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: 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.

My Trip to the McRae Industries Annual Meeting

After owning McRae (MCRAA) for two years, I've seen the stock double. After such a runup, it is always prudent to re-evaluate the investment. To help me re-evaluate MCRAA I decided to trek to North Carolina for the company's annual meeting held on Dec 18.

The trip was a success for me. First and foremost, I got a basic education about the company. I am surprised at how little I know about the company! I mainly put the most weight on the the financial statements for my investment decisions. But McRae's core business of selling boots has nearly doubled in the last 5 years. And anyone that invests in the company now must understand what the company does. The company is no longer a simple balance sheet purchase like it was when I bought two years ago; the stock is so much higher now.

The following from the company's website sums up its history well.

McRae Industries was founded in 1959 by Branson J. McRae with the primary focus of manufacturing high quality children’s shoes. In 1966, during the height of the Vietnam War, McRae received a contract award from the U. S. Government to manufacture military combat boots for the United States Army using the “direct molded sole” design. As a result, McRae Industries’ Footwear division has provided quality combat boots to the men and women serving in the U. S. Army for more than 40 years.

In a strategic move in 1996, McRae Industries purchased American West Trading Company, a manufacturer and seller of a variety of western boot products. During the 2002 to 2006 time period, the array of western boot products was significantly enhanced by the acquisition of several popular brand names – Dingo, Dan Post and Laredo. Also, during this same period of time, the company’s name was changed to the Dan Post Boot Company to more closely identify our products in the western boot market. In 2005, Dan Post Boot Company became a licensee of John Deere and began to design and market men’s and women’s work boots along with a line of children’s shoes and boots. Dan Post continued to expand its product mix in 2008 with the addition of the durable, price effective McRae Industrial line of work boots.

The company gets 1/3 of its sales from its commercial line and 2/3 from its western/lifestyle line. But the latter only started in 1996 and really took off in the mid 2000's when it purchased several companies in financial troubles. So the company, despite being in business for over 50 years, really took off in the last 10 years or so. And it makes talk about expansion more believeable. The company's FCF is around $6-8 mil a year, and management is thinking of using that money prudently for expansion. Initially, I was skeptical because I didn't realize that the company's western sales only got started in the last 20 years. And I thought if you haven't successfully expanded much in 55 years, why do you think you can now? But now I am willing to think of the company in the present form as only about 15 years old. It was only in the last 15 years that Gary McRae has run the company and has divested itself of the printer and bar code machine business. And most importantly in the last 15 years the company bought the various western boot businesses.

I personally don't have knowledge of the western boots that McRae is known for. In the future I'll definitely pay more attention to the boots that women wear, especially when I am in the South. So, I do not have an informed opinion of McRae's industry. Anyway, fashion market and trends are difficult to predict even for the experts. So really the only thing I can go by is the past results. And the past results show that McRae has expanded prudently, the company has executed well and management has been spot on diving into a lucrative market. The company did $104 M, $97M and $76 M in revenues in 2014, 2013 and 2012, respectively. The company also just reported Q1 revenue of $29.2M versus $31.7 M a year earlier. I wouldn't be surprised if revenue is slightly down this year versus 2014. However, this is still satisfactory considering where revenues were just a few years ago. If earnings plateau, the stock is a reasonable value. But if management can grow revenues and earnings over the next several years like they have for the last several years, this company can turn into a growth stock and would be ripe for acquisition. In that scenario I think a larger player must offer at least $60 a share for company. Compare this with Justin, one of the biggest players in the western boot business. Justin was a public company until 2000 when Warren Buffett bought out the company for $600M. At the time of his purchase, Justin was selling at about 20 times earnings and two times book. To buy McRae with those kinds of multiple would mean more than $60 a share.

I think this trip was invaluable for me. It also didn't feel like work. It was more like a learning experience and vacation rolled together. I saw the factory where they made their military boots — their western boots are outsourced to overseas suppliers. The management is very respectful and friendly towards the employees. But they are also capable of making the tough but necessary decisions to move manufacturing jobs overseas.

