Why I Sold Installux

In my earlier Installux post, I said I was on the fence about my Installux holdings and I would wait until annual earnings report before doing anything. Three weeks later I got cold feet and decided to dump all my shares.

My rationale was mainly the price support. The following chart shows that the current price is at a recent high. But I found that the company in 2020 bought back 5452 shares and the entire year's volume of trading was only 8534. Therefore, the company bought back 64% of the total shares traded in 2020! In 2019, the company began its buyback program with a cap of € 410. I just sold all at € 390 because I figured that's as high as it will get. There isn't enough support from the open market to ever go above the € 410 cap. As I have shown in an earlier post, the company's revenue and income numbers have shown mediocre growth in the last several years. And the stock price has justifiably never surpassed the 2017 high.

Installux was one of the first stocks I bought since writing this blog. In 8 years the stock has returned 14.5% including dividends. In USD, my functional currency, the stock has returned 13.5%. My gut says that's a resounding success. But after pondering about it for a while, I am a bit disturbed. If 13.5% is a resounding success, then I am expecting most of my other holdings to perform worse. What is average? Maybe 9-10%. What is bad? Less than 4%? Then by my admission, my methodology may only be able to get about 10% total returns. Now I have never disclosed my overall returns, because I simply don't know. But when I started this blog the back of my mind was saying I could do 12%. I am kind of disappointed that I clearly cannot.

Some Updates on the First Full Year of COVID

COVID hit most of the world starting in March 2020. So, many companies have (almost) had a year of impact from COVID. Many Japanese companies end their accounting year in March and thus their year coincides almost exactly with the start of COVID. So, their annual results will be able to tell us a lot about the true extent of the world's business slowdown.

Tachibana Eletech (TSE:8159) year end revenue is expected to fall 6.2 % to ¥ 160.0 B (2020 ¥ 170.5 B). Year end EPS is expected to fall 26.0 % to ¥ 128.8, (2020 ¥ 173.9), which implies a 13.0 x earnings multiple.

Riken Keiki (TSE:7734) Year end EPS is expected to fall 19.4 % to ¥ 150.5, (2020 ¥ 186.8), which implies a 20.4 x earnings multiple.

Takamatsu Machinery Co.,Ltd (TSE:6155) year end revenue is expected to fall 38.7 % to ¥ 13.4 B (2020 ¥ 21.9 B). Year end EPS is expected to fall to ¥ -12.7, (2020 ¥ 130.8).

Installux SA (PAR:STAL) H1 revenue fell 26.6 % to € 52.5 M (2020 € 71.5 M). H1 EPS fell 73.7 % to € 4.4, (2020 € 16.6). Their year ends in December.

In H1 2020, installux experienced shutdowns in their Spain and France locations and therefore revenues fell significantly. They were still profitable though. However, the company provided no guidance for H2 2020, so we don't know what happened in the last 7 months.

Installux is conservative, well-run, and highly profitable. They expand opportunistically and thus do not overpay for acquisitions. Their expansion has mainly focused on control of the supply chain. Their niche aluminum product offering remains unchanged. Still their sales figures are respectable. It has consistently risen by about 3.5% per year for the last dozen years. And of course they have no debt!

The company currently trades at 13 times 2019 earnings, the last full year of data before COVID. While this PE is not super cheap. The company looks much better when using the EV to EBIT ratio because it has no debt and ample cash. The company's EV is 7.2 times 2019 EBIT.

The coming challenges for the company is how to put its cash to use. The following figure shows the cash and equity buildup through the years. Note that in 2018, cash dipped and PPE rose by the same amount because of the acquisition of a factory in Spain.

The simplest way to get rid of cash is to pay generous dividends but management indicated it prefers not do do so to show solidarity with stagnant employee wages. I suppose this can partially explain why the company recently began share buybacks. So far the company has bought back 2% of the shares. 

Right now, I am really not sure whether I should hold Installux for the longer term, or reduce my position. At € 390, it is probably fairly valued. So, I'll just wait and see. Their annual report should out by April, then I'll decide.

Portfolio Update

This blog is so devoid of recent entries that I felt compelled recently to post something, anything. Fortunately I have a lot of odds and ends I can update on my portfolio and the market in general.

