måndag 12 oktober 2015

Bauposts (Klarmans) investeringar den 17 december 1999

"Currently, a number of spinoffs are truly orphaned securities trading at giveaway prices. For example, we have recently purchased shares of both of the recently separated subsidiaries of Tenneco, Inc. The larger company, Pactiv Corporation, manufactures Baggies brand food storage bags and Hefty brand trash bags, and has leading market shares in a myriad of other plastic packaging products. Due to indiscriminate post-spinoff selling pressure, the shares have slumped to around 10 times currently depressed after-tax earnings and about 5.5 times pretax cash flow. The earnings should grow from a combination of cost reductions, asset redeployments, bolt-on acquisitions, volume growth, and expected lower raw materials prices. Management recently received significant stock options as part of a new incentive plan to better align their interests with those of shareholders. They have also been buying stock personally. It has been many years since a branded consumer products business fell through the cracks to trade at such a compelling valuation.

We are also buying shares of the Tenneco Automotive spinoff; this company manufactures Monroe shock absorbers and Walker mufflers, and is the market share leader in nearly all of its products and markets. It currently trades at approximately four times after-tax earnings. It's shares have been particularly brutalized as a result of its deletion from the S&P 500 Index. Tenneco pre-spinoff traded at a market capitalization of several billion dollars; the highly leveraged Tenneco Automotive spinoff, still under extreme selling pressure, trades at a market capitalization barely above $200 million. Selling pressure has turned this market leader into a micro-capitalization stock, forcing many holders to exit because it no longer meets their size criteria. In effect, there is now a class of shareholders who must sell a stock simply because it trades at a depressed market valuation.

Harcourt General recently spun off most of its interest in Neiman Marcus, allowing it to become a pure play in the publishing and computer-based learning and training businesses. In the current turbulent market, we believe investors have failed to focus on the low valuation and highquality, strongly growing businesses within Harcourt. Currently, trading at a several year low, the shares trade for under 12 times cash earnings (earnings plus goodwill amortization) and for roughly half of our estimate of the company's asset value. The company is expected to grow earnings 12 - 15% annually, and recently reported strong quarterly results. Harcourt's management has most of their net worths invested in the company (which they control) and has committed to take additional actions as warranted to cause the company's share price to more fully reflect underlying business value.

Chemfirst, a specialty chemical company, came public several years ago as a spinoff. Despite the company's strong position in the fast growing electronics chemicals market, the shares trade at around five times estimated cash flow. Business results are strong, and the company's management owns a substantial interest in the company. In addition, the company is actively repurchasing its shares. We believe the company will eventually be acquired in the chemical industry's consolidation. We own several investments in the real estate area including shares in LNR Corporation, a spinoff a few years ago from a respected homebuilding company. This company is essentially an opportunistic investor in a variety of real estate assets, with a bias toward purchasing underperforming or out of favor properties, turning them around and selling them. They have achieved consistently strong returns over time, and the underlying value of the company's assets is close to twice the current market price of the shares. We expect underlying value to grow at a healthy rate for the foreseeable future. Management owns approximately 30% of the company's shares, and the company has been repurchasing substantial amounts of its own stock at the current price.

Octel was spun-off from Great Lakes Chemical Corporation in 1998 and has not succeeded in attracting investor interest. It is the world's dominant producer and marketer of worldwide TEL, a fuel additive that makes gasoline "leaded." This has been called a "sunset industry" because leaded gasoline is being phased out all over the world. In the meantime, however, it is a high margin business that requires almost no ongoing investment. Octel has recently consolidated its position and now controls in excess of 90% of the worldwide TEL market. The company is currently buying back around 10% of its stock per year. There are two primary risks - that the phase-out goes much more quickly than the 15-20% annual decline that management anticipates or that the company's abundant cash flow is squandered on foolish acquisitions rather than being used to pay down debt and buy back stock. At three times current after-tax earnings, valuation more than compensates for these risks.

We have recently become more active investors in thrift conversions. Thrifts at one time had a large dedicated community of investors, but after a period of overvaluation and poor stock performance, this is no longer true. While there are generally no short-term catalysts for value realization in this area, stock repurchases are accretive to shareholder value and industry consolidation seems likely to continue at a healthy pace. In short, the opportunity to buy significantly overcapitalized, conservatively managed thrifts between 50% and 75% of book value and at reasonable earnings multiples offer a low-risk investment with significant return potential.

We own shares in Stewart Enterprises, a funeral home and cemetery company which currently trades at approximately six times after-tax earnings per share. The death care industry has come under pressure as a result of overpriced acquisitions, excessive levels of debt, a recent, temporary decline in the death rate, and increased competition in some regional markets. All of the public companies in this industry are trading at extremely depressed levels. Stewart has some of the best properties in the industry; the company has recently repurchased its stock around current levels, and insiders have added to their holdings. A new management team is expected to reorient the company to maximize free cash flow generation.

Ucar is the world's leading manufacturer of graphite electrodes which are used in steel production. The company came under a cloud a few years ago when the industry admitted to price fixing. Results were then adversely affected by the Asian crisis last year. Management announced a sweeping cost cutting plan, which has been implemented faster than expected. Earnings are expected to grow strongly over the next few years as a result of lower expense levels, stronger demand, and possible price increases from currently depressed levels. The company also has announced a potentially lucrative product development and supply agreement with Ballard Power Systems, developers of a new fuel cell technology. Despite the company's excellent prospects and strong market position, the shares trade at roughly eight times estimated 2000 earnings.

Chargeurs is a French company which processes and trades in wool and produces fabrics, interlinings, and protective films. It is the market leader in virtually every segment in which it operates, generating substantial free cash flow from operations. Management is proactive in taking measures to maximize shareholder value including a securitization program to reduce volatility and risk in the trading business and the repurchase of a large number of shares. Some segments of the business have suffered as a result of the Asian crisis and are only now beginning to recover. Even on depressed results, however, the market values the company at approximately seven times earnings. Small capitalization companies in mundane businesses are out of favor in France, too.

Lambert Fenchurch is a publicly traded insurance broker in the U.K. Small in scale and in an industry that was out of favor amongst British investors, the company was unable to get a reasonable valuation from the stock market. Trading around 80 pence, the shares languished at six times earnings. Last month, after a long strategic review, the company accepted a takeover offer at 145 pence per share. The deal went unconditional on December 16.

Saab is a Swedish defense company primarily focused on aircraft, space and training systems which is valued at about seven times earnings. This valuation does not take into account growth opportunities available from the expansion of Saab's fighter aircraft program into the export market; the company recently received its first export order, validating our investment thesis. Management is also pursuing value creation through the monetization of the company's civilian aircraft lease portfolio. Last month, Saab agreed to purchase Celsius, another Swedish defense contractor, in a deal that enhances value by about 20% after cost-saving and revenue synergies. Although the European defense market is undergoing rapid consolidation, Saab, as one of the smallest remaining independent players, is below the radar screen of most investors.

We continue to have exposure to several investments whose outcome is totally independent of the level of the stock market. One such holding is Trustor Corporation, which is in liquidation. The company's assets are cash and legal claims against a former executive who committed embezzlement. Cash on hand exceeds the share price and a substantial liquidating distribution is expected shortly. Another such investment is in the debt of Maxwell Communications, which is also in liquidation. This company continues to make good progress selling off its assets and resolving legal claims at better-than-expected levels. Another liquidating distribution from Maxwell is expected in late December."

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