I also learned their VP of finance Marvin Kaiser will be stepping down. His replacement-in-waiting is now bringing up the Enterprise Resource Planning (ERP) software. Management is making an effort to improve the company. Ultimately, the results should show up in the books through improved margins, lower inventory levels, etc. Margins have dropped slightly in the last year and it definitely isn't due to pricing pressure. Management told me they are working on reversing the margin trend. This is probably my biggest area of concern.

Microcaps like this have very little coverage and insight into management. Furthermore, management in largecaps probably have no time for small individual investors. But for small companies this isn't so. I have heard of several successful smallcap money managers who regularly visit company management. Warren Buffett in his younger days used to drive around the country visiting management. Lynch also used to crisscross the country when he ran the Magellan Fund, And Francoi Rochon of the Giverney Capital also visits management regularly. This is my second company visit and I hope in doing so to emulate a bit of their success.

McRae Posts Second Consecutive Strong Year

McRae Industries reported year end earnings that was flat compared to a year earlier. Both 2013 and 2014 earnings were $7.5M despite a revenue increase from $97.1M in 2013 to $103.6M in 2014. The reason was that margins fell from 70.9% in 2013 to 69.6% in 2014 which negated the $ 6.6M increase in sales. The margin compression was due to higher cost of imported products, and management feels this will continue next year. However, I wonder if management is too pessimistic as the recent higher US exchange rate should lower import costs.

	MCRAA
Price	$ 31.500
Market Cap	76.55 M
P/E TTM	10.1 x
Div yield	1.7 %
P/BV	1.23
ROE	12.1 %
ROIC	18.7 %

The company's two sales segments were both strong. The western/lifestyle products business grew from $62.8M to $66.3M and work segment sales grew from $33.3M to $37.0M. Management foresees both segments continuing their strong performance in 2015. Management expects strong demand in the lifestyle segment which is not surprising considering that the US consumer is coming off five years of deleveraging and high unemployment. As the US economy rebounds in the coming year, consumer optimism will only increase pent-up demand for fashionable items such as boots. The work segment relies heavily on just a few military contracts and so this segment is more predictable short-term. And here management feels the current contracts will give this segment a strong 2015.

At current valuation, the numbers for McRea are quite impressive. The ROIC is 18.7% ! This number shows that the company has a lot of ancillary investments and cash on hand and the company is a lean operation. McRea does minimal advertising, if at all. This means the company cannot drive its growth; it just goes with the flow of the business cycle. I am just happy after an awesome 2013, the company maintained its results in 2014. If the company keeps this up, it will grow book value by $7M a year. Then, they will probably have to give a special dividend. I estimate this company's intrinsic value at $40.

Portfolio Earnings Reports and Macro Musings

A slew of earnings reports have come in. I will summarize them in 60 seconds.

McRae Industries reported earnings that were flat compared to last year. But looking at last year's fantastic results, this is an accomplishment. If the company can show that last year was not an anomaly, then we have a new normal for this company. If so, I feel the company should trade around $40 instead of $30 now.

Wellpoint reported decent earnings. But the market pays more attention to the company's guidance because it is so committed to Obamacare. The company raised its 2014 earnings guidance from $8.20 to $8.50 per share. The new CEO Joe Swedish seemed to have aimed low with this guidance earlier and he is carefully managing the expectation upwards.

Wellpoint is spending considerable money to upgrade its IT systems for Obamacare. The company has already spent $550M. This leads me to believe that the company will have an advantage over other smaller competitors who do not have the scale to do such large upgrades. Wellpoint's success will be tied to Obamacare and the first year Obamacare enrollment numbers do not look so bad. People can slice it or dice it in many ways, but I think the Obamacare enrollment is as good as one could have expected a year ago. The bottom line is, people who don't have healthcare will buy it at a reasonable price.

I think the mainstream is starting to agree with me on this one. Barron's just published a bullish piece on Wellpoint. But I think when the mainstream starts to tout a company, watch out! The stock probably hasn't got much more room to run, and it is time to be contrarian on the stock. I definitely wouldn't add to my position, the only thing I will do in the future is selling.

Petsmart reported mixed first quarter results and they also lowered the year-end guidance. Same store sales this year will be flat compared to a year ago. The stock has tumbled 20% off its peak of a year ago. Today it trades at 14 times forward earnings. But here again, Barron has a positive piece on the company recently, which help the stock recover a bit. I wouldn't buy any more but I also don't want to sell because I dislike the capital gains tax.

