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When asked how he became so successful, Buffett answered: “we read hundreds and hundreds of annual reports every year.”
With
John Mihaljevic, CFA Dear subscriber,
Managing Editor,
you
The Manual of Ideas It is my pleasure to bring
a new issue of our flagship
john@manualofideas.com
ide, we
“If our efforts can further the quarterly publication. Ins
selected
goals of our members by giving analyze stocks meeting
ght ten
criteria of value. We highli
them a discernible edge over
other market participants, we utiny.
have succeeded.” ideas that deserve closer scr
Sincerely,
John Mihaljevic
Super Investor
Special Situations Deep Value Magic Formula
Favorites
Profiled Candidates: Profiled Candidates: Profiled Candidates: Profiled Candidates:
Dr Pepper Snapple American Express, Barnes & Japan: Dell
EchoStar Noble, Burlington Northern Santa Canon, Fujifilm, Hitachi, EarthLink
EMC Fe, Canadian Natural Kyocera, Panasonic, Sharp, Garmin
KHD Humboldt Wedag Resources, ConocoPhillips, Sony, TDK MEMC Electronic Materials
Premier Exhibitions Depomed, DISH Network, Eaton, KBR
Other:
PRIMEDIA Forest Laboratories, Mesabi Trust
AmeriCredit, Capital Southwest,
Target GeoResources, Helix Energy, Microsoft
Cresud, Greenlight Capital Re,
Visa Horsehead, Jefferies, Leucadia, Net 1 UEPS Technologies
Lear, Sears Holdings, SFK Pulp
Yahoo! Lorillard, MasterCard, Sonae Tempur-Pedic International
Fund, Syneron Medical,
Capital, St. Joe, UnitedHealth, Travelzoo
UTStarcom, Yanzhou Coal
URS, USG, WellCare, WellPoint, Versant
Mining
Winthrop Realty
Proprietary Idea Funnel: Quantitative and Qualitative Screening, “Signal Value” Metrics, Special Situation Tracking, Multi-dimensional Alerts, etc.
Copyright Warning: It is a violation of federal copyright law to reproduce all or part of this publication for any purpose without the prior written consent of
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law. See last page for subscription information, including having multiple copies sent to you. © 2008 by BeyondProxy LLC. All rights reserved.
Table of Contents
EDITOR’S COMMENTARY............................................................................ 4
SNAPSHOT OF COMPANIES PRESENTED IN THIS ISSUE ...................... 5
IN ALPHABETICAL ORDER ............................................................................................................5
BY MARKET VALUE .....................................................................................................................7
STOCK PRICE PERFORMANCE .....................................................................................................9
P/E MULTIPLES .........................................................................................................................11
HISTORICAL AND PROSPECTIVE EPS .........................................................................................13
LATEST QUARTERLY EPS SURPRISE .........................................................................................15
REVENUE AND EPS GROWTH ....................................................................................................17
PERCENTILE RANK WITHIN INDUSTRY .........................................................................................19
SELECTED METRICS ..................................................................................................................21
INSIDER OWNERSHIP, OPEN MARKET ACTIVITY ..........................................................................23
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 3 of 241
U.S. Equites — Cheapness Snapshot1
% of U.S. stocks All MV>
Editor’s Commentary
trading for less than… stocks $1bn
net net current assets 8% 0% We highlight the following ten ideas in this Portfolio Manager’s Review:
net cash 8% 2%
tangible book value 34% 18% American Express (NYSE: AXP) is a wide-moat, high-ROE business that
5x trailing EPS 9% 9% trades at less than 1.5x tangible book value. Bruce Berkowitz and Glenn Greenberg
1
As of February 6, 2009.
joined Warren Buffett as shareholders in the fourth quarter. Shares have declined
another 31% since yearend 2008. While the market’s fear of a liquidity crisis at AXP
is palpable, we believe the shares offer an outstanding risk-reward tradeoff.
AmeriCredit (NYSE: ACF) operates in the sub-prime auto lending industry,
which has essentially ground to a halt. However, with a strong management team, a
valuation of .3x tangible book value, AmeriCredit offers compelling value for long-
term investors. Leucadia and Fairholme own half the company.
