Wednesday, April 22, 2015

European Reliance vs. Genesee Valley Gas

The Greek crisis seems like a never ending drama. My stake in Greece is my European Reliance (EUPIC) position. So I am watching the drama unfold with keen interest. First a little background. Greece faced a major financial crisis in 2011. but gradually came out of the crisis by 2014. Even though its GDP by had shrunken by 40% and unemployment was at 25%, the government deficit was almost nil. Then in the 2014 election campaign the leftest party Syriza ran on a platform of rolling back 5 years of austerity. And they won in early 2015.

Initially after the election, Greece was given temporary support while the new government comes up with a new plan to reform its economy. This hasn't happened so far. So, it looks like Greece will not get further outside help to service its debts, let alone get new loans. But regardless of whether it stays in the Eurozone or not, foreign companies will need to be paid in Euros or dollars or some respected currency. Greece can leave the Eurozone and print Drachmas in the way Zimbabwe printed their currency with reckless abandon. But it won't do any good in paying for imported goods and services. Right now Greece has a deficit about 10% of GDP. Greece cannot have a trade deficit if it cannot borrow money. So, Greece will to go through a lot of internal struggles if it thumbs its nose at the rest of the Eurozone and defaults on its debt.

ATH:EUPIC Genesee Valley
Gas (1953)
Price € 1.26 $ 5.00
Market Cap € 34.65 M $ 0.118 M
P/E TTM 2.8 x 1.9 x
Div yield 0.0 % 0.0 %
P/BV 0.49 0.40
ROE17.8 % 21.1 %
Against this backdrop, EUPIC has been hugely profitable. It has earned € 0.37, € 0.35, and € 0.33 in 2014, 2013, and 2012 respectively. This means the company earns a high-teens return on equity. And the company has ample equity for its business. Its assets are € 330M, its equity is € 70M and its premium revenue is € 166M. So the company is not overextending itself by writing excessive policies.

I believe the company has done well in part because of Greece's bad economic situation. In a society where the government is on the brink of insolvency, people can hardly rely on government social assistance. Therefore, I believe people who have the means would rely on the private sector to provide what used to be from the government; such as insurance for health and pensions. And in the event of a Greek government default or a Grexit, people will rely even more on the private sector.

As I try my best to evaluate EUPIC objectively, I try to imagine what a young Warren Buffett would do if he saw a similar company. That's one main reason why I've been posting so much about his partnership days. And it just so happens that Buffett did see a somewhat similar situation in his early twenties, when he was playing around with a small capital base. He recounts in 2005:
You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map. You may find local companies that have nothing wrong with them at all......

Other examples: Genesee Valley Gas, public utility trading at a P/E of 2, GEICO, Union Street Railway of New Bedford selling at $30 when $100/share is sitting in cash, high yield position in 2002. No one will tell you about these ideas, you have to find them.

So, then I got very interested in Genesee Valley Gas and found it in the Moody's Public Utility Manual. I found that in one year, 1953, the company earned $2.61. Genesee is a tiny cap company even by 1950s standards and so it is very illiquid. In fact I don't know where it was traded let alone the price. But Buffett did say that it was trading at $5. He did not say which year. But using his $5 price in 1953 then the stock was trading at a P/E of 2. However, Buffett failed to mentioned that 1953 was the only year it made that much. In other years earnings was was lower. See chart below. But still it was a very cheap stock.

Genesee Valley Gas is a small-time utility serving Western New York. It only served 28,000 people. During the depression it went into backruptcy protection and was reorganized. I suppose the legacy of that still affected the company almost 20 years later.

Now compare that with EUPIC today. EUPIC is just as solid and it has much more consistent earnings. The PE range is about the same. And both companies sell for considerably less than book. The big drag on EUPIC is of course the Greek macro situation. But as mentioned above I don't believe it will be a total castrophy if Greece defaults or even if it leaves the Eurozone. In either or both cases this company will continue to operate because Greece will no doubt continue to function. If I am right maybe some successful money manager will one day recount how back in the day, when Europe and Greece were in crisis, we could find bargains galore so long as we turned over enough rocks.

