than dipping a cautious toe in new
waters, Russo advocates an all-in approach, citing Starbucks' aggressive but successful
foray into China.</span></div>
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<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Russo ventures into
a fascinating but rarely-discussed matter in investing: the power of gut
feelings.<span style="mso-spacerun: yes;"> </span>He confides that he had a
funny feeling about the managers at Diamond Foods, though he didn't short the
company's shares.<span style="mso-spacerun: yes;"> </span>Surprisingly, he
offers an anecdote from none other than the ultra-rational, fact-obsessed (at
least in business-related matters) Charlie Munger, who sold out of Freddie Mac
shares long before they peaked, because something in his intuition said he
should.</span></div>
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<br /></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Russo, who once
worked at the Sequoia Fund with the late super-investor Bill Ruane, focuses in
part on multi-national companies operating globally, and has interesting things
to say about the need for ongoing opportunities to reinvesting in an existing
business.<span style="mso-spacerun: yes;"> </span>Clearly an expert on such
businesses, Russo addresses the fundamental strength of Brown-Forman, the
commodity-related challenges facing Kraft, the striking power of Pepsi's
Frito-Lay business, and more.<span style="mso-spacerun: yes;"> </span>In addition,
he holds forth about the attractive economics of aggregates firms, and the
merger between Vulcan Materials and Martin Marietta; discusses his philosophy
on investing in global firm headquartered outside of the US; offers several
reasons to avoid short-selling; and affirms the notion that it's easier to be
independent by ignoring Wall Street, even if you are located in New York.</span></div>
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<br /></div>
<div class="MsoNormal">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">Source is <a href="http://www4.gsb.columbia.edu/null/download?&exclusive=filemgr.download&file_id=7310999">here</a>. </span></div>
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<br /></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"></span><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"><b><u>Disclaimer:</u></b></span><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and indeed
expressly disclaims any responsibility or liability for any losses, financial or
otherwise, or damages of any nature whatsoever, that may result from or relate
to the use of this blog. This disclaimer applies to all material that is posted
or published anywhere on this blog.</span></span><span lang="EN" style="mso-ansi-language: EN; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;"></span></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-22972320297124195472013-04-02T16:46:00.000-07:002013-04-02T16:46:26.814-07:00An Interview with Jim Tisch and Joe Rosenberg of Loews<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; mso-ansi-language: EN;">Loews is a publically traded investment holding company,
one that is often likened to Berkshire Hathaway and Leucadia National.<span style="mso-spacerun: yes;"> </span>The company has been operating for over 50
years, and has been controlled by the Tisch family.<span style="mso-spacerun: yes;"> </span>The excellent <a href="http://www.grahamanddoddsville.net/">Graham and Doddsville newsletter</a>, published by the business school at Columbia University, recently
interviewed Loews CEO Jim Tisch and Chief Investment Strategist Joe Rosenberg.</span></div>
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<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; mso-ansi-language: EN;">Tisch recounts two investments that lead to excellent
returns, one involving buying ships used to transport oil during the OPEC price
spikes in the 1970s, the other having to do with offshore oil drilling, back
when it was an up-and-coming business.<span style="mso-spacerun: yes;">
</span>He has other interesting things to say, including the necessity to treat
minority shareholders well even when holding a controlling majority.<span style="mso-spacerun: yes;"> </span>After all, when you hold a permanent, say,
60% of a company, neither buying nor selling any shares, the only price
appreciation that will come happens among minority shareholders.<span style="mso-spacerun: yes;"> </span>If they are treated poorly by the controlling
owner, they will sell the stock, decreasing the price.<span style="mso-spacerun: yes;"> </span>In addition, he discusses the culture,
organizational structure, decision making process and day-to-day habits at
Loews; the pros and cons of holding permanent capital; and his preference for
US-based companies.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; mso-ansi-language: EN;">Joe Rosenberg recounts the airline industry in the early
1960s, a rare period of rising profits and stocks (yes, "airlines"
and "profits" appear together in the same sentence); he explains how
he uses research on riots to help understand the psychology of the market,
citing The True Believer: Thoughts on the History of Mass Movements, by Eric
Hoffer; and his contention that financial history, and indeed history in
general, is not given due attention in business schools.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; mso-ansi-language: EN;">As usual, the Graham & Doddsville letter lands a superb pair
of investors as interviewees, offering very useful information to readers.</span></div>
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<div class="MsoNormal">
<span lang="EN" style="font-family: "Times New Roman","serif";">Source is <a href="http://www.google.com/url?sa=t&rct=j&q=graham+and+doddsville+jim+tisch&source=web&cd=1&ved=0CDEQFjAA&url=http%3A%2F%2Fwww4.gsb.columbia.edu%2Ffilemgr%3F%26file_id%3D7312109&ei=OWxbUeW0O4GMygGE8IHAAg&usg=AFQjCNENUqSYOZMLhThxH8DfNBH5RH4Cgg">here</a>. </span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif";"></span><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"><b><u>Disclaimer:</u></b></span><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and indeed
expressly disclaims any responsibility or liability for any losses, financial or
otherwise, or damages of any nature whatsoever, that may result from or relate
to the use of this blog. This disclaimer applies to all material that is posted
or published anywhere on this blog.</span></span><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"></span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-15165015164624930242013-03-30T09:37:00.001-07:002013-03-30T09:41:55.560-07:00Glacier Media 2012 Fourth Quarter Update<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">Glacier Media
recently reported results for 2012.<span style="mso-spacerun: yes;">
</span>While sales were up significantly, increasing 23.4%, cash flows from
operations, the company's preferred gauge of profitability, were flat from the
earlier year, at about $44 million.<span style="mso-spacerun: yes;"> </span>More
importantly, though, the company required virtually no tangible equity to
generate these cash flows, the mark of a dominant business. </span><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">The somewhat soft
results were due to weakness in national advertising, sluggish economic growth
in the important B.C. market, and mediocre performance in the assets acquired
from Postmedia near the end of 2011, as well as increased investments that are
likely to result in stronger earnings in the future.</span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 10pt; mso-layout-grid-align: none; mso-pagination: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"></span><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">On a happier note,
business and trade publications performed well, and management is making
energetic efforts to increase the "decision dependence" of those
assets: the more businesspeople rely on the information, data and analytics
these publications provide, the higher Glacier Media's cash flows will be.</span><br />
</div>
<div class="MsoNormal" style="margin: 0in 0in 10pt; mso-layout-grid-align: none; mso-pagination: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">In the area of
