Loews Corporation (L) - Value Investors at a Discount?

Loews Corp is a diversified holding company, with significant interest in P&C insurance, natural gas, and offshore drilling through controlling ownership of its publicly traded subsidiaries:

-Diamond Offshore Drilling Inc. (NYSE: DO): 2nd largest publicly traded offshore drilling contractor after Transocean. Operates 47 offshore rigs.
-CNA Financial Corp. (NYSE: CNA): Struggling P&C insurer with underwriting history below the industry average.
-Boardwalk Pipeline Partners, LP. (NYSE: BWP): 3 natural gas pipeline systems extending from the South-West US to North-East US.

Non-Public Subsidiaries:

-Highmount: Natural gas production and exploration company with assets in Texas, Michigan, and Alabama.
-Loews’ Hotels: Luxury hotel chain operating 18 hotels in the US and 2 hotels in Canada.

The equity securities of Loews Corp are undervalued on a NAV basis. The shares are trading at a discount to their interest in their publicly traded subsidiaries. When you add in the fact that you are getting $12.16 per share of other assets for free, after subtracting parent company debt, the shares present a truly compelling value opportunity.

In addition, the value creation by this company's management over the past 50 years has been extraordinary. They have a long history of successful transactions (ex. Lorillard), which may continue into the future. They are self proclaimed value investors, and have shareholder interests in mind. Usually family managed conglomerates trade at discount to NAV because of shareholder unfriendliness, or dual share structures, but this should not be a problem in this scenario.

The company is also using cash to repurchase shares, and has a history of reducing outstanding shares by 25% in every one of the past 4 decades.

Investors could also play this trade by shorting out the market risk of the publicly traded shares.

See valuation below:



Have fun.

NOTE: No Holding. This is not an invitation or a recommendation to purchase securities. Please do your own research.

Warren Buffett - Coca Cola 1988

One of the things we like to do is reverse engineer some of Warren Buffett's historical investments. Coca-Cola is possibly the best investment he ever made. From Berkshire's 1993 Annual Report, only 5 years after the investment was made:

The Coca-Cola Company. ............... Cost: 1,023,920 Market: 4,167,975

Not many people can claim to have made investments as successful as that; especially in companies as mature as Coca-Cola was at the time of his purchase. Of course, this type of investment is very different from when Buffett was running his Partnerships and investing in net-nets.

For educational purposes only, and for those who are interested, like we are in learning from history, we present the 1987 and 1988 Annual Reports of the Coca Cola company. Since these are not available from Coca-Cola's website or generally on the internet, we managed to dig them up at the library:

KO - Annual Report 1987
KO - Annual Report 1988


Note: No holding.

GBO Inc

We feel that the shares of GBO Inc. provide a compelling value opportunity from recent trading prices.

GBO manufactured windows and doors, primarily in 3 types: exterior doors, PVC windows and wooden windows. The company operates out of Quebec, Canada where it has 3 plants and provides jobs for 500 workers. Sales are divided as follows: 43% Quebec, 30% Ontario, 5% Atlantic Canada, 22% US.

The company recently completed the sale of 2 of their divisions for cash considerations of $12.5M. The divisions sold manufactured PVC windows. The company is now trading at ~65% of current assets after subtracting all liabilities, what we feel in this case can be used as a rough indication of liquidation value. A large portion of current assets is in cash and the cash burn rate is minimal.

In addition, if that is not compelling enough, the company announced on Oct. 7, 2009, that they would be repurchasing 15M common shares for $0.20 a share, or 46% of their outstanding shares! That compares to their last trading price of $0.17. As of now, the bid has not yet commenced.

If 46% of the outstanding shares are successfully repurchased at $0.20, which assumes tendering by majority holders, our estimate of the per share liquidation value post issuer bid would be ~$0.36.

Keep in mind that, this stock is VERY thinly traded, with public float of only about 10%. 60% of the outstanding shares are held by Fonds de solidarite des travailleurs du Quebec (FTQ). We feel that the tender is likely to come from these holdings: their position is in the “turnaround” portfolio of the FTQ. The tender offers them an exit opportunity. The other 30% is held by insiders.