After riding high under Trump for a year, I am convinced the US market cannot go any higher. The Shiller PE ratio is at a mind boggling 32.3! That is higher than anytime before the great depression and is only surpassed by the dot-com bubble in 2000. On the other hand, I have holdings that are still reasonably valued overseas and even some in the US. Plus I hate paying capital gains taxes. So, instead of selling a lot I settled on hedging the US market. After all, this is a perfect time to short the US market if I am convinced it cannot go any higher.

I hedged the US market by shorting the S&P500 mini futures. Each of these futures is a contract to buy or sell a contract that will pay out $50 times the S&P 500 index on the delivery date. So suppose on the contract expiry the S&P500 is 2700. Then the contract would conceptually pay out $135,000. In reality the contract settles financially everyday, so the original purchase amount and the settlement payout do not happen but instead the delta in the value of the contract is debited or credited at the close of each trading day. So far I am turning a profit shorting the mini futures. However, I really prefer that were not the case, as each gain means an overall downward bias in my portfolio. But it only confirms my belief that the market cannot go any higher.

 A Prussian general once said that "No battle plan survives first contact with the enemy". I feel that way looking back at my first merger arbitrage situation , between Anthem and Cigna. As it turned out, all the forecasts about its chances of success were too optimistic. The merger fell apart after various state governments voiced objections and sued to block it. Despite this, I fell into the golden period for managed care organizations and both companies rose handsomely. I have since sold my Cigna shares. So the moral of this story is that with careful thought and due diligence, even if I am wrong in my predictions, I can still come out ahead. The S&P 500 hedge is another play from this same playbook.

In addition to the hedge I have also reduced my exposure to US companies whenever he opportunity arose. This was the case with IEHC and Senvest.

While the S&P 500 and my US holdings have done wonderfully since Trump's presidency. My international holdings are a mixed bag There have been laggards such as Lewis Group of South Africa. And there are some wonderful stocks, such as Installux, European Reliance, Tachibana Eletech and Riken Keiki. I have listed the basic metrics of some of my international holdings below.

	Tachibana	Riken	EUPIC	Installux	Lewis	CMH
Price	¥ 2028.00	¥ 2504.00	€ 3.47	€ 415.00	R 31.20	R 27.50
Marketcap ($Mil)	¥ 51105.60 ($ 461.66)	¥ 58092.80 ($ 524.78)	€ 95.43 ($ 110.79)	€ 125.83 ($ 146.09)	R 2602.08 ($ 190)	R 2057.00 ($ 150.2 )
ROE %	6.4	11.2	13.8	9.7	4.8	35.6
PE	13.1	14.1	6	14.5	9.9	8.3
PTBV	0.84	1.67	0.94	1.39	0.49	2.97
Div Yield %	1.97	1.2	3.46	1.93	6.41	5.85

Note that all these companies, with the exception of CMH of South Africa, all have very little debt. The companies whose stock appreciated significantly did so with a combination of increased profits and multiple expansion. I am still waiting for that to happen in my South African stocks. I have not wavered in my belief that the long term future of world economy is in the emerging markets. But in the meantime while I wait, they are yielding 6%.

Latest Earnings from Four Holdings

I usually write about my investments' latest financial results once or even twice a year. Recently I haven't done that. So, I will catch up on four of these today.

McRea Industries is a shoe company that sells military footware, industrial footware, and ladies luxury cowboy boots. The company occupies a niche in the military footware space because US military boots must be made by US companies. So, McRea has a North Carolina manufacturing plant devoted to supplying the US military with boots. The rest of the company's manufacturing is in Asia. Obviously, Asia can manufacture footware cheaper than any American company. These boots include women's luxury cowboy boots, industrial footware and even military boots that soldiers can purchase as spares.

McRea's sales has been flat and its mix of military to luxury boots has tilted to military in recent years. This is bad news because the military boots have lower margin. The overall sales of the company has been $104 to $108 M for the last 3 years. So it is basically flat. And the net earnings is down to $5M from $6.6M 2 years ago.

	MCRAA	SEB	PFHO	Installux
Price	34	4350	13.45	€ 415.00
Marketcap (M)	81.6	5089.5	10.76	€ 125.83 ($ 148.60)
ROE (%)	6.9	9.6	14.3	11.2
PE	16	15.6	11.7	12.9
PTBV	1.14	1.5	1.67	1.45
Div Yield (%)	1.53	0.1	0	1.93
Price/NCAV	1.27	2.18	1.71	1.97

The table on the right gives the financial metrics for McRea (MCRAA) and three other companies. The company has had a recent run-up which I cannot really understand because the fundamentals have not changed. The only plausible explanation is the general change in sentiment towards tiny microcaps in our long powerful bull market. But overall, my opinion is that this company is quite fairly valued for a shoe company.