I think a young Warren Buffett would approve of EUPIC.

Monday, April 13, 2015

Warren Buffett Partnership Investments

Warren Buffett is becoming a person bigger than life. He is 84 years old now and very coy about when he'll step down from Berkshire Hathaway. He is, however, focusing on the direction of the company after he passes on. I am very skeptical that anyone can control what happens after they die. But if Warren Buffett can, all the more power to him. I just don't think about it too much. Today, my Berkshire position has dwindled down to a small part of my portfolio. And I don't really pay that much attention on what he does for Berkshire today. He is a whale in the business world, and he buys entire large caps such as Heinz, Kraft and Burlington Southern. The domain where he looks for investments is a crowded space. Quality large caps are well covered and sought after. This results in a efficient marketplace where only geniuses like Buffett can generate alpha. I don't try to duplicate Buffett in this arena as it is too hard and risky.

It is hard because the space is crowded with people who are smarter and have more insight and more time than I do. Also, it is risky because I am not a young person starting out. If I was starting out in my twenties and had a small pot of savings I could do this. I can give it a try and possibly make it the start of a great career. And if I fail at it, no real harm I have plenty of time to recover and find my niche. But I am not twenty and I cannot take an excessive risk of failure. So I must choose a path that is more proven and which makes my abilities less of a factor in the method to success.

This is the reason I've settled on the more Ben Graham's cigar-butt type of investing. Ben Graham was Buffett's early mentor and the Graham's partnership ended when Buffett's partnership was just starting out. So both Graham and Buffett ran partnership's in the same era. And during that era both were looking at cigar butts. But while the mentor was beating the market by around 2% per year, the student, in his own words, "Killed the Dow". I think Buffett did better because he thought more about the quality of businesses. So, I think the opportunity for the least work with the least intelligence with the maximum payoff is to do what Warren Buffett did in the 50's and early 60's.

To do this I need to start with as much information about the investments as possible. This post lists sources of information for Buffett Partnership (BPL) investments of the 50s and early 60's. A copy of Warren Buffett's list of his 1962 BPL investments is displayed in the book Of Permanent Value by Andrew Kilpatrick. I want to get coverage on 75% of the 1962 BPL's total equity by the time I am done.

This list is a work in progress. Enjoy!

Stock year Description Source / Link
GEICO1952 He called GEICO his first love Buffett writeup
Western Insurance Securities1952 Buffett sold GEICO to buy Western, which was even cheaper on paper Buffett writeup
Genessee Valley Gas1953
bovinebear blog
Union Street Railway1956 compoundingmachines

The Snowball by Alice Schroeder
Sanborn Maps1961 Workout situation; Buffett bought company to unlock its stock portfolio csinvseting case study

The Snowball by Alice Schroeder
Berkshire Hathaway1962 A pretty soggy cigar butt
(2.4% of partnership)
Dempster Mills1962 Control situation
(23.0% of partnership)
csinvseting case study
British Columbia Power1962 Workout situation, recommended by Munger
(11.2% of partnership)
bovinebear blog
The Snowball by Alice Schroeder
Texas National Petroleum1962
(5.7% of partnership)

Trade Like Warren Buffett by James Altucher
Stanrock Uranium Ltd.1962 Workout situation
(5.0% of partnership)
bovinebear blog
Young Spring & Wire Corp1962
(5.0% of partnership)
Grinnell Corp1962
(2.9% of partnership)
bovinebear blog
Crane Co.1962
(2.1% of partnership)
bovinebear blog
Black, Sivalls & Bryson, Inc.1962
(1.8% of partnership)
Alco Products1962
(1.0% of partnership)
bovinebear blog
Hartford Fire Insurance, INS1962
(-2.4% of partnership)
bovinebear blog