In other news, Seaboard Corp completed their tender and announced that it was not fully subscribed. Therefore the buyback price will be $2950, which is the maximum price. I tendered about 15% of my shares.

And ITIC is down more than 20% since I started buying 5 months ago! And I don't really have an explanation for it. I have looked over the company a bit further to see if there is something about it that I missed in my initial analysis. I cannot find anything. Overall the housing market is stable and near-term should improve. The job market is improving which will do wonders for the housing market. Interest rates are up a bit but still near 12 month lows. So, in the absence of red flags, I have added to my position on the way down.

The US has seen inflation pick up to 2.1% yoy in May. Inflation directly affects interest rates and I'll be watching both closely. I own ITIC and four other insurance stocks. Insurance companies have large bond portfolios which would take writedowns if interest rates rise. But everything considered, inflation is a heck of a lot better than deflation.

McRae Reports Lackluster Q2, Sterihealth Gets Takeover Offer

Sterihealth at Buyout
Buyout Price	AU $ 1.75
Market Cap	AU $ 34.20 M ($ 31 M USD)
P/E TTM	8.9 x
Div yield	4.0 %
LT Debt/TBV	3.96
EV/EBITDA	5.35

McRea Industries reported Q2 revenue was up 3% but income was down 20% yoy. However Q1 was a great quarter. So H1 revenue was still up 14% and income was up 20% yoy. Profit margin was still a decent 8% in H1.

The company blamed the worse Q2 numbers primarily on 1) higher consumer sales in Q1 offsetting the Q2 consumer sales and 2) lower margins due to higher import shipping costs and consumers shifting away from premium boots, among other factors.

The stock went as high as $36 before the earnings report. Now it is $31 due to the lackluster Q2 results. I believe the Q2 numbers are more likely the norm than the exception. McRae has had a great recent run of improving sales and earnings. It's time for them to stop growing and maybe even fall back a bit. The boot business is not high tech. One reason I first bought the stock was the balance sheet. The company has no debt. With returns on equity around 15%, the company is simply growing book by 15%. The price to book ratio is currently at about 1.25. I am hoping the stock goes back to the $36 level before I contemplate selling.

In other news, the Steriheath board has accepted a $1.75 AU per share buyout offer from Dan Daniels. Dan Daniels currently owns almost 50% of the shares. After buying the stock three months ago at $1.30, I'll gladly take my money and run!

McRae Q1 Earnings Up 55%

McRae Industries reports revenue up 27%, earnings up 55% yoy. See below. The company reported the diluted earnings per class A share as $1.33 for the quarter.

Last 5 Quarters (mils)

A significant contributor was the military segment; the company now produces boots for the Israeli military! The good news just doesn't stop.


For the last few years the company has been on a tear. See below.

But the company has said that western/lifestyle segment, which is the most discretionary, typically goes on a 3-4 year cycle, and we are on the 4th year of this cycle. So McRae investors must be wary. That said, I feel much of the world today has an overabundance of life's necessities, and consequently many are moving beyond necessity to luxury. Thus there will be more demand for goods such as pet products, alcohol, healthcare, recreational drugs such as marijuana, high-end watches and the western/lifestyle boots that McRae sells. I am trying to profit on all of the aforementioned areas - well, all except except marijuana.

In other news, I found this thought-provoking article on Shiller's CAPE. I wrote, and so have many others, that the CAPE is an excellent historical measure and that the CAPE indicates the market is overpriced now. However,  this article argues that this conclusion is incorrect because accounting rules have changed and therefore CAPE values are based on inconsistent rules over time. This article's argument has huge ramifications for me because I am reducing my equity exposure as the market continually hits new highs. But if I can be convinced that the market is not overvalued I will have to reverse course! I recommend this article to any serious investor.

McRae Industries Income Up 55% in 2013

McRea Industries reported great earnings for the fiscal year 2013. Net income was up 55%. Their first paragraph says it all:

Consolidated net revenues for fiscal 2013 amounted to approximately $97.1 million as compared to $75.7 million for fiscal 2012. This 28% increase in net revenues was primarily attributable to strong performance in both of our boot product segments. Our western/lifestyle products business grew from $52.5 million for fiscal 2012 to $62.8 million for fiscal 2013 as demand for both men and women's products continued to be heavy.