capital allocation, the company pursued its usual balance between investing in
its own operations, making acquisitions, paying down debt, funding the dividend
and repurchasing shares.<span style="mso-spacerun: yes;"> </span>Unlike in most
years, when capital expenditures tend to range from $2-5 million, Glacier spent
around $15 million, mostly on a printing press, a one-time expense that will
both increase revenues and decrease costs.<span style="mso-spacerun: yes;">
</span>However, sustaining capex was a paltry $2 million, though that figure
may rise somewhat in the years to come after the elevated spending in
2012.<span style="mso-spacerun: yes;"> </span>Perhaps the sound and responsible
capital allocation is because management is relying on share/dividend returns
for their own wellbeing: after all, just $4.5 million was spent on wages for
all directors, senior executives and divisional managers, a refreshing
difference from what generally prevails in the corporate world.</span><br />
</div>
<div class="MsoNormal" style="margin: 0in 0in 10pt; mso-layout-grid-align: none; mso-pagination: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">Despite a
lackluster year, Glacier Media remains a compelling investment.<span style="mso-spacerun: yes;"> </span>The share price stands at about $1.90, and
net debt is $1.42 per share, meaning the company's enterprise value is
$3.32.<span style="mso-spacerun: yes;"> </span>Even assuming only modest organic
growth, the company is likely to generate $0.45-0.55 in free cash flow per year
over the next few years.<span style="mso-spacerun: yes;"> </span>Buying stock in
a company that generates $0.50 in free cash flow and costs $3.32 is the
equivalent of buying a bond that yields 15%.<span style="mso-spacerun: yes;">
</span>However, this particular arrangement is better still.<span style="mso-spacerun: yes;"> </span>In theory, Glacier Media could retire debt in
about three years, and pay all of its FCF out as a dividend in the ensuing
years.<span style="mso-spacerun: yes;"> </span>If it did so - it won't, but it
could, and all other capital allocation decisions should be weighed against
this alternative - shareholders would be buying the equivalent of a bond that yields
nothing for the first three years, but beginning in year four yields a
staggering 29% ($0.55/1.90) with the coupon likely to grow modestly over
time.<span style="mso-spacerun: yes;"> </span>Not bad for a bond.</span><br />
</div>
<div class="MsoNormal" style="margin: 0in 0in 10pt; mso-layout-grid-align: none; mso-pagination: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">Disclosure: At the time this article was published, the writer was long
GVC stock. </span></span><br />
<br />
<a href="http://navinvesting.blogspot.ca/2012/07/glacier-media-investment-analysis.html">Here</a> is my Investment Analysis of Glacier Media.</div>
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"></span><br />
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"></span><br />
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"></span><br />
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><div class="MsoNormal">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"><b><u>Disclaimer:</u></b></span><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and indeed
expressly disclaims any responsibility or liability for any losses, financial or
otherwise, or damages of any nature whatsoever, that may result from or relate
to the use of this blog. This disclaimer applies to all material that is posted
or published anywhere on this blog.</span></span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt; mso-layout-grid-align: none; mso-pagination: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"><br /></span></div>
</span><br />Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-77652787870813573572013-03-26T16:52:00.000-07:002013-03-26T16:52:22.008-07:00Book Review - The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, by William Thorndike, Jr.<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">William Thorndike
Jr.'s <i>The Outsiders </i>considers eight Hall of Fame CEOs (and, in some
cases, the small teams that they worked closely with), the only executives that
passed his twin tests: outperforming companies in their peer group, and besting
the performance of General Electric's Jack Welch, widely considered one of the
finest managers in business history.<span style="mso-spacerun: yes;">
</span>Thorndike found that unlike the jet-set, media-savvy,
wheeling-and-dealing, larger-than-life Welch, the truly elite eight were
modest, private, and humble.<span style="mso-spacerun: yes;"> </span>Their most
notable qualities, however, were cerebral.<span style="mso-spacerun: yes;">
</span>As Bill Stiritz of Ralston Purina put it: "Leadership is
analysis" (145).<span style="mso-spacerun: yes;"> </span>And all of the
featured executives had the independence of mind to turn analysis into action.</span></div>
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<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Warren Buffett has
noted that most CEOs, however exemplary their abilities in areas such as
marketing, production or administration, tend to be poor capital
allocators.<span style="mso-spacerun: yes;"> </span>They're executors, not
investors.<span style="mso-spacerun: yes;"> </span>However, decisions about what
to do with a spare dollar are just as important to the long-term performance of
a business as the day-to-day operations.<span style="mso-spacerun: yes;">
</span>In terms of specific policies, most of the featured CEOs repurchased
shares, but none paid a significant dividend; all focused on one version or
another of cash flows, rather than emphasizing earnings; and none provided earnings
guidance to analysts - in short, they behaved like investors, rather than
operators.<span style="mso-spacerun: yes;"> </span>They didn't out-manage Welch;
they bested him in the area of capital allocation.</span></div>
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<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Perhaps Thorndike's
greatest achievement in the book is to resurrect the largely forgotten story of
Henry Singleton, who Warren Buffett regards as among the greatest capital
allocators in the history of business.<span style="mso-spacerun: yes;">
</span>No business major, Singleton earned a PhD in electrical engineering, was
awarded the Putnam Medal as the best math student in America, and played chess
at an almost-grandmaster level.<span style="mso-spacerun: yes;"> </span>In 1960,
he and a partner founded a small firm, Teledyne, a conglomerate that swallowed
a mind-boggling 130 companies in its first decade of existence, using his own
firm's high-priced stock as the currency.<span style="mso-spacerun: yes;">
</span>While the sheer scale of his shopping spree might suggest an indiscriminate
approach to acquisitions, Singleton was in fact a bargain-hunter: he never paid
more than 12x earnings.<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Singleton
understood that using Teledyne's stock to fund acquisitions made sense only if
that stock was fully (or over) priced, and by 1971 he had grown the share count
by about 14x.<span style="mso-spacerun: yes;"> </span>However, when the
conglomerate form fell out of favor on Wall Street, Teledyne's stock swooned,
and he correctly reversed course.<span style="mso-spacerun: yes;"> </span>Not only
did he never again issue a single share of additional stock, he spent the next
decade-plus retiring an unheard of 90% of Teledyne's shares.<span style="mso-spacerun: yes;"> </span>In part by issuing stock at an average P/E of
25, and buying it at an average of 8, Singleton managed to grow EPS by a
world-beating 27% per year for 33 years.</span></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Just as he had
earlier retreated by repurchasing shares that had been previously issued,
Singleton eventually decided to dismantle the conglomerate that he'd spent his
life building.<span style="mso-spacerun: yes;"> </span>He spun out several of
Teledyne's largest operating companies, and sold what remained to another firm,
but only at a full price.<span style="mso-spacerun: yes;"> </span>What was it
