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.

Seaboard Corp Reports Record Earnings

Peter Lynch said that an investor should keep tabs on his investments. And this is why I make quarterly posts of my largest holdings. They help me keep abreast of progress in the company. And they allow me to periodically double check my investment thesis.

	SEB
Price	$ 4039.00
Market Cap	$ 4725 M
P/E TTM	12.9 x
Div yield	0.0 %
P/TBV	1.74
ROE	13.4 %
ROIC	11.9 %

Seaboard is my second largest holding and luckily for me, its stock has been on a tear for the last two years. The company is steadily expanding its footprint in the food industry. But it's core business is still pork. And Seaboard had its most profitable year last year because of great results from the pork segment.

Revenue for 2014 was $6.47 B versus $6.67 B the previous year. Income was $0.37 B versus $0.21 B the previous year. So sales did not grow but profits grew to the highest ever on margin expansion. This margin expansion was all from pork. Pork revenue was $1.72 B versus $1.71 B the previous year. Pork income was $0.35 B versus $0.15 B the previous year. Pork's recent performance was confluence of favourable pork and corn prices. See below.

US Hog Farm Prices

US Corn Prices per Bushel

Corn is the largest component of pork feed and I believe corn price recently is part of a natural decline in commodity prices. Commodity prices are cyclical and the high oil, gold and food prices of the last several years have to go down by definition. Pork prices on the other hand had a temporary boost due to a widespread virus t.hat luckily did not affect Seaboard. As the chart shows pork prices are coming back down in the last few months. But I think the corn and feed price drops will more than offset that.

The other Seaboard segments were generally good. The company's interest in turkey producer Butterball did well reflecting similar dynamics with pork: higher product prices with lower feed prices. And the marine division broke even last year versus a $26 M loss in 2013. I feel the improved fuel costs should help the marine segment to be profitable in 2015.

Seaboard Q3 Earnings

SEB
Price	$ 3072.000
Market Cap	$ 3594.24 M
P/E TTM	10.2 x
Div yield	0.4 %
P/BV	1.36
ROE	13.4 %
LT Debt/Equity	0.00

Seaboard Corp (SEB) recently reported Q3 results. Revenue was $1622.6 M versus $1648.1 M the previous year. Income was $104.7 M versus $26.0 M the previous year. So revenues dropped slightly but profit quadrupled. This was not a total surprise because of the jump in pork prices over the last several months. The pork division increased its operating income by $45M. The recent disease that hurt the pig industry has subsided. And pork prices have pulled back from the highs of the summer. However, my reading of the industry tells me that the pig crop won't be much higher next year because of the low birth rates this year. So, I expect higher pork prices for another year or so resulting in continued good performance from this division.

But pork wasn't the only division benefiting from commodity prices. Poultry prices are also at record highs this year, and so the Butterball operating income increased by $18M. Both meat divisions are benefiting from lower feed prices also.

The marine division and the sugar division increased their incomes by $10M and $6M, respectively. The marine division narrowed its loss this quarter in part because of cheaper fuel.

I have held this stock for close to a decade and have watched its performance ebb and flow with commodity prices. However, I think we are at a good point in the cycle. Feed crops such as soy and corn are now lower because of increased production and less emphasis on ethanol, which I think was a tremendously misguided effort by American government to use more renewable energy sources. At the same time, I don't think commodity prices are so low that producers like Seaboard will be unprofitable. So, Seaboard is going to a few more good years yet!

Summer Quarterly Updates

Tachibana Eletech reported Q1 total income increased 18.9% yoy; revenue increased 6.7% yoy. This improvement was partly the result of strong industrial demand in Japan. The results are even more impressive because the market presumed that last quarter's results were good because customers moved forward purchases to avoid the impending consumption tax increase. Q1 results were the first that included the consumption tax increase, and the results would have been impressive even if there was no tax increase!

The company also upped its year end EPS guidance from ¥161.41 to ¥170. The stock has rallied recently but it is still selling for only 8 times EPS guidance.

Riken Keiki reported earnings increased 19% yoy. Revenue increased 6.6% yoy. This company is firing on all cylinders. Last year its earnings increased 14% and the year before it increased 22%. This is my best performing Japanese holding, increasing by 90% in the 18 months that I've held it. When I initially bought the stock 18 months ago, the fact that it was a netnet was my margin of safety. Now it has risen 90% and is no longer a netnet. The market has priced it more as a earnings growth engine. But the stock still trades below book and and at 11x EPS guidance. This is Ben Graham's value investing at work: buy a good cheap stock, and usually something good happens!