The report also mentioned the fourth quarter was the biggest contributor to the year's results. This could be a good holiday shopping season in US overall

I originally bought McRea as a simple value play (see my original post here). In the following 1¼ year, its operations have also grown beyond expectations. And the stock is up 65%. That's the beauty of a margin of safety, low expectations means any surprise will most likely be on the upside.

I have read or heard many great investors say that when you score in investing it isn't all your doing. A lot of luck plays into it. And the converse is also true, when you lose, it isn't always your fault. In the case of McRea, the company is doing well now because it is riding a mature bull market. Consumer confidence has risen in the last few years as housing and employment have stabilized. This has meant more demand for the luxury and fashionable items such as women's cowboy boots. This is definitely a cyclical event.

McRea also is doing well in the military boots department. McRea is has focused on this for fifty years and that is still its bread and butter. The stock jumped 13% yesterday on the earnings. However, it is still trading at 6 times earnings! I am drooling at the potential 33% gain if the stock were to go to just 8 times earnings!

McRae Industries Reports Third Quarter Earnings up 46%

McRae Industries (MCRAA) reported revenues up 22% and earnings up 46% from the same quarter a year ago. Operating margins were the same as a year ago, but SG&A expense was 18.6% of revenue this quarter versus 21.4% a year ago. This made the difference in the tremendous improvement in earnings.

The company earned $1.3M in the quarter. In each of the first and second quarter the company earned $1.9M. I consider the drop in earnings acceptable. From what I hear about earnings this year, companies that sell domestically have outpaced the market as a whole. That would explain McRae's outstanding results this year. Consumer sales now account for about 2/3 of sales. McRae's biggest product is women's cowboy boots. And the recession's effects must have depressed earnings last few years. But this year they appear to be back in a big way. The earnings for the first 3 quarters are $5.1M. Projected over the year that is $6.9M. The company market cap is approximately $54M, for a PE of 7.8!

Granted women can be fickle and earnings could go south very quickly. But with the end of the recession (hopefully) and consumer confidence back I think the upside is much greater than the downside. Furthermore, the balance sheet offers protection for the investor. The following chart shows their balance sheet numbers:

The company is a netnet and it is earning good money, money which goes straight into making a bigger and bigger netnet! My intrinsic value on this stock is $32. It trades at $22.35 today.

How McRae Reports EPS

The company's financial statements are straightforward, except for the EPS calculations which has myself and otcadventures stumped. But today I finally solved the mystery by speaking with Marvin Kiser, the CFO. Marvin explained to me that the formula for the EPS calculation came from the SEC and was blessed by their auditor. So they just go with it.

The cause of the EPS anomaly comes from the treatment of the class A and class B shares. The class B shares are the big voting shares, and they are like preferred shares and they mostly lies in the hand of the insiders. Class A is what us common folk own. There are about 5 class A shares for each class B share.

The reported basic and diluted class A EPS is:

Now if you think like me, the reported EPS just makes no sense. Is the dividend somewhere in the income statement as an expense? No it isn't. So, it appears the reported EPS is double counting the dividend amount, which was $0.09 last quarter. Go figure!

From now on, I will ignore the company's reported EPS and use my own EPS, as I have given above as the net income divided by total class A shares. But it isn't a big deal, as the EPS has no real bearing on the shareholder's bottom line. What really matters to the shareholder is his dividend and his share of the equity.

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McRae Industries is one of my largest positions.

McRae Reports Solid Earnings, Bruce Fund Update

My small cap portfolio is at five stocks, McRae Industriies (MRINA) is my largest. The company reported earnings of $1.26 and $2.13 per share for the second quarter and first half year. The current first half year earnings are a 69% improvement over the first half last year. The stock jumped 10% on the news. This confirms to me that even small pink sheet stocks will move with earnings.

The chart summarizes McRae's financials. The earnings are based on the projection of the last two quarters.