Unfortunately, we have been unable as of yet to acquire shares at our limit price. The shares traded at $0.13 on January 14, 2010, and in the past few days have ticked up to $0.16 and then to $0.17. Recent trading activity suggests shares are available, however an investor should tread very carefully; especially in considering post-repurchase liquidity if they should choose to hold rather than tender.

Woopdeedoo.

SG

NOTE: No holding. This is not an offer to buy or sell securities. Do your own research.

Greenlight Capital 2009 Annual Letter

We found a copy of Greenlight's 2009 letter floating around online. David Einhorn did extremely well in 2009, up 36.9%, 33.7% or 30.6% depending on the fund. His average annualized return since 1996 is now 22%. One thing we found interesting was that he had average 18% of the fund invested in debt securities throughout the year, which included a huge 30% gain from CIT debt in the 4th quarter. He also continues to have long positions in physical gold. While we feel that there are better ways to hedge inflation given the current gold price (bond options/rate caps/curve caps), only the future can say how that position pans out.

Greenlight Capital - 2009 Annual Letter

Stay Tuned.

Chesswood Income Fund (CHW.UN)

We believe that the trust units of Chesswood Income Fund present a compelling value opportunity as well as offering the potential for growth.

Chesswood Income Fund owns 3 businesses: Pawnee (an equipment lease financing company operating in the US), Acura Sherway (an automobile dealership in Toronto), and Lease-win (an automobile lease financing company) which is being wound-down. We very much like the business of Pawnee, where most of the trust’s profits come from. The business of Acura Sherway, while not in the most attractive industry, has an excellent location adjacent to sprawling Sherway Gardens shopping mall in Toronto. Acura Sherway has shown remarkable resilience to the economic downturn, especially for an automobile dealership, although it does not throw off very much in terms of profits. On a consolidated basis the fund as a whole has operated profitably throughout the credit crisis, after adjusting for goodwill impairments.

We believe the real value driver going forward will be Pawnee, with added optionality from the business that is Acura Sherway.

Pawnee offers commercial equipment lease financing to “B” credit businesses and start-ups for up to but not exceeding $30,000 per lease. We like this “niche” business because if risk is managed properly the margins are much better than a typical leasing company. We feel that management has done an excellent job of managing risk as proven over the trying credit-crunch period.

The company has a rigorous credit testing process and generally only funds a lease when they feel they are getting an above average risk/reward ratio; they actually fund less than 10% of lease applications received by dollar volume.

As a matter of protection, Pawnee diversifies to an incredible extent. No individual leasing contract makes up more than 0.01% of the lease portfolio. Leases are also diversified across 85 different industries and 65 different equipment categories. All leases require a personal guarantee from the business owner. And they eat their own cooking too; Pawnee keeps all of their leases on-balance sheet, rather than generating fees through the origination and sale process.

Obviously revenue from leases must exceed charge-off rates in order for the investment to be successful; so how about little bit of math. Since 2000 charge-offs as a % of net investment in leases has averaged 8.5%, while lease income as a % of net investment has averaged 30%. Assuming credit standards have not changed (leases funded as a % of applications received have not), this would imply a normalized charge-off rate of $6.8M, and revenue of $24.4M on $81.2M net investment in leases.

Assuming no recovery in revenue streams, and adjusting to normalize provision for credit losses, earning power of at least $7M can be conservatively expected within the next few years. Using this number, EPS of $0.76 is not to be unexpected, after assuming conversion of outstanding dilutive securities. The trust units are currently trading at only 5.3 times this number, and at 75% of book value.

It is important to bear in mind that Pawnee’s lease portfolio grew at a rate of ~17% between 2000 and 2006, and averaged 12% between 2000 and 2008. If the pre-credit crisis expansion rate is any indication then we feel that the patient unit-holder may be pleasantly surprised with a purchase at today’s price of $4.02.

Although we would rather own a pure-play on Pawnee, Acura Sherway should not be a drag on investment performance through a holding in Chesswood Income Fund. We do, however, feel that a transaction to split Pawnee and Acura Sherway would be beneficial to unitholders.