Fujimak reported a ¥ (38.39) loss per share versus ¥ 3.5 a year ago. Revenue decreased 5% yoy. This was a surprise...no... a shock! The company said much of this was the result of a natural pullback from its knockout Q4, when it earned ¥ 99 a share, and to a lesser extent the consumption tax increase.

The company gave an EPS guidance of ¥98, which I hope is true but I also fear may not be met. The company trades at 8x EPS guidance.

Now on to US stocks. Seaboard Corp had one of its best quarters in history. Because of record pork prices, EPS was $79 versus $33 a year ago. H1 EPS was $119 versus $81 a year ago. The stock didn't budge after the earnings reports. In fact it dropped a bit because of plunging pork futures. Pork meat was regularly around $0.80/lb for the last several years, then it suddenly jumped to a high of $1.30. Today, futures for delivery in the next several months is back at $0.90s. Next year delivery dropped but now is back in the 90s also! So the weak stock performance is understandable.

Kansas City Life Insurance reported Q2 earnings slight down. Q2 EPS was $0.77 versus $0.98 a year earlier and premium revenue was down 5%. Book value has grown steadily and now the stock trades at 2/3 book. It also pays a 2% dividend. I feel this is one undervalued and neglected company.

Investors Title Insurance Company reported earnings were down 20% yoy. Premium revenue was flat yoy, which is encouraging considering the exceptional refinancing activity last year. The decrease in earnings was primarily the result of increased commissions. The company now trades at 1.1x book.

Putprop pre-announced that the company's earnings will be approximately ZAR$1.50 vs ZAR$0.86 a year ago! That is a 75% increase and even after the stock jumped by 30% from my initial purchase, it is still trading at 6 times earnings!

IEHC reported Q1 EPS $0.17 versus $0.23 a year ago. Sales was down 4% yoy. I would've liked to see better yoy results, but last year's Q1 was exceptional. I don't really know what to make of this tiny company. I had hoped based on my reading that this company's sales would take off in the last several quarters. But this hasn't happened. The company's sales are quite erratic. I'll pay close attention to this one in the coming quarters.

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.

SEB is Trading Near Tender Price

Seaboard Corp's tender offer is due in a week. And the stock is approaching the maximum tender price. The price today reached $2920. The maximum tender price is $2950. Volume at this price has been more than daily average. So, when I try to guess the intentions of the buyers and sellers, I can only deduce one thing. The market does not think that the stock is worth the tender price, and the company will not be able to buy Seaboard stock with all the allocated $100M.

Several news items are affecting the Seaboard stock recently. Seaboard announced quarterly earnings of $40.55 per share compared to $47.98 a year ago. Revenue was also down slightly versus a year ago. However, operating income actually rose compared to a year ago. The operating income rose but net income fell because the company benefited from a one-time tax benefit last year. This means that last year was the anomaly and this year is the norm. The company now trades at 18 times TTM earnings.

Pork prices have jumped by more than 30% recently. I am not exactly sure why, but there has been some kind of pig virus spreading about.

The other news is that Pilgrims and Tyson Foods are in a bidding war for Hillshire Brands. Hillshire Brands in turn is trying to buyout Pinnacle Foods. It looks like food company valuations are going up amidst consolidation. In 2013, Smithfield Foods was purchased by Shuanghui. Nonetheless, Seaboard's return on equity is 7.8%. The company does not appear undervalued unless one believes that it is a takeover target. Seaboard trades at a EV/EBITDA of 10, while Pinnacle and Hillshire trade at 13.

Seaboard is my third largest position and I must consider taxes carefully if I want to close the position. I wrote about taxes in another another post but it doesn't really guide me on whether to sell. Today I have another way to think about taxes.

Suppose my Seaboard investment has gone up 100% over a long period. Also suppose the tax rate is 25%. If I sell it, the capital gain is $50 for every $100 that I should pocket. But the government takes a $12.50 tax on that, which leaves me with $87.50.  Suppose further that Seaboard returns 10% a year in the future. So, by the rule of 72, it doubles about every 7 years. Then that $12.50 which would be in Seaboard if I did not sell, would give me $12.50 in gains in 7 years.

So the fundmental question is: can I get a further $12.50 in gains in 7 years on my $87.50 if I sell Seaboard and buy something else? When put in this way, tax considerations become much more straightforward.

So I think soon I will sell or tender at least some of my Seaboard shares.