all for?<span style="mso-spacerun: yes;"> </span>A 20.4% stock return over
nearly three decades, or an 180-to-1 increase. </span></div>
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<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">John Malone, who
has made his eye-popping fortune in the cable and media industries, allocates
capital, and leaves operations to a trusted number two, as well as local
managers.<span style="mso-spacerun: yes;"> </span>For many years as he built his
empire, Malone was the only significant cable company CEO to strive for cash
flow growth, rather than increases in EPS.<span style="mso-spacerun: yes;">
</span>In fact, the now widely used acronym EBITDA was coined by Malone.<span style="mso-spacerun: yes;"> </span>(Admittedly, this is not a wholly desirable
accomplishment).<span style="mso-spacerun: yes;"> </span>Recognizing that scale
is a powerful competitive advantage for cable operators, Malone bought smaller
competitors at a heated pace, but managed to do so on attractive economic
terms.<span style="mso-spacerun: yes;"> </span>Not only did size lead to lower
costs - and higher cash flows - per subscriber, Malone used it to strike unique
deals in which he acquired stakes in up-and-comers such as BET and Discovery in
return for access to his imposing subscriber base.<span style="mso-spacerun: yes;"> </span>Thorndike argues convincingly that Malone
used joint ventures more often and more effectively than any other CEO ever
has, perhaps adding a sixth category to the Big Five types of capital
allocation.<span style="mso-spacerun: yes;"> </span>The scorecard: 30.3% per
year from 1973 to 1998, over 900-to-1.</span></div>
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<br /></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Inevitably, a book
about capital-allocating CEOs will include a chapter on Warren Buffett and Charlie
Munger.<span style="mso-spacerun: yes;"> </span>While the chapter itself covers
no new ground, it's an able summary of the twin Oracles of Omaha, and offers a
nearly up-to-date performance record: 20.9% over 45 years, or a 6,265-to-1
return.<span style="mso-spacerun: yes;"> </span>But Buffett and Munger cannot be
bound and contained in a single chapter.<span style="mso-spacerun: yes;">
</span>In fact, the book reads a little like an experimental, post-modern
literary work, in which the mischievous author (Buffett) writes a book wherein
its main character (Thorndike) writes a book about the author (Buffett).<span style="mso-spacerun: yes;"> </span>After all, Thorndike, like most investors,
almost certainly first heard of Tom Murphy and Dan Burke of Capital Cities and Henry
Singleton from Buffett; Kay Graham would not have fared nearly as well as she
did without the active, ongoing counsel of Buffett, long the Washington Post's
largest shareholder; Buffett invested in General Dynamics well before it became
a must-read case study; and most of the books Thorndike cites are about, or
have been recommended by, Buffett and Munger. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Though Buffett,
Munger and Singleton are three of the finest, most original minds in the
history of business and investing, better capital allocation is possible for
most CEOs, regardless of their ability to play chess blindfolded or perform
complex calculations in their head.<span style="mso-spacerun: yes;"> </span>In
fact, the book left this reader frustrated: a few of the case studies offer
formulas that are so simple they border on boring.<span style="mso-spacerun: yes;"> </span>How difficult can it be, after all, to close
or sell poor businesses?<span style="mso-spacerun: yes;"> </span>To be sure, not
all businesses can be above average, but shareholders as a whole would be
meaningfully richer even if CEOs were better at just one simple task:
discriminating between paying a dividend and repurchasing cheap shares.<span style="mso-spacerun: yes;"> </span>For even a moderately disciplined chief
executive, buybacks are a far more attractive option over the long-term, since
most stocks are undervalued in the market from time to time.<span style="mso-spacerun: yes;"> </span>Thorndike is more optimistic than this reader
about the potential uses of leverage: even the uber-talented John Malone nearly
succumbed to bankruptcy - largely because of debt that he inherited, but not
entirely - and few CEOs will be mistaken for Malone.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Rather than merely
reassembling and reinterpreting publically available material, Thorndike
conducted nearly 100 interviews, talks that included many of the (surviving)
subjects themselves, as well as people who worked directly with them, adding
freshness to the book.<span style="mso-spacerun: yes;"> </span>In addition to
the stories noted above, he offers analysis of the Dick Smith at General
Cinema, and Bill Stiritz at Ralston Purina, case studies unknown even in many
business schools.<span style="mso-spacerun: yes;"> </span>And for active investors,
Thorndike addresses a few potential investments, including Transdigm, Sara Lee,
Exxon Mobil and the collection of companies controlled by John Malone.<span style="mso-spacerun: yes;"> </span>This fine book ought to be read by most
investors; but it's an emphatic <i>must read </i>for all CEOs.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Source: Thorndike, Jr.,
William.<span style="mso-spacerun: yes;"> </span><i>The Outsiders: Eight
Unconventional CEOs and Their Radically Rational Blueprint for Success</i>.
Boston: Harvard Business Review Press, 2012.</span></div>
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<div class="MsoNormal">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"></span><b><u><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">Disclaimer:</span></u></b><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and
indeed expressly disclaims any responsibility or liability for any
losses, financial or otherwise, or damages of any nature whatsoever,
that may result from or relate to the use of this blog. This disclaimer
applies to all material that is posted or published anywhere on this
blog.</span></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-54116537745578611092013-03-10T12:21:00.002-07:002013-03-10T12:21:43.822-07:00Mason Hawkins and Carl Icahn versus Dell<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Outside
shareholders upped their pressure on Dell's board of directors this week,
arguing that the proposed go-private transaction is unfair to all shareholders
not named Michael Dell.<span style="mso-spacerun: yes;"> </span>Southeastern
Asset Management’s Mason Hawkins, who has been arguing for several weeks that
the deal being promoted by the board undervalues the company, sent a letter to
Dell restating his case, and requesting information about Dell's shareholders,
which will enable him to persuade other owners to join his cause.<span style="mso-spacerun: yes;"> </span></span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">In the letter, Hawkins
points out that the special committee charged with assessing the proposed
transaction - and soliciting alternative offers - is composed of board members
who themselves own very little of Dell’s stock, meaning that their interests
may not be fully aligned with the interests of all shareholders.<span style="mso-spacerun: yes;"> </span>In addition, he questions the fact that Dell
has long argued that its sizable cash hoard was "trapped" overseas -
since repatriating it would involve paying tax - yet is now using that very
same cash to fund part of the buyout.<span style="mso-spacerun: yes;">
</span>Further, Hawkins wonders aloud about the way management presented recent
earnings results, and suggests that they were arranged in such a way as to
emphasize the declining PC segment, rather than highlighting the rest of the
business, which surely has a brighter future. </span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Hawkins was joined
by the formidable activist investor Carl Icahn, who reportedly owns up to 6% of
Dell.<span style="mso-spacerun: yes;"> </span>The significant size of his stake,
combined with Icahn's experience and reputation engaging in proxy battles, adds
immense weight to the growing list of dissatisfied outside shareholders.<span style="mso-spacerun: yes;"> </span>It's unclear if their efforts are
