November 28, 2008

A few recent articles have caught my eye about the potential for inflation to spike up in the next few years, as a result of the financial bailouts.

This quote from Seth Karlman from Street Capitalist, with the orginal post here.

We think inflation could become out of control in 3 to 5 years. Yet, we might not wait for that position. Hence, perhaps early, we have a large inflation hedge. We don’t own gold as a commodity. We won’t disclose our inflation hedge, yet with enough work, you can find true inflation hedges.

And this comment from International Value Advisers’ Charles de Vaulx in the latest issue of Value Investors Insight

Do you still have an affinity for gold?

CDV: Yes. As governments throw significant amounts of money at the economic crisis, that will eventually push inflation higher. We want to have some gold in our portfolio – it’s now a 4.5% position, virtually all in bullion – as that happens. There’s a saying that you should not confuse a clear vision with a short distance. We’re willing to own gold even though it may not act as a hedge in the near future, because we have a fairly clear vision about what will happen to inflation three, four or five years out, and it’s not a pretty sight.


Punch Taverns

October 7, 2008

Excerpt from Greenlight Capital’s recent letter to investors which talks about Punch Taverns (PUB).

PUB is an operator and lessor of over 8,000 pubs in the United Kingdom. Approximately 875 are owned and operated, and 7,500 are leased to live-in long term lessors. PUB charges “dry rent” equal to 50% of the estimated 5-year average of pre-rent profits and “wet rent” of markup In beer. Lessors are required to buy all their beer from PUB, which PUB sells at a markup, acting as a distributor from the brewers. U.K. pubs are suffering from the initiation of the U.K. wide smoking ban, supermarkets’ aggressive beer discounting, and the U.K. consumer crunch. We believe the franchise model creates high margin revenues with low volatility. In addition, it appears the stock is under pressure because the market misunderstands PUBs debt structure. PUB has three debt securitizations, each structured to pay down incrementally between now and 2036 without needing to be refinanced. In addition, PUB has £283 million of convertible debt at the parent company due December 2010. During the quarter, the market began pricing in a high risk of default or cash trapping within the securitizations. In addition, PUB announced its intention not to pay a final dividend for fiscal year 2008 to conserve cash at the parent company. The market took PUB’s conservatism as a sign of potential cash flow problems regarding the debt and began pricing in an equity issuance to pay down the convertibles. Based on conversations with the company and analysis of the debt documents, Greenlight believes PUB has the flexibility to manage its securitizations without a liquidity crunch, even in a difficult period for pubs. PUB is likely to use the cash savings from the cancelled dividend to pay down some of its debt early. We do not think the chances of an equity issuance are high. Greenlight initiated the position at £2.83 or less than 4x estimated 2008 profits. PUB shares ended the quarter at £1.32 (you do the multiple).

Valuecruncher seems to agree putting a valuation of £5.25 / share on the PUB

Dr Pepper Spinoff

October 7, 2008

Excerpt from Greenlight Capital’s recent letter to investors which talks about the Dr Pepper (DPS) spinoff.

DPS was spun off from U.K. based Cadbury PLC in May 2008. The Partnerships established their position at an average price of $23.84, which represents 12x estimated 2008 earnings. DPS exhibited many of the characteristics we have seen in successful spinoff investments, including favorable management incentives (which were struck while market participants were still wondering how bad the company’s initial outlook might be in the difficult industry environment), systematic selling by U.K. shareholders more interested in the global confectionary business and less so in the U.S. beverage business, and a conservative management posture. DPS is the third largest liquid refreshment beverage company in the Americas, with a portfolio of 50 brands including Dr. Pepper, Canada Dry, 7-Up and Snapple. The company is a combination of a high-margin concentrate business (like Coke and Pepsi, which trade at 17x earnings) and lower-margin and more capital-intensive bottling and distribution operations (like Coca Cola Enterprises and Pepsi Bottling Group, which trade at 12x earnings). While the market seems to apply a discount for its bottling ownership, we believe that an integrated model affords DPS the opportunity to expand distribution of its underrepresented and newly-launched brands. Over time, DPS has the potential to generate meaningful earnings growth through new product extensions, increased use of its distribution capacity, further cost reduction, and increased exposure to single serve channels, where it is currently underrepresented. DPS shares ended the quarter at $26.48.