Saturday, April 4, 2015

Earnings on tap: McRea Industries, Senvest, EUPIC, CMH, Putprop

McRae Industries (MCRAA) recently reported H1 2015 results. Revenue in H1 was $57.31 M versus $58.26 M the previous year. And the gross margin was 28.1% versus 30.9% the previous year. This resulted in a H1 income drop of $3.80 M versus $4.55 M the previous year. Despite the slight disappointment, management tone was upbeat. They attributed the lower margin to two main factors. The first is higher costs associated with hiring and training new personnel, which is encouraging because it says they are expanding capacity. The second is due to higher import costs, which is worrying. One would expect that with the dollar getting stronger and stronger that import costs would decrease. On the other hand if most of their imports is from China then that would not apply as the Yuan is actually appreciating versus the dollar. The company did express optimism that demand remain strong in all product segments, so this year results should be on par with last year's record results.

Senvest just reported 2014 results which was as expected given the company posts the results of its funds monthly. Shareholder's equity at year end stands at CDN$738 M or CDN$264 per share. The company currently trades at 64 % of year-end book value. However, it should be even lower considering that after Q1 2015, the Senvest main funds Senvest Partners is up 7% and the Senvest Israel Partners is probably up around the same. The stock today probably trades at less than 60% of book!

Senvest year end 2014 year end 2013 year end 2012 year end 2011
Common equity (CDN$ M) 738 565 331 263
yoy equity gain 31% 71% 26%
Employee compensation (M) 32 43 12.5
Compensation as a
percentage of equity
4.3% 7.6% 3.8%

Senvest is a steal in my opinion. But, there is a lively debate in stock forums and the blogosphere whether the stock is indeed undervalued. The debate centers on whether the management deserves the compensation for the alpha, or lack of, that they generate for their portfolios. The above table shows the employee compensation (management fees) for the last 3 years and their percentages of equity. The fees are from the consolidated balance sheets which is shared by not just the common shareholders but also the outside owners of the Senvest funds and the minority interests. I estimate that the outside owners pay about 1/3 to 1/4 the management fees. And the minority interest is another 10%. So overall, the common shareholders directly pay around 60% of the total employee compensation. So, with this in mind, the fees are around 2.5% in a bad year, when incentive bonuses do not kick in, and it is around 5% in a good year, when incentive bonuses kick in. I think that is reasonable. Back in the day, when I was still buying mutual funds in Canada, the mutual fund management expense ratios could run as high as 2.5%!

I'll be watching the employee expense numbers closely in the coming quarters as the company also said it is expanding its work force in New York.

European Reliance of Greece (EUPIC:ATH) reported earnings of € 0.37 in 2014 versus € 0.35 a year ago. Equity grew to € 70M from € 58M a year ago. This means that the company is now selling for 1/2 book! No doubt the underpricing is due to the ongoing Greek debt crisis. I definitely need to think of the company's contingencies in the event of a Greek exit from the Eurozone, because if I can access the downside I can have a better gauge of whether this company should really be priced at 1/2 book.

Next up are my two South African holdings. CMH, an auto retailer, pre-announced that 2014 headline earnings would be between R2.04 and R1.88 versus R1.58 a year ago. Actual EPS would be between R1.73 and $1.57 versus R1.57 a year ago. Beyond that the company didn't give any more details. So it appears that the company has some one-time charges in the last year, which lowered earnings in a otherwise excellent year. Today the company trades at 9x earnings.

My other South Africa holding Putprop reported sales in line with last year. But a flurry of news made me just too scared and I sold. I think real estate companies are not for my style of investing and it'll be a while before I'll buy another. In the last six months Putprop reported its primary customer was in arrears with rent. It also announced it was doing a rights offer at R6.30 when the stock was trading at R7.00. However, when the rights offering time came, the stock was trading at R6.20! And several board members were replaced at around the same time. All these borderline red flags and the stock's poor performance made me give up on Putprop.