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

Young Warren Buffett - Writings from 1951 and 1952

Here are articles on 2 companies Warren Buffett wrote about in 1951 and 1952:

GEICO

Western Insurance Company

SG

Quest Capital Corp (QC)

(All data from quarterly June 30 2009)

Quest capital is a mortgage finance company in Canada. They focus on short-term (less than 2 years) mortgage lending, and therefore do not have significant exposure to interest rate risk. The investment thesis for this company is quite simple; the company was hit quite hard by the credit-crisis and is now trying to monetize its loan portfolio. They have stopped issuing new loans. The share price is trading at less than a reasonable estimate of what the company will be able to recover through its monetization efforts.

The market cap of QC is $170M or $1.12 per share with 151M shares outstanding. It appears as though this price is much too low; the shares are trading at 55% of adjusted book value.

The company has paid down all its debt and is working on the repayment of its preferred shares. The preferred shares carried a coupon of 13.5% that has now been renegotiated to 12.75% and will be reduced further to 12% on January 1st 2010. Preferred shares have been subtracted in the calculation of book value above.

The company has 49 loans outstanding with total principal of $369.8M. They have taken provision for loan losses of $20M. The company classifies loans as impaired when either principal or payment becomes past due by 90 days. 17 of the 49 (34%) loans outstanding have been deemed impaired as at the end of Q2. Total impaired principal is $162M (44%). However, management’s estimate of fair value of the collateral underlying these impaired loans is $171M.

There is also $6M of loans past due but not yet classified as impaired. For the purpose of this analysis I will assume this amount is already impaired. The $6M appears to be the last of the past due loans.

The nature of the business is such that the balance sheet can be used to determine the value of the business to a purchaser of the company’s common shares.

The majority of the loans outstanding should be partially recoverable, if necessary, through the monetization of collateral. Since the total collateral value is estimated at $171M, which is more then the total value of the impaired loans, it is reasonable to assume that most, if not all, of the principal will eventually be recovered. For this reason, I feel there is a higher probability for a positive outcome.

It seems as though the current price offers an appealing risk-reward scenario. Of course the success of this investment depends on stability in the real-estate market. Even if a relapse were to occur, it is not certain that a purchaser of the shares at these prices would suffer a permanent impairment of capital. The situation as it is along with the fact that the CEO is purchasing shares seems to provide a sufficient margin of safety to warrant an investment of capital in this situation as part of a diversified portfolio.

Disclosure: I own shares in QC. This is not a recommendation to purchase or sell securities.

Greenlight Capital and Pershing Square Q2 Letters

Here are the Q2 letters from David Einhorn and Bill Ackman, who are actually quite good friends. It is interesting to see how their approaches differ with regard to the structural risks the U.S. is still facing:

Greenlight Capital Q2 Letter to Shareholders

Pershing Square Q2 Letter to Shareholders

And It Doubles...

Arctic Glacier Income Fund (AG.UN) mentioned here yesterday, issued a press release last night at around 7:30:

Arctic Glacier Income Fund announced that its U.S. subsidiary, Arctic Glacier International Inc., has reached agreement with the U.S. Department of Justice. The agreement settles all charges related to allegations that three former employees conspired with a co-conspirator company from January 2001 through July 2007 to allocate packaged ice customers in southeastern Michigan and the Detroit metropolitan area. Arctic Glacier initially entered into this market in 2005 when it acquired shares of certain companies in that market. Because it acquired shares it assumes liability for such practices and conduct in those predecessor companies. Under terms of the agreement, Arctic Glacier International Inc. agreed to plead guilty and to pay a fine of US$9 million, payable in instalments over the next five years. Arctic Glacier has also agreed to cooperate with the DOJ's ongoing investigation of other companies and individuals. The agreement remains subject to court approval.

The shares opened up 120% this morning.

Unfortunately, I did not have a position. This is just another example of why it makes sense to bet against the crowd.