My Plans for the SEB and Sterihealth Offers

Seaboard Corp is offering to repurchase $100 M USD in common stock through a dutch auction. The offer gives shareholders the opportunity to tender their shares at a price between $2500 and $2950. The company will pick the lowest price that allows it to buy $100 M worth of shares. Anyone who tenders at or below the chosen price will be selling their shares at the chosen price. The stock was at  $2350 before the announcment. The news caused the stock to pop, and it is now at $2615

This means the market thinks the chosen price will be above $2615. No one will tender his shares below $2615 because when he can sell it today. On the other hand, buyers are hoping to buy below the chosen price, and then tender. Those buyers must expect a large enough premium for their risk exposure. Say it is $100. Then, the market expects the chosen price to be $2715.  Considering their mediocre results last few quarters, I will tender some shares at $2700, $2800 and $2900.

Sterihealth's largest shareholder Dan Daniels recently offered to take the company private at $1.75. The vote is on June. Today it is trading at $1.73. This means that the market believes the transaction will happen. If the transaction happens, the shareholders will get their payment on June 26. This means that today's buyers expect to make a $0.02 gain within a little over a month. I am selling my shares today at $1.73 and I will forgo the $0.02 because I believe I can return greater than that by investing the capital.

The above is my understanding of two transactions. It may have errors or omissions. Please read the disclaimer on the right.

Seaboard Reports 2013 Results

SEB
Price	$ 2620
Market Cap	$ 3127.18 M
P/E TTM	15.2 x
Div yield	0.0 %
P/BV	1.26
ROE	8.3 %
LT Debt/Equity	0.13

Seaboard Corp (SEB) reported that Q4 was the best quarterly result in 2013, but for the year income was lower than 2012. Revenue for 2011 2012 and 2013 were 5746M 6189M and 6670M, respectively. Income for 2011 2012 and 2013 were 346M 282M and 205M, respectively This appears to indicate that margins are dropping. SEB has many businesses segments, all of which are cyclical commodities. So I wouldn't read too much into the drop.

The pork segment is Seaboard's largest at 1/4 of total sales. This segment made up 3/4 of the company's profit however. The marine segment turned in a loss, though it was profitable last year. Shipping is suffering from a glut of ships and rates don't appear to be improving much. Seaboard is committed to shipping however and it is investing in several new ships. I believe Seaboard wants to stay in shipping to be a vertically integrated food company.

Overall I feel the company's management has a very long term view. They allocate capital prudently with little debt. And this shows in their consistent revenue growth. The last year's numbers came in a bit lower than I would like but in my eye this is a company that is trading at 10 times forward earnings.

In other news from my portfolio, Sterihealth (ASX:STP) resported H1 earnings were $0.10 AUD, which is the same as a year ago. However, sales were up 9%. This indicates some margin pressure. Still the company trades at 6.5x earnings.

Tachibana Eletech (TSE:8159) recently announced the company will expand into Indonesia. But at the same time, Tachibana Eletech will sell ¥ 1 B (about $10 M USD) new and treasury shares! They say the purpose is for buying office buildings which would save on leases. What the heck?? What is that about?? This company has ¥ 13 B in investments, of which ¥ 8 B is marketable equities and ¥ 2 B is bonds. And yet they are issuing shares to raise a relatively small amount. Several possibilities come to my mind. Maybe it is patriotism; the company wants to keep its government bonds. Maybe management management feels the stock price is overvalued; but the company is very profitable. Maybe the company is allocating the shares to favoured shareholders. But I can't find a very plausible reason really. I am baffled. What do you think?

On the other hand, the company seems to be doing great. Sales are up, exports are up. The company just raised guidance for the year to ¥ 179 which means the company trades at 7.2x earnings. The company also raised the dividend payout for the year from ¥ 20 to ¥ 22.

Seaboard First Quarter Earnings $47 per Share

Seaboard Corp reported earnings of of $47 per share, which is a 21% drop yoy. However, Seaboard Corp is a diversified agriculture company with five main segments. So, to understand the company, one should break down the operating results by segments. I decided to analyse the segments by detail.

The following table shows the most recent quarter's results, as well as that of the same quarter a year ago. And it shows the yearly results for the last three years.