coordinated, but Icahn contends that Dell is worth around $23 per share, almost
exactly the same number that Hawkins has put forth, and recommends a deal that
is similar to one of the scenarios that Southeastern favors.<span style="mso-spacerun: yes;"> </span>Icahn would like to see the company pay a
special dividend of $9 per share, funded by a combination of cash, receivables
and new debt.<span style="mso-spacerun: yes;"> </span>In addition to the $9,
ongoing shareholders would own a "stub" that could be expected to be
worth nearly $14, based on Dell's cash flows.</span></div>
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<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">But Icahn goes
further than Hawkins.<span style="mso-spacerun: yes;"> </span>If Dell
shareholders vote against the go-private proposal, and if the company doesn't
then implement his preferred deal, Icahn stated his intention to run a slate of
directors who will.<span style="mso-spacerun: yes;"> </span>In effect, the
annual meeting where shareholders are given the choice between the two
competing boards would amount to a vote between Dell's deal and Icahn's.<span style="mso-spacerun: yes;"> </span>In a bold and clever move, Icahn pledges that
he will personally provide financing, on commercially reasonable terms, which
would allow for the prompt payment of a special dividend.<span style="mso-spacerun: yes;"> </span></span></div>
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<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Taken together,
Hawkins and Icahn are making a multi-pronged attack on the go-private
offer.<span style="mso-spacerun: yes;"> </span>They make a sound business case
that the proposed deal undervalues the company; they raise hard questions about
the interests and fiduciary duties of the board, questions that will not fade
away quietly as they proceed to rally the support of additional shareholders; by
offering financing of his own, Icahn has pre-empted management, if they were
planning to claim that the cash for a special dividend was unavailable; and
management was reminded that matters that can't be settled agreeably in the
boardroom can be settled disagreeably in the courtroom, as legal options remain
available.</span></div>
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<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">If reports of Icahn
owning about 6% of the firm are accurate, then together he and Hawkins control
14-15% of the company, about the same proportion as Michael Dell.<span style="mso-spacerun: yes;"> </span>It will be fascinating to watch which side
prevails, though this writer's guess is that shareholders will not approve
Dell's existing offer.<span style="mso-spacerun: yes;"> </span>Whether the
transaction that is ultimately agreed to is a sweetened version of the
go-private deal, or a different transaction altogether, remains to be seen,
however.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">Sources: The letters referred to above can be found in Dell's <a href="http://phx.corporate-ir.net/phoenix.zhtml?c=101133&p=irol-sec">SEC filings</a>. </span></div>
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indeed expressly disclaims any responsibility or liability for any
losses, financial or otherwise, or damages of any nature whatsoever,
that may result from or relate to the use of this blog. This disclaimer
applies to all material that is posted or published anywhere on this
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-13074471165177674082013-03-03T12:04:00.000-08:002013-04-21T12:43:22.563-07:00Warren Buffett - A Friend to Shareholders<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">In <i>The Office,</i>
Steve Carrell's Michael Scott, a manager at dying paper company Dunder Mifflin,
hosts the "Dundies," an annual award ceremony put on to recognize the
staff's accomplishments.<span style="mso-spacerun: yes;"> </span>In that same
spirit, this writer will award a "Friendly" to acknowledge behavior that
is beneficial to shareholders, whether it comes from managers, investors,
members of the media, or elsewhere.<span style="mso-spacerun: yes;">
</span>These prestigious awards will be handed out from time to time, rather
than annually, and without the accompanying evening at Chili's, where the
not-so-grateful employees of Dunder Mifflin met to receive their awards.</span></div>
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<i><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">And the award goes
to...</span></i><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Warren Buffett</span><i><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;"><br /></span></i></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">It's fitting that
the first "Friendly" has been earned by Warren Buffett, history's
most thoughtful, convincing and prominent advocate of shareholder-friendly
behavior.<span style="mso-spacerun: yes;"> </span>In a remarkable move - and a
first, to my knowledge - Buffett has invited a "bear" to join the
cast of analysts that will pose questions to himself and Vice-Chairman Charlie
Munger at the upcoming annual meeting.<span style="mso-spacerun: yes;">
</span>The person must be an investment professional with a negative outlook on
Berkshire, preferably holding a short position.<span style="mso-spacerun: yes;">
</span>Most CEO's would sooner invite an actual bear to the AGM than face the
paw-swipe or bite of a short-seller, but Buffett's commitment to openness,
transparency and the free expression of ideas is authentic.<span style="mso-spacerun: yes;"> </span>A range of perspectives are necessary to an efficiently
functioning market, and Buffett is helping ensure that Berkshire Hathaway
shareholders are alert to the challenges facing the company, not just the
opportunities.<span style="mso-spacerun: yes;"> </span>Bravo, Mr. Buffett.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"></span><b><u><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">Disclaimer:</span></u></b><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and
indeed expressly disclaims any responsibility or liability for any
losses, financial or otherwise, or damages of any nature whatsoever,
that may result from or relate to the use of this blog. This disclaimer
applies to all material that is posted or published anywhere on this
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-64343101231857925482013-03-03T11:58:00.001-08:002013-03-03T12:04:44.355-08:00A Comment on Warren Buffett's 2012 Letter to Shareholders<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Warren Buffett's
eagerly-awaited annual letter to shareholders was recently released.<span style="mso-spacerun: yes;"> </span>As ever, Buffett highlights the negative,
even as he downplays his accomplishments.<span style="mso-spacerun: yes;">
</span>For example, he refers to last year's performance - 14.4% growth - as
"subpar."<span style="mso-spacerun: yes;"> </span>This is true in the
literal sense that par is the S&P index, which returned 16%.<span style="mso-spacerun: yes;"> </span>However, that's not much of a difference, and
a gain in book value of $24 billion isn't all that shabby.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">He quickly
summarizes the basic terms of the Heinz deal, agreed to after the end of 2012,
without a hint of the "Gotcha!" that he must feel.<span style="mso-spacerun: yes;"> </span>Many long-time Buffett watchers likely
scratched their heads when they learned that the Master offered a price that
valued the venerable seller of ketchup and beans at about $28 billion
(including debt).<span style="mso-spacerun: yes;"> </span>However, once the
details emerged, it became clear that the terms of the deal were extremely
favorable to Berkshire shareholders.<span style="mso-spacerun: yes;">
</span>Alice Schroeder <a href="http://www.ft.com/cms/s/0/5cd29ec0-79be-11e2-b377-00144feabdc0.html">responded</a> to the deal in the <i>Financial Times</i>,
explaining that it was the Buffett brand that allowed for the one-sided
benefits of the deal, a transaction that will be studied decades from now in
business case studies.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">As usual, much of
the letter's space was devoted to a summary of Berkshire's large business