The entire company is now trading at $156M in the market. Average cash flow has been about $30M for the past 4 years. If you take out tax they will have to pay once they convert over to a corporation, whenever they decide to do it, they are likely to produce $24M of cash. Therefore, the stock still looks cheap at 6.5 times. The packaged ice industry is the type of stable industry you would expect to be trading closer to 13 or 14 times.

SG

Stocks On My Radar

Although I have not had much time recently to do any in-depth analysis, here are some stocks that appear to offer interesting characteristics and the potential for an attractive buy price:

World Color Press – Previously, “Quebecor World”, in the printing business. The company emerged from bankruptcy protection on July 21, 2009. It entered bankruptcy largely due to financial issues rather then fundamental business problems. The common stocks of recently reorganized companies sometimes offer attractive buying opportunities due to selling pressure by previous debt holders. Reorganization information is at this link (including management projections):

World Color Press - Plan of Reorganization Documents

Arctic Glacier Income Fund - Recently cut their dividend. They are now the subject of US Department of Justice Antitrust investigation. The accusation is that Arctic Glacier and its peers in the packaged ice industry had been avoiding competing with each other in the same geographical market. One of their competitors the Home City Ice Co. has already plead guilty and is facing a fine of between $24M and $48M USD. Arctic Glacier is a larger company and is likely facing a fine larger than that if proven guilty. The stock is trading at approx. 2 times avg. cash from operations valuing the entire company at about $69M CAD. It looks like this might be too low even given the antitrust investigation and warrants further investigation.

AG Growth International – What a horrible name for a corporation…Sounds like something out of my grandmothers’ mutual fund portfolio. That aside, the company makes agriculture equipment and grain storage products. They have recently converted from an income fund to a corporation via reverse merger, which may be a cause for undervaluation. I don't know anything about the agriculture industry, but the shares look cheap based on how much they are on track to earn this year. Revenue for the first 6 months of 2009 vs. 2008 is up 34%, partly due to price increases. 3rd quarter is usually strongest for their seasonal business.

TVA Group Inc. – Trading at 6.5 times LTM Earnings. They are a francophone media company operating in 3 businesses: television (conventional and specialty), publishing and movie distribution. They are the market leader (about 56% market share) in the francophone conventional television market and are expanding into the more profitable specialty channel industry (currently 8% market share). Recently purchased Sun TV is losing about $6M after tax, and may be written off soon which will result in earnings increasing by about 10%. A rebound in the publication segment could produce comparatively large gains in earnings based on recent margin expansion in this business segment. The distribution business operates as a sort of "option" and can produce large gains depending on if any blockbuster films are released in a given year. The subordinated voting structure is a potential risk. One person I talked to suggested that the management might be depressing the stock price in attempt to buy the entire company cheaply. It is possible but it seems like they would be doing many more things wrong if they were trying to depress the stock price, rather then booking record revenue like they did in 2008. They have repurchased about 10% of their shares in the last year and have filed an issuer bid to repurchase another 5%. My feeling is that 6.5x earnings is much too low. For instance, competitor Astral Media trades at 12x.

Other stocks looking cheap at first glance:
- Clublink Corp.

I'd like to mention again that I have in no way done in-depth analysis on any of these stocks besides TVA Group. Thus far, they are just things I am looking into.

Disclosure: The above is in no way an offer or recommendation to purchase or sell securities. I own shares in TVA Group Inc.

SG

Margin of Safety - Updated Link

I received several requests stating that the Margin of Safety link was broken. Here is an updated link:

Seth Klarman - Margin of Safety

SG

The Extraordinary Share Performance of Shell Companies

Thanks to The Manual of Ideas and Greenbackd for this link.

Here is some research that shows that shell companies have a 48.1% 3-month abnormal return after a reverse takeover is consummated:

October 2009 — Empirical Finance Newsletter on The Stock Price Performance of Shell Companies


Note: The above is not a recommendation nor a solicitation to purchase securities.