Other bloggers have posted on the DPS spinoff previously:

Gurufocus (which tracks investments by funds) points out that Greenlight have invested 6% of their fund in DPS.

America’s Infrastructure

July 2, 2008

The Economist has an article about the current infrastructure in America. The article contains some of the same figures which Sellers Capital use in their VMC investment thesis.

A few excerpts from the article:

In 2005 the American Society of Civil Engineers estimated that $1.6 trillion was needed over five years to bring just the existing infrastructure into good repair. This does not account for future needs.

The private sector is hungry to invest. In May Morgan Stanley raised $4 billion for its new infrastructure fund.

In January a national commission on transport policy recommended that the government should invest at least $225 billion each year for the next 50 years.

The article also outlines the underfunding of water infrastructure. Which is one the reasons behind Whitney Tilson picking MWA in July 2007, as mentioned in Kiplinger.

America’s ageing water infrastructure is sorely underfunded: the Environmental Protection Agency forecasts an $11 billion annual gap in meeting costs over the next 20 years.

Spinoffs: A Quick Summary

June 25, 2008

Below is an excerpt about spinoff investments from Joel Greenblatt’s You Can Be A Stock Market Genius.

1. Spinoffs, in general, beat the market.
2. Picking your spots, within the spinoff universe can result in even better results than the average spinoff.
3. Certain characteristics point to an exceptional spinoff opportunity:

    • Institutions don’t want the spinoff (and not because of the investment merits).
    • Insiders want the spinoff.
    • A previously hidden investment opportunity is uncovered by the spinoff transaction (e.g. a cheap stock, a great business, a leveraged risk/reward situation).

    4. You can locate and analyse spinoff prospects by reading the business press and following up with the SEC filings.
    5. Paying attention to “parents” can pay off handsomely.
    6. Partial spinoffs and rights offerings create unique investment opportunities.
    7. Keep an eye on the insiders.

      This points are useful when looking at investment opportunites like EMC and SATS.

      Good to Great by Jim Collins

      June 16, 2008

      I have just finished reading Good to Great by Jim Collins and was going to post a brief book summary. But a quick search reveals a mindmap of the book and WikiSummaries already has a chapter by chapter summary.

      2008 Berkshire Hathaway Shareholder Meeting: Detailed Notes

      May 7, 2008

      Reflections on Value Investing has posted some notes from the recent Berkshire Hathaway meeting. Below are some quotes that I noticed.

      I started investing when I was 11. I believe in reading everything in sight. I wandered for 8 yrs with technical analysis. I read Intelligent Investor, chapters 8 and 20 I recommend, and if you absorb it you won’t be a lemming.

      Our job is not to select great managers, our job is to retain them.

      In business school the amount of time spent teaching option pricing is total nonsense. You only need 2 courses, how to value a business and how to think about stock market fluctuations.

      We never want to trade reputation for money.

      There is a lot I wouldn’t buy even if best management in world, as it doesn’t make much difference in a bad business.

      We want a company with durable advantage, which we understand, can trust management, at a good price.

      If I were working with small sums of money, it would open up thousands of possibilities. We found very mispriced bonds. We found them in Korea a few years ago. You made big returns but had to be small size. I wouldn’t be in currencies with small amount of money. I had a friend who used to buy tax liens. I’d look in small stocks or specialized bonds.

      Several times I have had 75% of my non-Berkshire net worth in a situation. You will see things where it would be a mistake not to act. You won’t see them often, and the press and your friends won’t be talking about them.

      We have lower due diligence expenses than anyone in America. I know of a place that pays over US$200m to its accountants every year, and I know we are safer because we think like engineers – we want margins of reliability.

      A brand is a promise.

      We waste a lot of time, but we waste it on things we want to waste it on.