categories - a range of insurance companies; regulated, capital-intensive
businesses; manufacturing, service and retail businesses; and finance and
financial products - plus a few words about the stock portfolio.<span style="mso-spacerun: yes;"> </span>Most of this section is similar to the
comparable coverage in years past, with a few added comments, and, of course,
numbers that are more recent by one year.</span></div>
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<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Buffett always
offers sharp, clear insights into the sometimes fuzzy world of accounting.<span style="mso-spacerun: yes;"> </span>This year, he illustrated the difference
between "real" and "non-real" amortization charges –
software-related write-downs are generally legitimate, while charges to the
value of customer relationships tend not to be – and how they diminish the
reported earnings of IBM and Wells Fargo, two of Berkshire's "Big
Four" stock holdings.<span style="mso-spacerun: yes;"> </span>He also holds
forth on some of the arcana of GAAP purchase accounting as it relates to
Berkshire's steadily increasing investment in Marmon.</span></div>
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<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">This year, Buffett
spilled much ink on the newspaper industry.<span style="mso-spacerun: yes;">
</span>Because he has long prophesied that newspapers are in permanent decline,
many have wondered about his sudden spending spree on them (people must not
lose their sense of proportion, however: while he has bought many different
papers, even in aggregate they represent only a small fraction of Berkshire's
resources - so small in fact, that one wonders if his focus might be better
used elsewhere).<span style="mso-spacerun: yes;"> </span>Still, he offers a
clear and insightful history of the newspaper industry, where it stands at
present, and the direction it might take in the future.<span style="mso-spacerun: yes;"> </span>While he remains pessimistic about papers in
large, hyper-competitive markets, smaller papers with "primacy" in
matters of interest to readers - high school sports, local coverage, obituaries
- plus a sensible internet strategy can make for a buy, though only at very low
prices.</span></div>
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<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Using the topic of
dividends as a launching point, Buffett offers a concise general theory of
capital allocation.<span style="mso-spacerun: yes;"> </span>While he's shared
most these thoughts in the past, this primer is excellent.<span style="mso-spacerun: yes;"> </span>Both experienced and novice investors ought
to read and re-read this section.</span></div>
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<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Now well into his
80s, Buffett's mind remains razor-sharp, and his performance continues to be
stellar.<span style="mso-spacerun: yes;"> </span>The 2012 letter to shareholders
belongs in the same exalted company as all of the previous ones.<span style="mso-spacerun: yes;"> </span>Here's hoping for many more to come.</span></div>
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<div class="MsoNormal">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"><a href="http://navinvesting.blogspot.ca/2012/05/warren-buffetts-letters-to-partners.html">Here</a> is a rare summary of Warren Buffett's early letters to partners.</span></div>
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<div class="MsoNormal">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">Disclosure: At the time this article was published, the writer was long IBM stock. </span></div>
<div class="MsoNormal">
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<div class="MsoNormal">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"></span></div>
<div class="MsoNormal">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"><b><u>Disclaimer:</u></b></span><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and indeed
expressly disclaims any responsibility or liability for any losses, financial or
otherwise, or damages of any nature whatsoever, that may result from or relate
to the use of this blog. This disclaimer applies to all material that is posted
or published anywhere on this blog.</span></span></div>
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"><br /></span>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-43811931831803094062013-03-02T10:08:00.001-08:002013-03-02T10:08:24.897-08:00A Summary of Bakken Business, by Richard Manning
<br />
<div class="MsoNormal" style="margin: 0in 0in 10pt; mso-layout-grid-align: none; mso-pagination: none;">
<i><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">Harper's</span></i><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"> magazine is a little to the left of the conservative
business press.<span style="mso-spacerun: yes;"> </span>Maybe more than a
little.<span style="mso-spacerun: yes;"> </span>But investors, or anyone else
interested in shale drilling, ought to read Richard Manning's fine article,
"<a href="http://harpers.org/archive/2013/03/bakken-business/">Bakken Business</a>," appearing in the March, 2013 issue.<span style="mso-spacerun: yes;"> </span>The piece is a thorough and rich work of investigative
reporting.<span style="mso-spacerun: yes;"> </span>It includes material that
investors ordinarily drool at, expressed in the familiar language of dollars,
percentages, proportions.<span style="mso-spacerun: yes;"> </span>Readers learn,
for example, that the local house prices have already surged by five-fold, yet
the Bakken is expected to eventually support 35-40 000 wells, around seven
times the current number.<span style="mso-spacerun: yes;"> </span>Unemployment
is just 3%, despite huge influxes of work-starved employees, compared to a
national rate approaching 8%, and wages are growing at nearly 10% per year.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt; mso-layout-grid-align: none; mso-pagination: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"></span><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">Manning briskly
covers the longer-than-you’d-think history of fracking, explains what's
different about this latest incarnation, and offers a nuts-and-bolts description
of the current drilling process.<span style="mso-spacerun: yes;"> </span>The
social consequences are addressed, too, including the strains on infrastructure
in wildly growing cities and towns, and he includes off-beat details, like the
image of local roads littered with "trucker bombs," urine-filled
bottles that are regularly ejected from moving vehicles.<span style="mso-spacerun: yes;"> </span>The images are not just word-based, either:
the article features striking photos of rigs, flares, camps, flatlands and
more.<span style="mso-spacerun: yes;"> </span>While some locals have left due to
the changes, many who would have been forced to leave for want of a job have
stayed, and large numbers of people that once left have since returned.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt; mso-layout-grid-align: none; mso-pagination: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">Manning also
devotes space to the environmental controversy surrounding fracking, including
questions about the chemicals in fracking fluid, the methods of disposing waste
and pressures on local wildlife and habitats.<span style="mso-spacerun: yes;">
</span>On the Keystone pipeline, he argues that it'll be built eventually, as
pipelines are safer, cleaner and cheaper than shipping by truck or rail.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt; mso-layout-grid-align: none; mso-pagination: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;">Investing isn't
just about economics; it includes a broad political, social and cultural milieu.<span style="mso-spacerun: yes;"> </span>Manning offers the whole, larger
picture.<span style="mso-spacerun: yes;"> </span>While he may not have written
his piece for investors, anybody interested in the business of fracking must
read it. </span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt; mso-layout-grid-align: none; mso-pagination: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"></span> </div>