Segment		Q1 2013	Q1 2012	2012	2011	2010
Pork	Revenue	409.3	400.7	1638.4	1744.6	1388.3
	Income	32.3	52.9	122.6	259.3	213.3
	Margin	7.9%	13.2%	7.5%	14.9%	15.4%
Commodity	Revenue	800.8	724.5	3023.5	2689.8	1808.9
	Income	12.3	25.7	71.9	43.2	34.4
	Margin	1.5%	3.5%	2.4%	1.6%	1.9%
Marine	Revenue	230.2	233.7	969.6	928.5	853.6
	Income	-3.3	0.5	26.1	-3.9	47.6
	Margin	-1.4%	0.2%	2.7%	-0.4%	5.6%
Sugar	Revenue	66.2	73.6	288.3	259.8	196
	Income	16.5	17	60.2	65.1	31.7
	Margin	24.9%	23.1%	20.9%	25.1%	16.2%
Power	Revenue	73	35.5	255.4	111.4	124
	Income	12.9	5.8	55	60.8	13.4
	Margin	17.7%	16.3%	21.5%	54.6%	10.8%

Total quarterly revenue was up indicating the company is growing and/or higher prices for commodities. However, profits are down due to the Pork and Commodities Segments.

Pork Segment

Looking at the Pork Segment, the company indicated corn (feed) prices were higher yoy. This may explain the lower margin. Pork cost is very dependent on corn prices. The following table shows the pork and corn price indices over the same periods. Unfortunately, in Q1 2013, the price of pork dropped at the same time that the price of corn rose. But good news is coming, the good rainy season we have now will mean corn prices will drop in the coming summer and fall. So, I anticipate the Pork Segment's profits to rise.

Commodity Trading and Milling Segment

The biggest subsidiary is the Commodity Trading and Milling Segment which is like a middle man for wheat, corn, soy and etc. Commodities for this segment are generally higher than last year, however the profits are down. That is troubling. In the report, the company states

...The decrease primarily reflects lower margins on commodity trading sales to third parties and non-consolidated affiliates, especially on sales of wheat and corn. The decrease is primarily the result of unfavorable market conditions and certain inventory positions negatively impacted by the decrease in commodity prices in the first quarter of 2013 compared to favorable market conditions and certain inventory positions positively impacted in 2012 from increasing commodity prices.

which seems to indicate that commodities purchased in Q4 2012 were sold in Q1 2013 as commodity prices dropped. Indeed, wheat prices dropped 20% from Q4 2012 to Q1 2013. Similarly, corn prices dropped 15% over the same period.

Management said in the report it cannot predict the results from this Segment for this year. Most of this Segment is in less predictable foreign countries.


Sugar Segment

The following chart shows the price of sugar. The results of the Sugar Segment follows sugar prices. Unfortunately, sugar prices were down in the quarter.

Other Segments

The Marine and Power Segments shouldn't be the main sources of income for Seaboard, although a newly introduced power facility did help in the quarter. In addition, their 50% interest in Butterball suffered a $5 million loss, versus a $8.9 mil gain in the same quarter a year ago.

So overall, the first quarter has been a disappointing start. But even if all other Segments run at the current rate, and pork prices rise and corn prices fall, the company could still earn more than $200 per share.

Seaboard is my largest holding and I bought this stock many times at below $2000 per share. Now the stock trades at $2700. My estimated intrinsic value is also about $2700. So, I may reduce my holding soon as I feel it is fully valued.

SEB Quarterly Update

Seaboard (SEB) report year-end earnings last week. They earned $234 per share for the year. I liked their recent consistent quarterly performance. To me, SEB is in a very cyclical and low margin business. But for the last three years the company consistently earned more than $230. This gives SEB a PE of 12. I like companies with PEs around 10 that are consistent and boring. SEB fits the bill. The following chart shows the company's balance sheet and earnings. I have multiplied the PE by my ideal ratio 10.

The chart shows the market cap starting to get high relative to earnings and net-net — I define net-net as total current assets minus total liabilities. I feel if it enters $3000 per share from $2800 today, my SEB story would have played out and I would liquidate as much as taxes would allow. In fact, I am selling a bit here and there as I find better investments.

SEB 3rd Quarter Update

This blog has been up three months. And I am still here writing! Three months is also the length of a quarter. I have relatively small amount of holdings, so even with a full-time job I have time to focus on my larger holdings.

Seaboard Corp. (SEB) is my largest holding and last week they announced earnings. It was surprisingly good considering the economic climate. As I wrote in my first SEB post, SEB is a conglomerate with business lines related to commodities. I own SEB because I believe it has good management and the management's interests are aligned with those of long-term shareholders.

The market feels that the world is in a slowdown mode and cyclical sectors such as commodities will lose revenue. To make things worse, we had a record drought in the US which raised corn prices. Corn is the largest component of pork feed. And pork is the largest SEB segment. All this meant I was expecting a bad quarter, but instead they managed to earn $61.92 per share. At this rate they would earn $250 for the year. That means they would have earned over $250 in each of the past three years, which gives them a average P/E of 9 over that time!