SG

Updated Version of Tweedy Browne's "What has worked in investing"

Tweedy Browne Company has compiled a booklet of empirical research demonstrating which investment strategies have produced exceptional returns. It is well worth a read:

"What has worked in investing" by Tweedy Browne

SG

Monarch Services – Undervalued Liquidation Play (OTC: MAHI)

Monarch Services is an undervalued asset play with a plan to liquidate and distribute remaining assets to shareholders. The company used to be in the publishing business producing a magazine called “Girl’s Life”, the rights to which have now been sold in exchange for a promissory note of $600000. Other assets included a restaurant business, “Peerce’s Plantation”, which has now been sold, and real estate adjoining the restaurant property. The company has not kept up to date with its regulatory filings due to the fact that it anticipates legal and accounting fees of up to $250,000 to accomplish this task.

In April 2008, the company published an 8-k report stating future business plans and containing pro forma financial statements for the year ended April 2008.

8-K

Analysis of these exhibits reveals cash balance of $698000 and remaining liabilities of $36000. There are also $941000 worth of assets held for sale, which consist of the housing (referred to as “GLPM”) and land real estate (referred to as “GLPP”) connected to the restaurant property. The company spent $479000 in administrative expenses between April 2007 and 2008.

Since April 2008 there have been several developments; namely the sale of the GLPM property for cash value of $560000 less $38000 closing expenses. Also, the company is in discussions with Baltimore County over the sale of the GLPP property for $624000 and is expecting closure in November 2009. The sale price could be substantially less than this value.

Also, the promissory note received in exchange for the sale of Girl’s Life magazine has substantially been written down to 0, implying the expectation of complete default. There is still the probability of receiving some denomination on this note although the value is probably negligible.

The $698000 cash balance was increased by $522000 due to the sale of GLPM, giving a pro forma balance of $1220000. Adjusting for a possible discount in the sale price of the GLPP property, 75% of the offer price is $468000. Assuming payment in cash, the balance increases to $1688000. Expenses in the year are likely to be less then the 2007-2008 period when the company spent $479000 in administrative expenses. However, in order to err on the conservative side, assuming there is no decrease in expenses the cash balance will be reduced to $1209000. Subtracting the $36000 in liabilities, the estimated cash available to the equity holder will be $1173000, calculated conservatively.

The current market value of Monarch Services: $891791.
Estimated cash available for distribution: $1173000.

This implies a substantial discount from realizable value. The possible gain is 32% in a few months, with no correlation to the overall market, if the November 2009 closing date is correct.

Aberdeen International (AAB) - Value Opportunity

Aberdeen is an international asset management company. They have been primarily focusing on equity investments in resource-based companies around the world. The company has been repurchasing shares. The value to be found here is based on balance sheet numbers. The company is trading at a discount to its investment portfolio:

Market Value of Aberdeen Intl: $24M CAD
Market Value of Equity Portfolio @ April 30 2009: $37M CAD

The company may be undervalued in the market because of an unfortunate and complex situation in which a $10M loan made to South African mining company Simmers and Jack may not be repaid . Even with no value attributed to this loan the equity is still undervalued. As per the debenture agreement, the company is supposed to receive a 1% net smelter royalty from Simmers and Jack, which they have in fact been paying. This royalty is held as a long-term asset and is valued at $38M on the balance sheet. I believe this is a bloated number due to the fact that the company used a 5% discount rate, which would imply a risk-free return. In fact, Simmers and Jack has proven that any dealings with them are not risk-free by refusing to repay the $10M loan. I am inclined to say that the smelter royalties " are worth more then 0" from a conservative stance. The company also owns several other assets which may end in defaults, but are not truly material in terms of their value.

There are warrants outstanding for 42M shares expiring in 2012, which may be another reason for the undervaluation. The warrants are currently valued at only $2M by the market. The total value in the market is therefore $26M. Which is still less then the portfolio of securities. I am going to say that the warrants offer a much better vehicle for capital appreciation, due primarily to their lower relative price (8 cents a share vs 27 cents for common) and the time interval till expiry.

Disclosure: I own warrants and shares issued by AAB.