EchoStar (Nasdaq: SATS) is 50%-owned by satellite industry pioneer Charlie
Ergen who has a track record of smart capital allocation. With two-thirds of market
value in net cash, and valuable set-top box and satellite assets, Ergen can create
value by buying back stock or opportunistically acquiring operating assets.
Greenlight Capital Re (Nasdaq: GLRE) is a tax-efficient investment vehicle
run by David Einhorn. Given Einhorn’s sensible investment approach and strong
track record, we believe the shares should not trade at a discount to book value.
Microsoft (Nasdaq: MSFT) is a wide-moat business with favorable long-term
growth characteristics. The shares appear unjustifiably cheap at approximately ten
times headline earnings. The latter do not reflect the valuable MSN.com and Xbox
businesses, neither of which contributes meaningfully to earnings at present.
Premier Exhibitions (Nasdaq: PRXI) owns rights to certain assets related to
the Titanic shipwreck site. These assets have been appraised at meaningfully more
than the enterprise value of the company. Premier also has other operating assets and
a fundamentally attractive, high-ROIC business. With 16% shareholder Mark Sellers
successful in ousting management, we expect value to be unlocked.
Sears Holdings (Nasdaq: SHLD) appears to trade at an enterprise value below
the value of the company’s substantial real estate holdings. The shares have limited
fundamental downside even if one ascribes no value to the retail business. We expect
Eddie Lampert’s capital allocation skills to benefit shareholders over time.
SFK Pulp Fund (Toronto: SFK-UN) is a Canadian pulp producer that trades at
a distressed valuation of .1x tangible book value. The company recently suspended
its monthly distribution, putting additional pressure on the shares. Despite the
market’s apparent assertion that SFK may become bankrupt, we view the debt load
as quite manageable. In addition, SFK has distinct pulp mill assets in Canada and the
U.S., some of which could be sold if necessary to stave of bankruptcy. We like the
risk-reward in this situation, as SFK has a high likelihood of survival and the ability
in good times to throw off free cash flow in excess of recent market value.
Sony (NYSE: SNE) trades at a multi-year low that implies a valuation of .7x
tangible book value. This valuation does not reflect the company’s earning power,
global brand or competitive strength in businesses ranging from video games to
consumer electronics. While we generally find little value among Japan’s low-ROE
companies, we find Sony shares too cheap to ignore.
Travelzoo (Nasdaq: TZOO) trades at a price that does not accurately reflect the
value of its 12+ million email subscriber base. The company has a strong business
proposition even in a weak travel environment, as it helps hospitality companies
liquidate unfilled capacity. Heavy insider buying appears to support the view that the
shares are grossly mispriced.
Sincerely,
John Mihaljevic, CFA and The Manual of Ideas research team
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 4 of 241
Snapshot of Companies Presented In This Issue
In Alphabetical Order
Recent Market Enterprise LTM LTM Date of FY
Price Value Value EBIT / EBIT / Latest End
Company / Ticker ($) ($mn) ($mn) EV Capital Quarter Date
American Express / AXP 15.74 18,258 66,258 11% >99% 12/31/08 12/31/09
Barnes & Noble / BKS 17.24 953 1,063 17% 0-25% 10/31/08 1/31/09
Burlington Northern / BNI 66.04 22,414 31,336 12% 0-25% 12/31/08 12/31/09
Canadian Natural / CNQ 34.50 18,661 28,218 14% 0-25% 9/30/08 12/31/08