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><div class="MsoNormal">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"><b><u>Disclaimer:</u></b></span><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and indeed
expressly disclaims any responsibility or liability for any losses, financial or
otherwise, or damages of any nature whatsoever, that may result from or relate
to the use of this blog. This disclaimer applies to all material that is posted
or published anywhere on this blog.</span></span></div>
</span><div class="MsoNormal" style="margin: 0in 0in 10pt; mso-layout-grid-align: none; mso-pagination: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><o:p></o:p></span> </div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-27813496582626523552013-02-25T17:01:00.000-08:002013-02-26T16:39:39.318-08:00Barry Schwartz on Valuing a Business<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Baskin Financial Services
is one of the finer investment outfits in Canada.<span style="mso-spacerun: yes;"> </span>Both David Baskin, the company's namesake,
and colleague Barry Schwartz have much to offer knowledge-hungry
investors.<span style="mso-spacerun: yes;"> </span>The two make regular
appearances on BNN <a href="http://www.bnn.ca/Shows/Market-Call.aspx"><i>Market Call</i></a> and <a href="http://www.bnn.ca/Shows/Market-Call-Tonight.aspx"><i>Market Call Tonight</i></a>, and correctly emphasize
the competitive strengths of businesses, and important metrics such as return
on capital.<span style="mso-spacerun: yes;"> </span>In addition, both men
contribute regular articles on the firm's <a href="http://www.baskinfinancial.com/main/category/blog">blog</a>, where they've had wise things
to say about ignoring headline news, being patient, the perils of
over-diversification, and much else.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">A recent <a href="http://www.baskinfinancial.com/main/stop-paying-me-a-dividend-and-start-buying-back-shares/">article</a> by
Barry Schwartz considers an important question: How do shareholders decide
whether management ought to pay a dividend or repurchase shares?<span style="mso-spacerun: yes;"> </span>If they pay a dividend, he points out,
shareholders must pay tax, but are given control of the investment
decision.<span style="mso-spacerun: yes;"> </span>They have the option of buying
more shares of the dividend paying firm, but if they believe that the newfound
dollar in their pocket is better invested elsewhere, they can do exactly that.<span style="mso-spacerun: yes;"> </span>A share repurchase saves owners the tax, but
robs them of the alternative of investing elsewhere.<span style="mso-spacerun: yes;"> </span>His narrowly framed question can stand in for a
broader one: How should investors determine if a company is undervalued,
regardless of whether management returns money to shareholders (via dividend or
buyback) or if they retain all earnings to reinvest.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">The formula he
offers to resolve this question, unfortunately, is unsound.<span style="mso-spacerun: yes;"> </span>Schwartz argues that a company ought to
repurchase shares only if the P/E ratio is lower than its return on
equity.<span style="mso-spacerun: yes;"> </span>As he knows, P/E measures how
expensive a stock is, and ROE gauges the profitability of the underlying
business.<span style="mso-spacerun: yes;"> </span>Though both are critically
important, the two metrics are not on the same plane, the way, say, P/E and
earnings growth are combined to form the PEG ratio.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">To illustrate, in
2011 IBM posted adjusted earnings of $16.3 billion, on an equity base of $20.1
billion, for an ROE of 81%.<span style="mso-spacerun: yes;"> </span>By
Schwartz's logic - he prefers to pay no more than 75 cents for each percentage
of ROE - management is wise to pay up to 60 times earnings to buy back shares of
IBM.<span style="mso-spacerun: yes;"> </span>That's $1000 per share, for a
company now trading at $200, with a P/E ratio of 12x earnings.<span style="mso-spacerun: yes;"> </span>A little rich, I think.</span><br />
<br /></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">In fairness, I've
used an extreme example, since IBM's ROE is radically high.<span style="mso-spacerun: yes;"> </span>And, in practice, an investor that purchased
only stocks with, say, an ROE of 20% and a P/E of 15 would likely do well over
time.<span style="mso-spacerun: yes;"> </span>In fact, the three companies that
he cites as passing his test - CSX, Viacom, and Tim Horton's - are all superb
companies, and probably undervalued, too.<span style="mso-spacerun: yes;">
</span>Schwartz is profoundly right to covet companies offering both a high ROE
and low P/E ratio.<span style="mso-spacerun: yes;"> </span>Still, the formula he
has concocted is flawed.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">Disclosure: At the time this article was published, the author was long IBM stock. </span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"><a href="http://navinvesting.blogspot.ca/2013/02/valuing-business-mason-hawkins-on-dell.html">Here</a> is an article on how Mason Hawkins values a business.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"><b><u>Disclaimer:</u></b></span><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and indeed
expressly disclaims any responsibility or liability for any losses, financial or
otherwise, or damages of any nature whatsoever, that may result from or relate
to the use of this blog. This disclaimer applies to all material that is posted
or published anywhere on this blog.</span></span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-64484272039567542802013-02-25T16:49:00.000-08:002013-02-25T16:49:16.258-08:00Mohnish Pabrai on Investing Mistakes<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Investors should
listen when Mohnish Pabrai speaks.<span style="mso-spacerun: yes;"> </span>He
recently gave an enlightening <a href="http://www.gurufocus.com/news/208937/outlook-business-interviews-mohnish-pabrai">interview</a>, in which he discussed his personal
experiences as an entrepreneur, and the relationship between being a
businessperson and an investor; his "all-in" bet on financial
companies; his "two-outta-three-ain't-bad" philosophy of investing
errors, borrowed from John Templeton, and, affirmed, he claims (not
convincingly, in my view) by Warren Buffett's experience; and the opportunity
costs of committing capital, among other things.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">I'd like to
highlight, though, his candid exploration of his mistakes, a few of which led
to substantial and permanent losses of capital.<span style="mso-spacerun: yes;">
</span>One was Sears Holdings, which sits on real estate that's worth far more
than the company's market cap, but can only be monetized by liquidating the
business.<span style="mso-spacerun: yes;"> </span>Despite a prominent theory
which holds that people act only according to the cold calculus of economics,
most CEO's are not hot on the idea of liquidating the firm they preside over
(or perhaps this affirms the theory: after all, why dismantle the company
that's paying you such an appealing salary?).<span style="mso-spacerun: yes;">
</span>Either way, the alternative that's best for shareholders is not always
the option that's pursued by management.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">A second misstep
was his investment in Pinnacle Airlines, a contract operator that flew on
behalf of traditional airlines, including Delta.<span style="mso-spacerun: yes;"> </span>While Pinnacle had a cushy cost-plus
arrangement, shielding it from the challenges of the airline industry, making
money from customers that are losing money is not a recipe for long-term
success.<span style="mso-spacerun: yes;"> </span>When they fall, so do you.<span style="mso-spacerun: yes;"> </span>Pabrai concedes that he should have better
understood the full economic ecosystem that Pinnacle was operating in (Charlie
Munger would greatly respect this lesson, as the ecosystem is among the 100-odd