The table below breaks down the results in their various segments. The operating profit is revenue minus cost of sales minus administrative costs. It does not include taxes, interest, etc., nor does it include profits from investments. All amounts are thousands of dollars.

Segment	Revenue	Op. profit
Pork	413,077	29,863
Commodity Trading and Milling	675,649	16,662
Marine	242,330	13,006
Sugar	69,025	13,615
Power	75,778	18,649
All Other	3,557	93
Total	1,479,416	91,888

The table shows that SEB operates low margin businesses. If management makes some missteps, a segment could lose money. For example, the pork segment lost money in the years around 2008. Now pork profits are stable (quite a relief to me!). The marine segment impressed me because shipping is suffering a slowdown worldwide. In 2011, the power unit sold two power generating plants but has since built new plants and this segment has the best margins in the company. So from the quarterly numbers, I think management has managed well the margins in all segments.

If management can keep up this kind of earnings for several more quarters, I think SEB can break through $3000 for the first time. And don't forget, SEB adds $250 of equity every year.

Why I Own SEB

The other day I saw an article about Warren Buffett. In it he discusses how the investing world favors the little guy. For Berkshire Hathaway's size, he says there are only about 200 companies that he can meaningfully invest in.  But for a small investor, investing in small caps can yield much higher returns.  This idea is nothing new. But he really startled me when he said he can guarantee a 50% return on a million dollar portfolio. Now I can picture him starting over with a million dollar and easily getting a 20-30% return, but come on Mr. Buffett, 50%? I firmly believe Buffett is a person of integrity not prone to empty boasts, and I could only wish I can invest like he does, but I cannot imagine how he can return 50%.

In the article, Buffett tells where he has found bargain stocks in the past and where he can find them today. He gives an example of looking through a list of Korean stocks in 2005 and finding many bargains. I finished the article with a little better sense of how he can quickly scans a list of stocks and find bargains. It is mostly earnings, cash flow and tangible book value. Gosh I wish I could do that!  He does say you have to look away form the beaten track.  I am already starting to look on the internet, for example here is a website I found for all traded Korean companies. It gives the data that would help me emulate Buffett, which is a concise description of the company and their financials.  But I don't know of a free automatic screener of all international stocks. I suspect it is still best to manually look at the stocks one by one.

In the whole I like to stick with large companies that are well covered. The only exception that could fit the above the aforementioned Buffett criteria is Seaboard Corp. (SEB).

SEB is a diversified conglomerate. Their biggest business line is meat production (primarily pork). Their other business lines include power generation, trading of agricultural products, container shipping, sugar production and milling.  This is a company that is easy to analyze, their financial reports are barebones and straightforward.  I'll summarize their trailing twelve month numbers:

- Recent share price: $2257
- Working capital per share: $964
- Tangible equity per share: $1766
- Retained earnings per share: $1958
- TTM earnings: $204 for a P/E of 11
- Dividends: negligible

Seaboard also has a good growth rate.  The chart below shows their earnings and free cash flow going back 10 years.  The FCF has been less than their earnings because they have use cash flow from operations to fund growth.  So, they have little debt.  They also actively acquire companies to support their growth.  They buy back their shares but not a lot.  All these facts along with their strong balance sheet shows shrewd money management.

The arguments against owning this company is that their earnings can be very cyclical and their pork business margins can be thin or negative. Also, the company was founded by the Bresky family back in 1918 and the Bresky family still owns 75% today.  The Bresky family doesn't bother to give guidance to analysts.  So it is no surprise no one covers this stock.

So I imagine several conservative exit scenarios for SEB.  I assume the Bresky family keeps chugging away growing and generating cash. The Bresky family could later take the company private. Or they can easily distribute $1000 per share without affecting the business.  The resulting business should get a reasonable PE multiple of 10.  That gives a current buyout value of about $3000.

I do admit such concentrated control worries me. The Bresky family may not act in the minority shareholder's interest, or something worse such as deceit in the books.  ^[1] KPMG is the SEB auditor for the last 10 years.  But, in the end I think I worry mainly because there is little SEB coverage in the media. So, in the end I am comfortable with owning SEB.

1. I have NOT heard of any accusations of any significant impropriety regarding SEB

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As a follow up to a previous post titled "What is My Net Worth?", I got a reader's feedback and decided to take it down. Seems like it may not be necessary, people don't need to know what I am worth and I like it better that way. I will keep discussing my stock holdings, but from now in terms of percentage of my net worth.  In the end, I just want to do whatever to bring the readership up! For your thoughts on this, email me!  thanks!

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Disclosure: SEB is my largest holding at about 11% of my portfolio.  I first owned it in 2005.

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