DISH Network / DISH 13.58 6,071 10,620 18% 50-99% 9/30/08 12/31/08
Dr Pepper Snapple / DPS 16.60 4,211 7,594 12% 50-99% 9/30/08 12/31/08
Forest Labs / FRX 25.84 7,794 5,604 19% 25-50% 12/31/08 3/31/09
Helix Energy / HLX 4.78 439 2,367 21% 0-25% 9/30/08 12/31/08
KHD Humboldt Wedag / KHD 9.58 292 -103 nm >99% 9/30/08 12/31/08
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 5 of 241
In Alphabetical Order (continued)
MEMC Electronic Materials / WFR 16.11 3,616 2,511 34% 50-99% 12/31/08 12/31/09
Net1 Ueps / UEPS 15.32 853 732 15% >99% 12/31/08 6/30/09
SFK Pulp Fund / SFK-UN.TO C$0.45 C$53 C$221 7% 0-25% 9/30/08 12/31/08
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 6 of 241
By Market Value
Recent Market Enterprise LTM LTM Date of FY
Price Value Value EBIT / EBIT / Latest End
Company / Ticker ($) ($mn) ($mn) EV Capital Quarter Date
Burlington Northern / BNI 66.04 22,414 31,336 12% 0-25% 12/31/08 12/31/09
Canadian Natural / CNQ 34.50 18,661 28,218 14% 0-25% 9/30/08 12/31/08
American Express / AXP 15.74 18,258 66,258 11% >99% 12/31/08 12/31/09
Forest Labs / FRX 25.84 7,794 5,604 19% 25-50% 12/31/08 3/31/09
DISH Network / DISH 13.58 6,071 10,620 18% 50-99% 9/30/08 12/31/08
Dr Pepper Snapple / DPS 16.60 4,211 7,594 12% 50-99% 9/30/08 12/31/08
MEMC Electronic Materials / WFR 16.11 3,616 2,511 34% 50-99% 12/31/08 12/31/09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 7 of 241
By Market Value (continued)
Recent Market Enterprise LTM LTM Date of FY
Price Value Value EBIT / EBIT / Latest End
Company / Ticker ($) ($mn) ($mn) EV Capital Quarter Date
Barnes & Noble / BKS 17.24 953 1,063 17% 0-25% 10/31/08 1/31/09
Net1 Ueps / UEPS 15.32 853 732 15% >99% 12/31/08 6/30/09
Helix Energy / HLX 4.78 439 2,367 21% 0-25% 9/30/08 12/31/08
KHD Humboldt Wedag / KHD 9.58 292 -103 nm >99% 9/30/08 12/31/08
SFK Pulp Fund / SFK-UN.TO C$0.45 C$53 C$221 7% 0-25% 9/30/08 12/31/08
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 8 of 241
Stock Price Performance (sorted by price decline since 12/31/08)
Recent ∆ to 52-Wk Price Performance
Price Low High Since Since Since
Company / Ticker ($) ($) ($) 12/31/08 12/31/06 12/31/04
SFK Pulp Fund / SFK-UN.TO C$0.45 -11% 431% -22% -89% -94%
KHD Humboldt Wedag / KHD 9.58 -32% 274% -14% -52% -4%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 9 of 241
Stock Price Performance (sorted by price decline since 12/31/08) (continued)
Recent ∆ to 52-Wk Price Performance
Price Low High Since Since Since
Company / Ticker ($) ($) ($) 12/31/08 12/31/06 12/31/04
MEMC Electronic Materials / WFR 16.11 -38% 439% 13% -59% 22%
Barnes & Noble / BKS 17.24 -38% 95% 15% -57% -47%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 10 of 241
P/E Multiples (sorted by P/E based on estimated EPS for next fiscal year)
Recent Market P/E (A) P/E (Estimated) FY
Price Value Last This Next In End
Company / Ticker ($) ($mn) FY FY FY 2 Yrs Date
Barnes & Noble / BKS 17.24 953 8x 12x 15x 15x 1/31/09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 11 of 241
P/E Multiples (sorted by P/E based on estimated EPS for next fiscal year) (continued)
Recent Market P/E (A) P/E (Estimated) FY
Price Value Last This Next In End
Company / Ticker ($) ($mn) FY FY FY 2 Yrs Date
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 12 of 241
Historical and Prospective EPS (in alphabetical order)
Recent FY EPS (Actual) EPS (Estimated)
Price End 2 Yrs Last This Next In
Company / Ticker ($) Date Ago FY FY FY 2 Yrs
American Express / AXP 15.74 12/31/09 3.45 2.42 1.11 1.64 3.03