"<a href="http://navinvesting.blogspot.ca/2012/07/book-review-poor-charlies-almanack-wit.html">Big Ideas</a>" that he draws wisdom from).<span style="mso-spacerun: yes;"> </span>Finally, his worst failure was his position
in Delta Financial, a company that wrote, bundled and securitized mortgages,
and was felled by the recent financial crises.<span style="mso-spacerun: yes;">
</span>His position, 10% of his portfolio, went to zero.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Nearly all
prominent investors will concede that they've made mistakes, but when pressed
to provide specific examples, few are keen on discussing them in detail.<span style="mso-spacerun: yes;"> </span>Post-mortems are grim, after all.<span style="mso-spacerun: yes;"> </span>But kudos to Pabrai for doing so, and
allowing the rest of us the opportunity to learn from his mistakes for free,
rather than paying to do so first-hand.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"><a href="http://navinvesting.blogspot.ca/2012/05/book-review-dhando-investor-by-mohnish.html">Here</a> is a review of Pabrai's book <i>The Dhandho Investor</i> </span></div>
<div class="MsoNormal">
<br /></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"></span><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"><strong><u>Disclaimer:</u></strong></span><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and indeed
expressly disclaims any responsibility or liability for any losses, financial or
otherwise, or damages of any nature whatsoever, that may result from or relate
to the use of this blog. This disclaimer applies to all material that is posted
or published anywhere on this blog.</span></span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-59871852875177793302013-02-21T16:58:00.000-08:002013-02-21T16:58:25.977-08:00Terex - 2012 Fourth Quarter Update<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Terex recently
reported fourth quarter and annual earnings, both of which were significantly
better than the year-ago periods, though the improvement was due in part to
easy comparisons.<span style="mso-spacerun: yes;"> </span>More importantly,
management forecasted 2013 earnings of $2.40-2.70, and published their internal
"goal" of reaching $5 in EPS by 2015, but insisted that this wasn't
"guidance."<span style="mso-spacerun: yes;"> </span>The CEO, in the
past a bit of a shop-a-holic, promised to move towards the goal by focusing on
operational improvements, not through acquisitions.<span style="mso-spacerun: yes;"> </span>In addition, the company is aiming for a 15%
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Just as important
as the P&L is the balance sheet, which has been strengthened considerably
over the past few years, and the company pledged further improvements in the
years to come.<span style="mso-spacerun: yes;"> </span>Indeed, the 2015 EPS goal
appears to assume little or no remaining debt (management forecasted operating
income in 2015 of $1 billion, and assuming a 35% tax rate and 120 million
shares outstanding, EPS would amount to around $5.40, leaving little room for
interest payments).</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">The $5 goal is a
bit light, so Terex shareholders must be hoping that management is under-promising
with the intention of over-delivering.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"><strong><u>Disclaimer:</u></strong></span><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and indeed
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-47454152999395339892013-02-19T16:57:00.000-08:002013-02-19T16:57:08.295-08:00Valuing a Business - Mason Hawkins on Dell<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Valuing a business
is part art, part science.<span style="mso-spacerun: yes;"> </span>Since
determining a business's true worth is subtle enough to resist any
hard-and-fast formula, it's always useful to learn how successful investors do
it.<span style="mso-spacerun: yes;"> </span>After all, investors who have
outperformed the market over an extended period of time must know how to
identify undervalued assets.<span style="mso-spacerun: yes;"> </span>The
consensus these days is that most of a business's value lies in the free cash
flows that it will generate in the future, albeit adding on surplus assets, and
subtracting long-term liabilities.<span style="mso-spacerun: yes;"> </span></span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Warren Buffett pegs
the value of a business on the earnings that will be generated "from now
to kingdom come," though he's deliberately vague on specifics.<span style="mso-spacerun: yes;"> </span>It appears that he doesn't employ any
standard discounted cash flow model.<span style="mso-spacerun: yes;"> </span>In
fact, biographer Alice Schroeder, among the most well-informed and shrewdest of
all Buffett-watchers, has suggested that when gauging a business's value he
looks forward mostly by looking backward, focusing on a business’s past ability
to generate profits as a predictor of future results.<span style="mso-spacerun: yes;"> </span>If he's confident that the business has an
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to undergo major change, he assumes that tomorrow will look much the same as
yesterday and today.<span style="mso-spacerun: yes;"> </span></span></div>
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<br /></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">However, there are
other valid ways of assessing a company's worth.<span style="mso-spacerun: yes;"> </span>One of North America's foremost investors is
Mason Hawkins, of Southeastern Asset Management.<span style="mso-spacerun: yes;"> </span>He is currently campaigning on behalf of Dell
shareholders, maintaining that the proposed leveraged buyout, led by founder
Michael Dell, "grossly undervalues" the company.<span style="mso-spacerun: yes;"> </span>In fact, he argues in a recent <a href="http://www.longleafpartners.com/downloads/dell-board-letter.pdf">publication</a>
that the tech giant is worth nearly twice what's being offered.<span style="mso-spacerun: yes;"> </span>Given that Southeastern is the largest
outside shareholder, owning 8.5% of Dell's stock, the business world will be
watching closely as events unfold.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Happily for
investors and students of investing, Hawkins not only makes explicit what he
thinks Dell is actually worth - $23.72 per share - he offers details about he
arrives at his conclusion.<span style="mso-spacerun: yes;"> </span>Essentially,
Hawkins breaks Dell down into its constituent parts - no longer merely a
purveyor of low-priced desktops, the company now sells servers, software and
services, in addition to its financing operation - and attaches a multiple to
current operating income.<span style="mso-spacerun: yes;"> </span>The multiples
applied are different for each business, reflecting the going rate for
comparable companies in their respective industries.<span style="mso-spacerun: yes;"> </span>He sums up these numbers, adds net cash plus
an estimate of the value of recent acquisitions, then subtracts unallocated
financing and corporate expenses.<span style="mso-spacerun: yes;"> </span>While
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network offers the company a competitive advantage, adding further value.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Number-loving
investors will be fascinated by Hawkins' analysis, but the important work is
actually qualitative.<span style="mso-spacerun: yes;"> </span>Taking apart Dell
piece by piece forces Hawkins to carefully consider each of its component
businesses, and how they compare to competitors in their respective
industries.<span style="mso-spacerun: yes;"> </span>While this analysis focuses
on today's earnings, rather than attempting to predict what may happen
tomorrow, it has one crucially important thing in common with a future cash
flow estimate: it places a company's value in its ability to sell products and
services to customers. <span style="mso-spacerun: yes;"> </span>Hawkins goes on
to suggest several scenarios that may <i>unlock</i> latent value, but the value
itself resides in the quality of the business.</span></div>
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<div class="MsoNormal">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">Source: http://www.longleafpartners.com/downloads/dell-board-letter.pdf</span></div>