The way I see it, the company can only increase its earnings if it increases margins and efficiency in the military boot segment. And it appears to be doing that. Last year the company had $27M of inventory and this year it is only $18M. This helped to increase its cash position from $16M to $28M yoy.

Seaboard Corp (SEB) is a food conglomerate that I have owned for over 15 years. I have always seen it trade at about 10x earnings. But in this bull market it has jumped to 15.6x. The company's management has proven itself to be disciplined and shrewd capital allocators. But it is still a commodity producer. The company currently still drives 75% of the operating income from pork. We have had food deflation for the last several years. But pork has actually benefited as the cost of feed (i.e., corn) has dropped much more than the cost of pork products, hence the decent earnings in recent years. But commodities are always cyclical and things can and will turn. I just don't see how this stock can go any higher.

Pacific Healthcare Organization (PFHO) is in a two-year recovery after losing Amtrust, a huge customer in 2015. Thus far it is doing just fine, earning about $0.30 a quarter for the last three quarters. And it has a great balance sheet, with $7 per share in cash and no debt!

And last but not least on my list today is Installux (PAR:STAL) . Installux has been a star performer in my portfolio. In the five years that I have owned it, the French maker of aluminum building products has increased sales marginally. But profit has increased by about 9% per year in those years because of increased gross margins and increased profit margins. The company's metrics are still quite good and it has € 130 per share cash and no debt.

Earnings on Tap: Senvest, Seaboard and Installux

Senvest 2015 Q1 earnings showed that book value per share went to CDN$312 from CDN$264 just 3 months earlier. The company attributed some of the gains to favourable currency effects. The Canadian dollar was worth USD$0.79 at Q1 period end and today it is worth about USD$0.80. On the other hand, the Senvest Israel hedge funds is up 8% in April. So I can loosely say that Senvest further gained value up to today. So, the stock today at CDN$181 trades at around 55% of book! In my experience as a DIY investor, companies with liquid assets rarely trade below 60% of book. So the 50-60% range is my floor on Senvest stock. And typically, companies that trade at those levels reside in countries that have questionable corporate governance. But I don't think Senvest has such severe corporate governance issues to warrant such a discount.

The company's funds mostly focus on small and mid-cap companies. And they have outperformed the Russel 2000 index. The company also has CDN$736M in short positions. That is 29% of the balance sheet versus 27% the quarter earlier. This partially explains how the company can outperform the market. They mentioned one successful short of a financial company. The company was exposed to the Swiss de-pegging to the Euro. The management did not take credit for predicting the Swiss de-pegging and their short was based on other factors. But to me it shows that they did their homework and put in a sufficient margin of safety, and odds are things like that will happen.

Seaboard Corp reported Q1 earnings of $28.49 per share versus $40.55 per share a year earlier. The earnings was a disappointment but not a surprise when considering that pork was one of the worst performing commodities in Q1, even worse than oil. Pork prices reached a high of $1.20 last year during the swine flu epidemic, but last quarter had fallen to $0.60. Now it is back to around $0.80. The pork segment earned an operating profit of $19.1M versus $60.5M a year earlier. But this is not an apples to apples comparison as the company sold a 50% stake in a pork subdivision to Triumph. Management also mentioned that low feed prices were helpful for the results. Corn prices are at 8 year lows and I am hopeful that it will stay that way.

Seaboard's Marine Division earned an operating profit of $7.5M versus -$7.4M a year ago. This is one area where the company's performance exceeds the performance of a commodity industry. The company hopefully will benefit from increased trade with Cuba as they operate a huge facility Miami with a new 25 year lease.

	STAL
Price	€ 233.000
Market Cap	€ 70.72 M (USD $ 80 M)
P/E TTM	8.3 x
Div yield	3.4 %
P/BV	0.99
ROE	12.0 %
ROIC	13.1 %
LT Debt/Equity	0.07

The Searboard Trading and Milling Segment had a $9.2M loss from a affiliate in Brazil. This affiliate looks to be a continuing problem. We shall see how management handles it in the coming quarters.

Installux reported year end 2014 results that shows an improvement in profits despite a difficult economic climate. Sales were basically flat. My contrarian mind tells me that Europe could be the surprise in the coming several years. With the continuing QE by the European Central Bank money will flood Europe just like it did for America. I believe this will result in multiple expansion throughout Europe. Installux at 8.3x earnings is certainly a candidate for significant expansion. An expansion to 12x is very reasonable, and that would mean a 50% rise in stock value.