Barnes & Noble / BKS 17.24 1/31/09 2.17 2.03 1.46 1.12 1.17
Burlington Northern / BNI 66.04 12/31/09 5.10 6.08 5.60 6.50 7.52
DISH Network / DISH 13.58 12/31/08 1.37 1.68 1.99 2.16 2.31
Dr Pepper Snapple / DPS 16.60 12/31/08 2.01 1.96 1.82 1.64 1.77
Forest Labs / FRX 25.84 3/31/09 1.41 3.06 3.44 3.48 3.89
Helix Energy / HLX 4.78 12/31/08 3.87 3.34 2.70 1.98 2.71
KHD Humboldt Wedag / KHD 9.58 12/31/08 1.04 1.42 2.12 1.02 1.18
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 13 of 241
Historical and Prospective EPS (in alphabetical order) (continued)
Recent FY EPS (Actual) EPS (Estimated)
Price End 2 Yrs Last This Next In
Company / Ticker ($) Date Ago FY FY FY 2 Yrs
MEMC Electronic Materials / WFR 16.11 12/31/09 3.56 1.71 0.79 1.60 1.77
Sears Holdings / SHLD 38.99 1/31/09 9.58 5.70 1.35 0.44 0.75
Syneron Medical / ELOS 5.98 12/31/08 1.12 0.20 0.79 0.31 0.75
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 14 of 241
Latest Quarterly EPS Surprise (sorted by magnitude of surprise)
Recent Market Date of Latest EPS Surprise
Price Value Latest Date EPS EPS %
Company / Ticker ($) ($mn) Quarter (Actual) (Estimated) Diff.
KHD Humboldt Wedag / KHD 9.58 292 9/30/08 11/12/08 0.80 0.55 45%
Forest Labs / FRX 25.84 7,794 12/31/08 1/20/09 1.03 0.76 36%
MEMC Electronic Materials / WFR 16.11 3,616 12/31/08 1/22/09 0.65 0.61 7%
Net1 Ueps / UEPS 15.32 853 12/31/08 2/5/09 0.44 0.46 -4%
American Express / AXP 15.74 18,258 12/31/08 1/26/09 0.21 0.22 -5%
Helix Energy / HLX 4.78 439 9/30/08 10/29/08 0.65 0.70 -7%
Dr Pepper Snapple / DPS 16.60 4,211 9/30/08 11/13/08 0.45 0.51 -12%
Syneron Medical / ELOS 5.98 172 9/30/08 11/11/08 0.08 0.13 -38%
DISH Network / DISH 13.58 6,071 9/30/08 11/10/08 0.20 0.59 -66%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 15 of 241
Latest Quarterly EPS Surprise (sorted by magnitude of surprise) (continued)
Recent Market Date of Latest EPS Surprise
Price Value Latest Date EPS EPS %
Company / Ticker ($) ($mn) Quarter (Actual) (Estimated) Diff.
Barnes & Noble / BKS 17.24 953 10/31/08 11/20/08 (0.18) (0.16) nm
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 16 of 241
Revenue and EPS Growth (sorted by next FY EPS growth)
Revenue Growth EPS Growth
5-Year Last FY LTM Last FY This FY Next FY LTGR
Company / Ticker CAGR (Actual) (Estimated) (Estimated) (Estimated)
Lorillard / LO 5% 6% 6% 0% 5% 6% 8%
Helix Energy / HLX 42% 29% 27% -14% -19% -27% 12%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 17 of 241
Revenue and EPS Growth (sorted by next FY EPS growth) (continued)
Revenue Growth EPS Growth
5-Year Last FY LTM Last FY This FY Next FY LTGR
Company / Ticker CAGR (Actual) (Estimated) (Estimated) (Estimated)
KHD Humboldt Wedag / KHD 15% 27% 11% 37% 49% -52% na
Syneron Medical / ELOS 27% -18% -18% -82% >99% -61% 14%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 18 of 241
Percentile Rank within Industry (sorted by LTM EBIT margin rank)
Market Percentile Rank within Industry
Value Revenue Growth EPS Growth LTM EBIT
Company / Ticker ($mn) 5-Year LTM LTM Estimated Margin
Versant / VSNT 62 23 70 66 na 87
Lorillard / LO 10,737 30 49 50 20 85
Visa / V 47,333 na 86 96 81 80
PRIMEDIA / PRM 80 3 22 21 na 75
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 19 of 241
Percentile Rank within Industry (sorted by LTM EBIT margin rank) (continued)
Market Percentile Rank within Industry
Value Revenue Growth EPS Growth LTM EBIT
Company / Ticker ($mn) 5-Year LTM LTM Estimated Margin
Panasonic / PC 23,987 27 24 32 4 55
Travelzoo / TZOO 77 85 44 14 na 53
Lear / LEA 58 13 17 5 26 40