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<br /></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"><a href="http://navinvesting.blogspot.ca/2012/11/dell-value-or-value-trap.html">Here</a> is an earlier article on Dell.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";"><strong><u>Disclaimer:</u></strong></span><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and indeed
expressly disclaims any responsibility or liability for any losses, financial or
otherwise, or damages of any nature whatsoever, that may result from or relate
to the use of this blog. This disclaimer applies to all material that is posted
or published anywhere on this blog.</span></span></div>
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<br /></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-12274932318399405142013-02-17T10:33:00.000-08:002013-02-17T10:33:10.782-08:00A Summary of the IMF's Survey of Canada's Economy and Housing Market<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; mso-ansi-language: EN;">The International Monetary Fund recently released an
<a href="http://www.imf.org/external/pubs/cat/longres.aspx?sk=40321.0">economic report</a> on Canada that included an analysis of Canada's housing
market.<span style="mso-spacerun: yes;"> </span>Based on a detailed study that
included immigration trends, household income, mortgage rates, and the rental
market, the IMF concludes that Canada's housing market is overvalued by 10-15% (as
of the third quarter of 2012).<span style="mso-spacerun: yes;"> </span>While the
report suggests that there has been some overbuilding, it concludes that excess
supply remains modest.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span lang="EN" style="font-family: "Times New Roman","serif"; mso-ansi-language: EN;">Overall, the authors do not express any particular
alarm.<span style="mso-spacerun: yes;"> </span>While they cite downside risks,
their "baseline" scenario is a "soft landing," where
nominal house prices are flat, or down slightly, over the next few years, with
inflation slowly closing the gap between price and value.<span style="mso-spacerun: yes;"> </span>While reduced housing starts and softening
prices will drag on economic growth, it will not dramatically reduce
expansion.<span style="mso-spacerun: yes;"> </span>The (mostly) responsible lending
practices and homeowners' significant equity mean that it's unlikely Canada
will suffer from a US-style housing crash, the report concludes.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif";"></span><span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN;"><b><u><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">Disclaimer:</span></u></b><span style="color: #666666; font-family: "Trebuchet MS", "sans-serif"; font-size: 7.5pt; mso-bidi-font-family: "Trebuchet MS";">
The host of this blog shall not be held responsible or liable for, and indeed
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-34393244208607625882013-02-17T10:27:00.000-08:002013-02-17T10:27:38.993-08:00A Summary of Investing in Worldly Wisdom, by Robert Hagstrom<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Robert Hagstrom,
the chief investment strategist and managing director of Legg Mason Investment
Counsel, recently wrote an <a href="http://www.cfainstitute.org/learning/products/publications/cfm/Pages/cfm.v24.n1.4.aspx">article</a> about the value of a multi-disciplinary
approach to business and investing.<span style="mso-spacerun: yes;"> </span>The
author of several excellent investing books - including <i>The Warren Buffett
Way </i>and <i>Investing: The Last Liberal Art </i>- Hagstrom discusses Charlie
Munger's <a href="http://navinvesting.blogspot.ca/2012/07/book-review-poor-charlies-almanack-wit.html">"latticework"</a> of mental models that he faithfully uses to
solve problems, investing and otherwise.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Hagstrom not only
convincingly makes the case that business schools are too isolated from the
valuable concepts and ideas from other disciplines, he offers some evidence
that things may be starting to improve.<span style="mso-spacerun: yes;">
</span>One example is a consortium put on by the Aspen Institute entitled,
"Rethinking Undergraduate Business Education: Liberal Learning for the
Profession."<span style="mso-spacerun: yes;"> </span>It's surely not a
coincidence that the CEO of the Aspen Institute is Walter Isaacson, the
highly-regarded author of Steve Jobs' biography.<span style="mso-spacerun: yes;"> </span>After all, one of the enduring themes of
<a href="http://navinvesting.blogspot.ca/2013/01/book-review-steve-jobs-by-walter.html">Isaacson's book</a> is that Jobs' resounding success was made possible by borrowing
and employing ideas from a range of fields.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Despite the fact
that investors needn't become an expert in every topic, the ideal of the
renaissance man/investor exists more in theory than in practice.<span style="mso-spacerun: yes;"> </span>Articles like Hagstrom's may help to change
that.</span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6009642928029215494.post-55169702531996378252013-02-15T15:39:00.000-08:002013-02-15T15:39:32.700-08:00Home Capital Group - 2012 Fourth Quarter Update<!--[if gte mso 9]><xml>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">Home Capital Group
posted a strong fourth quarter, to cap off yet another strong year.<span style="mso-spacerun: yes;"> </span>Earnings per share were $1.70 for the
quarter, up 17.2% from the prior year period.<span style="mso-spacerun: yes;">
</span>For 2012, earnings were $6.40, 16.8% higher than in 2011.<span style="mso-spacerun: yes;"> </span>Just as important, return on equity remained
high, at 25.5% for the year.<span style="mso-spacerun: yes;"> </span>With HCG,
growth never comes at the cost of a weakened balance sheet or significant
risks.<span style="mso-spacerun: yes;"> </span>Indeed, its tier one capital
ratio stands at a formidable 17.01%, and the total capital ratio stands at
20.68%.<span style="mso-spacerun: yes;"> </span>Non-performing loans amounted to
just 0.33% of gross loans, a superb figure.<span style="mso-spacerun: yes;">
</span>In addition, Home Capital Group increased its savings and fixed-term
deposits, which are cheap, safe forms of funding.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">The company has a
long and commendable record of delivering on its promises, and this year was no
different.<span style="mso-spacerun: yes;"> </span>Shareholders ought to be
excited about the year to come, too: the company is forecasting earnings growth
of 13-18% in 2013, and return on equity exceeding 20%.<span style="mso-spacerun: yes;"> </span>Importantly, these expectations are not based
on starry-eyed assumptions about the Canadian economy or housing market.<span style="mso-spacerun: yes;"> </span>Management foresees slow but steady economic
growth, and a moderate decline in housing starts, resales and prices.<span style="mso-spacerun: yes;"> </span>While it remains early, the first six weeks
of the year were strong, management noted on the conference call.</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN;">The mid-point of
the 2013 EPS estimate is about $7.35, meaning that even after a 20% or so
increase in the stock over the past year, Home Capital Group currently trades
at just 8x earnings.<span style="mso-spacerun: yes;"> </span>This offers a large
margin of safety on the downside, and a tremendous opportunity on the
upside.<span style="mso-spacerun: yes;"> </span>The dividend now stands at $1.04
per year, offering a 1.7% yield, slightly less than the market average, though
there's a good chance it will rise before the year concludes. </span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"><br />Disclosure: At the time this article was published, the writer was long HCG stock</span></div>
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<span lang="EN" style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">My investment analysis of Home Capital Group is <a href="http://navinvesting.blogspot.ca/2012/11/home-capital-group-investment-analysis.html">here</a>. </span></div>
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