Installux Expanding Despite Economy

The Installux CEO Chistian Canty recently gave an update on the company. In it, he expressed pessimism towards the current French economic situation — just like last year. However, he believed that the company could maintain its revenue and margins in the company's core aluminum business in the current year. He also said management could try to grow the company using its excess cash and equivalents to acquire businesses. However management feels that is risky because of the current economic malaise. Instead, they decided to focus on organic growth in the coming two years.

The company owns six divisions. One is FAC, which does aluminum coloring and surface treatment.  The company will double the floor capacity of this division in 2015. The management feels they can fund the expansion with increased business and, if necessary, by bringing back work doled out to subcontractors.

A second division is IES, which makes metal of a specific cross-sectional shape. This is a process called extrusion. Management has decided to buy a second press to do this job as the division has been running at full capacity for two years now. The location for the expansion is still unknown, but it will happen in 2015 also. IES is the largest of the company's six divisions.

In other company news, preliminary first quarter numbers indicate an 8% increase in revenue. However, Canty said the number can fluctuate unpredictably from month to month.

I bought this stock 16 months ago and it has risen 45%. I am holding on to it because I believe the company is undervalued without the expansion plans. With it, I have even more to reason to wait to see how things go in the coming year or two.

Installux and KCLI Report Good Earnings

KCLI
Price	$ 42.00
Market Cap	$ 460.66 M
P/E TTM	15.4 x
Div yield	2.6 %
P/BV	0.62
ROE	4 %

Installux (STAL) recently reported preliminary year end results for 2013. Revenue was € 108.4 M versus € 113.2 M the previous year. The company earned € 8.1 M versus € 6.7 M the previous year. Revenue decreased 4.3% due to a struggling French economy. But remarkably, earnings were up 20.8% due to much improved margins. The company has not published the full annual report so I don't have the balance sheet numbers. But at this rate the company probably trades slightly above book and at 9 times earnings. The stock is up more than 50% since I bought it a year ago.

Kansas City Life Insurance (KCLI) reported Q1 2014 results. Revenue was $70.6 M versus $78.8 M the previous year quarter. The company earned $5.5 M versus $5.2 M the previous year quarter. The earnings increase was primarily due to realized gains. The company earned $0.50 per share.

Most interestingly, however, is that the company increased equity by $20 M due to unrealized gain and earnings. That is four times the reported earnings! I do wonder how they did this. I read in their 10K that every percentage rise in interest rates causes a $150M drop in equity and vice versa. Their equity is about $750M.

I mentioned KCLI because I just bought back some stock after closing my position a few months ago. I initially bought a year ago at $37, and then sold recently at $48 and now re-bought at $43. So, I have shown that a trader can buy low, sell high, and buy low again. And I can do this indefinitely with KCLI.

Ok, ok, I couldn't resist a tongue in cheek reference to short-term trading.

Installux Reports Good Q3

Installux SA continues the string of good news from my small caps. I had mentioned that the company had 10% less revenue yoy in Q1 and Q2. However, Q3 revenue was flat compared to a year ago. I hope this is a sign of a turnaround for the company. However to counter this, recent news suggest France is still struggling to get out of recession. I suppose this is why the stock jumped 13% on the revenue numbers and then gave it all back the next day. I think Installux is still a work in progress. That is, the stock is still depressed due to uncertainty, but I am betting when the uncertainty is over the stock will jump, as has happened with my other smallcaps.

In other portfolio news, I sold about 15% of my WLP holding. I had held it since the days when it was still called Anthem. I don't remember ever selling through last 7 years. But I have bought it regularly in that time. Now the stock is at an all time high of $93 and at around 10 times earnings. At this multiple I no longer regard see WLP as seriously undervalued anymore. The Obamacare discount of a year ago — which I mentioned here — is gone. So it is time for me to finally take some off the table. In addition I also sold some Berkshire Hathaway. Berkshire is a fine company run by the best CEO in the world. However, it is a huge holding company. I just don't believe it has much growth opportunity above the market as a whole anymore.

And finally, I recommend this great tutorial on basic valuation metrics. I believe the first thing a beginner value investors should learn is the set of basic valuation metrics. However, although they are mentioned a lot in the media, there are very few knowledgeable people who have explained them well. And not only does this article explain them well, the author also compares the pros and cons of each in a table, which I have never seen before.  