McRae is the first of my five small caps. See this earlier post for the list. My small caps stocks have a few key common themes:

• they are geographically diversified
• their country of origin is a leader in their industry; e.g., Greece is well-known for its shipping industry
• they are all either trading at net-net or, in the case of Globus Maritime, the stock trades at a small fraction of book value
• they have consistently been profitable in at least the last five years

I am a conservative investor and this is a very conservative portfolio. Some blogs I have read contain stocks that are losing or barely making money. I avoid them. This selection criteria has turned out well (for the most part) in the short time I've owned these stocks. Of course, as luck would have it, Globus Maritime had its first two losing quarters just after I invested. Nonetheless, I have added to my position after a 33% drop.

I do wonder, however, if this blog has any short term influence on the prices of my stocks. If it does it is definitely not intentional. Firstly, I would tell any listener that if he or she wants to invest, the only way is to do his or her own research. Don't rely on second hand information (like this blog), especially for small cap low volume stocks which can be easily manipulated. Secondly, I am a long term investor. My holding time is typically 3 to 5 years. So any short term effect from this blog would fade by the time I want to sell.

On a final note, I just got the semi-annual report from The Bruce Fund. This is the only mutual fund that I own. As I mentioned earlier, I feel owning it adds something of value to my portfolio.

I admire the father and son team that run the fund. They charged $1mil (in a half year) for managing a $300mil fund. I feel that is a small change to collect for performing in the top 1% of their category for the last decade. Partly because of this, they aren't influenced by their investors and the whim of the markets. They stick to their guns.  In the last half year the fund's results lag the market, 4.72% vs 5.95%.

I pay attention to what they say. They now have the fund in a very defensive position with less than 50% common stock. They anticipate "equity deflation" and are only finding value in large caps, stocks with dividends and special situations. I am thinking I agree with them, that's why I am patiently waiting on my CSCO, MSFT and Intel to go up.

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This post initially had incorrect data and was corrected.

McRae Industries Reports 38% Earnings Gain

Earlier this month McRae announced great results. The company had earnings of $24.9M and earnings of $1.9M or $0.87 per share. This is 24% improvement in revenue and a 38% improvement in earnings over the same quarter last year.

I was very happy to see that the biggest contributor to the sales increase was from their consumer products, and not their work (military) products. The reason for this increase was mostly due to a better economic environment. With all indications from recent economic data pointing to a healthy economy, I expect this earnings trend to continue. At this rate of earnings improvement, this year earnings will be $3.13 per share which would give the company a forward P/E of about 6!

I feel that McRea is a value stock with training wheels. No large investor can be bothered to invest in this company because it is so small it cannot make a difference in any large portfolio. Only a little guy can feasibly invest in it. In addition, their financials are so plain and simple that any person can grasp it. And their business is also simple, it is just boots that you and I could wear.

I am contemplating adding to my position at the current price of $18.30. However, that is simpler said than done. McRea is so lightly traded that the spread between bid and ask can be around close to 10% of the stock's value! So if it trades at $18.30, I would be lucky if I can buy below $19. So, I think I will be paying attention to McRea looking for any sign of a dip in price to add to my position.

AIG and McRae Industries Quarterly Update

AIG and McRae Industries are two recent purchases (meaning within the last half year). These are my two recent new ideas so I am watching them closely to see signs my thesis was correct.

I own AIG because it is a profitable business that trades at half of book value. In the 3rd quarter they earned an after-tax profit of $1.00 per share. The company breaks down the company into four segments: life insurance, property and casualty insurance (P&C), aircraft leasing and others (including mortgage related insurance). The good news is that all four are profitable. The only worrying sign to me the 105% combined ratio of the P&C segment. Combined ratio is the ratio of total insurance payouts and costs divided by the total insurance premium. A combined ratio over 100% does not necessarily imply an loss in the business however, because the business can eke out a profit through investment gains on the premiums held. In the coming quarters, we will also have to see the effects of Hurricane Sandy, but right now AIG cannot predict its affects.

But overall I am very pleased with the quarter and I am surprised that the stock price dropped more than 10% since the earnings announcement. Of course great investors all advise others to tune out the short term noise. So I try to ignore the crowd and remind myself that AIG has $69 of equity per share yet trades at $32. I may add to this position if AIG drops more.

McRae Industries is one of my two small cap holdings. Its market cap is a little over $50mil.