NOTE: If you are Canadian as we are, keep in mind by holding this position you are incurring foreign exchange risk, even though the equity is listed on the Canadian market. Management owns ~28% of CHW.UN on a diluted basis.
NOTE: Author has a long position in CHW.UN. This is not a recommendation or an offer to buy or sell securities. Do your own research.

Sanborn Map Company - 1960

McGill's library has a collection of the Moody's manuals going back to 1950. My natural reaction when I discovered this fact was to look up some of Warren Buffett's investments from the Buffett Partnership days. He has talked about Sanborn Map Company several times at his annual meetings and it was mentioned in the 1960 Buffett Partnership letter. From the 1960 letter:

Last year mention was made of an investment which accounted for a very high and unusual proportion (35%) of our new assets along with the comment that I had some hope this investment would be concluded in 1960. This hope materialized. The history of an investment of this magnitude may be of interest you.

Sanborn Map Co. is engaged in the publication and continuous revision of extremely detailed maps of all cities in the United States. For example, the volumes mapping Omaha would weigh perhaps fifty pounds and provide minute details on each structure. The map would be revised by the paste-over method of showing new construction, changed occupancy, new fire protected facilities, changed structural materials, etc. These revisions would be done approximately annually and a new map would be published every twenty or thirty years when further paste-over became impractical. The cost of keeping the map revised to the Omaha customer would run around $100 a year.
...
There was considerable opposition on the Board to change of any type, particularly when initiated by an “outsider,” although management was in complete accord with our plan and a similar plan had been recommended by Booz, Allen & Hamilton, Management Experts. To avoid a proxy fight (which very probably would not have been forthcoming and which we would have been certain of winning) and to avoid time delay with a large portion of Sanborn’s money tied up in blue chip stocks which I didn’t care for at current prices, a plan was evolved taking out all stockholders at fair value who wanted out. The SEC ruled favorably on the fairness of the plan. About 72% of the Sanborn stock, including 50% of the 1,600 stockholders, was exchanged for portfolio securities at fair value. The map business was left with over $1¼ million in government and municipal bonds as a reserve find, and a potential corporate capital gains tax of over $1million was eliminated. The remaining stockholders were left with a slightly improved asset value, substantially higher earnings per share, and an increased dividend rate.

It is easy to see that the stock is trading at less than the market value of the investment portfolio. Situations akin to this are a rarity these days, although if you flip over enough stones you can find a few in the smaller capitalization area.

More to come.

SG

Quest Capital Corp (QC) - Update

Quest Capital has announced a normal course issuer bid under which it will repurchase up to 10% of its outstanding shares. In addition the company has repurchased $20M worth of their preferred share liability. I think that this bodes well for an investor in the company's common stock, as it shows they are making progress on resolving their loan impairments and that there has been significant cash flow generated by monetization efforts. Also, the insiders are still buying shares, acquiring roughly 7% of the company since the beginning of this year.

Disclosure: I own shares in QC.

SG

Warren Buffett's Hedge Fund Days...(or more politely "partnership")

Probably the best thing I've ever read.

Buffett Partnership Letters 1959-1969

SG

Monarch Services (MAHI) - Liquidation Update

We originally wrote about Monarch Services on September 4, 2009 because they had a plan to liquidate the company and appeared to be trading at a discount to the estimated amount of cash that would ultimately be distributed to shareholders. On November 5, Monarch confirmed the sale of their remaining asset, the Girl's Life Plantation Parcel (GLPP) to Baltimore County. Cash proceeds received were the full $624000 agreed upon. Net of fees this worked out to roughly $548000.

We had previously taken a 75% discount to the agreed sale price of $624000 in our estimate of cash proceeds, due to the impaired real estate market and to remain conservative. In light of this favourable development we have revised our estimate of liquidation cash proceeds upwards to $1253000 from $1173000.

Current Market Cap: $971772
Estimated Liquidation Proceeds: $1253000
Return Profile: 28.9%

Disclosure: I own shares in MAHI

SG

Walter Schloss Collection - From Valueinvestingpro.com

A collection of 13 articles written by Walter Schloss who has a 5 decade investment record averaging 16% annually and is touted by Warren Buffett as a superinvestor in his 2006 annual report.

Walter Schloss Collection