Installux SA H1 2013 Update

Just after my recent post on Installux SA, the company reported their first half-year earnings. The company earned € 13.69 / shr, which is a 14% drop yoy. Revenue dropped 10% yoy. Gross margin was 56% versus 53% a year ago. EBIT margin remained constant at 11%. So the company appears to manage costs well in light of the downturn in France. And this year the company will continue to increase book value — which is larger than market cap — and pay a 5% dividend.

2013 is a Tough Year for Installux SA

While I await Installux SA's 2013 semi-annual earnings report, I found this company report published in June. It is a message from the CEO regarding the company. I am going to paraphrase parts of the report it here in English because the report, like everything else from Installux, is in French. If you can read French, please disregard this post and read the report instead.

Revenue (2012)	€ 113 M
EBITDA	€ 13.6 M
Net income	€ 6.7 M
EV / EBITDA	2.1x
P/E	7.1x
Price shr	€ 156
Dividend yield	5.1%
Total shr outstanding	303k

In it, the CEO Christian Canty discusses how the company did quite well in 2012 despite the bad economic conditions in France. The company's sales has been flat for the last five years. And the CEO has been aggressively trying to take market share from competitors. However, the company cannot expand given the overall economic situation. So the company will wait for the European recession to pass, wait for better days.

Preliminary results for the first four months of 2013 are bad, but not unexpected given the economy. For the first four months ending in 30 April, 2013, the company's sales are down 10% and operating profit down 24% compared to a year ago.

My biggest worry with this company and my Japanese holdings is the difficulty of gathering information; I can only read English. But this report sooths my nerves a bit. Installux makes aluminum products for housing in France and some other countries. I feel this is a solid , boring, small company. The perfect type for a small-time value investor like me.

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Disclaimer: the information on this post was the result of Google Translate and my interpretation, neither is guaranteed to be accurate.

Why I Own Installux SA

I just bought my fifth small cap stock. It is Installux SA, a French manufacturer of aluminum products. I found all my previous four small caps on various screeners. But I found this one an article in another investor blog.

The company's English website explains what it does:

The strategy of the Installux Group rests upon three major principles: the use of a single material, aluminium, the distribution of products via a network of professionals (metal workers, ironsmiths, silverers, awning dealers, fitters, partition dealers, wholesalers), and the targeting of niche markets rather than big volumes.

We are present in three distinct yet complementary business sectors: building and residential improvement (Installux Aluminium), ready-to-install (Roche Habitat), fitting of tertiary and commercial spaces (Sofadi-Tiaso).

Installux is like most of my other small caps. It is consistently profitable, with TTM PE of less than 10, and it has a great balance sheet. See chart below.

As the chart shows, the company trades at almost the net-net, which I define as total current assets minus all liabilities.

I used translate.google.com to read the company's financials in English. But I admit it is still tough going. The valueandopportunity blog mentions the company is majority owned by Christian Canty. I cannot find confirmation of that but I will assume that for now. I do know that Mr. Canty, who is 67, is grooming his son to run the company. I have had good experiences with family majority owned businesses; namely, Seaboard and McRae Industries. It makes sense that you can trust such companies more because the majority owner who effectively runs the company has exactly the same long term objectives as shareholders like me. This contrasts with a CEO who has a small share of the company and who is compensated by stock market performance. Think of a CEO who has a large stock option package. That CEO is motivated to create volatility in the stock price. If the price goes up, the CEO gets stock option payoff, but if the price goes down, he doesn't have to return the payoff. And he may even get more shares at the lower price. Talk about rewarding bad performance. This illogical situation extends to the hedge fund world. A hedge fund manager typically gets 20% of profits, but he doesn't have to return 20% of his losses

On a final note, I have built a portfolio of five small cap stocks now, most of which are foreign based companies. I expect to end up with about ten such stocks in this portfolio, with a value of about 25% of my net worth. To do this, I have sold some of my other holdings. I have closed out my St. Joe position, with a +20% gain. The following table summarizes my small caps. All gains are in local currencies.

Stock	Market	Notes
McRae Industries	OTC (USD)	+15% in 6 months
Globus Maritime	NASDAQ USD (Greece headquarters)	-30% in 6 months
Installux SA	Paris (Euro)
Riken Keiki	TSE (Yen)	+10% in 2 weeks
Tachibana	TSE (Yen)