McRea makes high quality work/western boots and military boots. The company just finished its 4th quarter this summer and announced it earned $2.27 per diluted share for the year, versus $1.84 the previous year. Revenue was flat, so it indicates the company is able to increase margins. The stock trades on pink sheets recently at around $17. Its book value is about $20.50. And its net-net value is about equal to the market value. With such a strong balance sheet and a P/E of 7.5, what is there not to like?

I only found this stock after I started this blog and I documented it in this entry. So my entire history with it has been and will be documented on this blog. We shall see how it goes.

Why I Own McRae Industries

I recently opened a position in McRae Industries (MRINA). MCRINA is a microcap company based in North Carolina. They make work boots and military boots. Their market cap is $40M. I believe MRINA is a great value. I bought MRINA as a long term value investment. Having said this, I want to warn the reader that microcap stocks often have limited coverge in the media and can be subject to fraud and/or manipulation. We all should be extra vigilant when dabbling in microcaps. Furthermore, the information in this blog should never be the basis anyone's investments. The reader should do his own research and/or consult a professional for investment advice before buying MRINA.

I found MRINA while screening for low P/E and low book-value smallcap companies. What stuck out about MRINA immediately is their impressive balance sheet and earnings. Their net-net value is about $15.50 per share, and their share price is $16.40! Their P/E is 8 and they have zero long term debt.

MRINA was founded in 1959 and in the succeeding years they built up a solid balance sheet. Their dividend yield of 2% is small relative to earnings. They buy back some shares. But mostly they mostly retain their earnings as equity on their balance sheet. In this manner they have zero long term debt. This is the only company I know of that sells hard goods and have zero long term debt. What a concept!

So MRINA is a small company that operates without outside financial assistance. They make work boots for civilian and military use. Their military segment is 25% of their revenue. I believe they have been adversely affected by the recent downturn in construction. No doubt this segment of sales will improve once construction returns to normal. The management says that military contracts are very competitive and they could lose when when they bid in the future. But military is still a relative small portion of their business.

MRINA is a tiny company that has little (if any) financial coverage, so I have to really do all my own research. I researched to old SEC EDGAR filings. The EDGAR online system has been around since around 1994. So their filing would go back to that time. I found the annual report in for 1995. In the report, they refer to performance going back to 1991. So 1991 is the earliest information I could find on MRINA. Back in 1991, MRINA was not only a boots maker, but also a seller of copiers, and maker of bar code readers. The three segments were evenly split back then. Seems like they have dabbled in this and that over the years. They

Warren Buffett has always measured the Berkshire Hathaway's growth return to shareholder by the change in its book value. You can find this at the front of each of Buffett's letters to shareholders. I will also measure MRINA by its value, but instead of book value (which is equity) I will use net-net value, which is a more conservative (smaller) value than book value. Also, I include the dividends. See table below.

	Most Recent Qtr	2011	2007	2005	2000	1995	1991
Net-net	37.6M	35.3M	29.4M	27M	16.4M	12.3M	10.1M
Net-net per share	15.40	13.80	11.50	9.70	5.90	4.50	3.70
Dividend per share	0.36 (projected)	0.36	0.33	0.30	0.36	0.35	0.32

This table shows that MRINA has grown in its net-net plus dividend value at more than 10% per year. And they have not really had to increase revenue, they have kept revenue always about the same. They simply manage the business well and thereby returning cash to the balance sheet or the shareholders. However, this current model cannot work indefinitely into the future because their balance sheet is ever growing while sales and their business stays the same size. To best serve the shareholders in the future, they must either allocate that capital to grow profits, or they must distribute the cash to shareholders. And I bought MRINA expecting them to take either action.

Investors in MRINA should know MRINA is more than 50% owned by the McRae family. McRae family members also run the company. This means to me that the interest of management is aligned with the shareholders.

McRae is traded over-the-counter (OTC). This means it is not traded on a central exchange. OTC prices can fluctuate greatly.

MRINA is classified as Pink with Limited Information. This means MRINA is not required to file with the SEC, and their financials are not at the level to be considered current by the OTC Markets Groups. MRINA's yearly and quarterly financials are found on their website. Their yearly financials are audited by Grant Thornton, one of the largest auditors in the country.

MRINA was traded on the AMEX exchange up to 2005 when it voluntarily delisted to save on costs.