MasterCard / MA 20,923 65 73 17 75 35
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 20 of 241
Selected Metrics (sorted by net cash to market value)
Recent EV / Price /
Price LTM Tangible Net Debt / Net Cash / Dividend
Company / Ticker ($) Revenue Book Equity MV Yield
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 21 of 241
Selected Metrics (sorted by net cash to market value) (continued)
Recent EV / Price /
Price LTM Tangible Net Debt / Net Cash / Dividend
Company / Ticker ($) Revenue Book Equity MV Yield
Barnes & Noble / BKS 17.24 0.2x 1.8x 13% -12% 5.8%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 22 of 241
Insider Ownership, Open Market Activity (sorted by # of buys)
Market Recent Last Six Months
Value Price YTD Insider Insider Insider
Company / Ticker ($mn) ($) Change Ownership Buys Sales
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 23 of 241
Insider Ownership, Open Market Activity (sorted by # of buys) (continued)
Market Recent Last Six Months
Value Price YTD Insider Insider Insider
Company / Ticker ($mn) ($) Change Ownership Buys Sales
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 24 of 241
Top 10 Candidates For Investment
We highlight the following companies:
h American Express (NYSE: AXP)
h Americredit (NYSE: ACF)
h EchoStar (Nasdaq: SATS)
h Greenlight Capital Re (Nasdaq: GLRE)
h Microsoft (Nasdaq: MSFT)
h Premier Exhibitions (Nasdaq: PRXI)
h Sears Holdings (Nasdaq: SHLD)
h SFK Pulp Fund (Toronto: SFK-UN)
h Sony (NYSE: SNE)
h Travelzoo (Nasdaq: TZOO)
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 25 of 241
American Express (NYSE: AXP) New York, NY, 212-640-2000
Financial: Consumer Financial Services, Member of S&P 500 https://www.americanexpress.com
$70
$60
$50
$40
$30 c
$20
$10
$0
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 26 of 241
BUSINESS OVERVIEW SELECTED OPERATING DATA
Founded in 1850, American Express is a global payments FYE December 31 2005 2006 2007 2008
and travel company. It operates in two groups: % of net revenue by type:
Discount revenue 51% 52% 53% 53%
Global Consumer (67% of revenue) includes proprietary Net card fees 9% 8% 7% 8%
consumer cards, customer service, small-business services, Travel commissions and fees 8% 7% 7% 7%
Other commissions and fees 9% 9% 9% 8%
prepaid products, and consumer travel. Sub-segments are Securitization income, net 6% 6% 5% 4%
U.S. Card Services and International Card Services. Other revenue 6% 7% 6% 8%
Global Business-to-Business (29% of revenue) includes the Interest income: member lending 15% 18% 22% 22%
Interest income: other 5% 5% 5% 4%
merchant business, network services, commercial card, and Interest cost: member lending -4% -5% -6% -4%
business travel. Sub-segments are Global Commercial Interest cost: charge cards etc. -5% -6% -8% -9%
Services and Global Network & Merchant Services. % of net revenue by segment:
U.S. Card Services 49% 50% 51% 49%
AXP became a bank holding company last November. International Card Services 17% 16% 16% 17%
Global Commercial Services 17% 16% 15% 17%
INVESTMENT HIGHLIGHTS Global Network & Merchant Svcs 13% 13% 14% 14%
Corporate & Other 5% 5% 4% 3%
• Premium brand in payments industry, focused
Net income margin by segment:
on prime customers. Since launching the American U.S. Card Services 16% 17% 13% 6%
Express card in 1958, the company has built a brand International Card Services 8% 9% 7% 7%
that today encompasses 70+ million cardmembers. Global Commercial Services 12% 12% 13% 11%
Global Network & Merchant Svcs 20% 23% 26% 24%
• “Spend-centric” business model. AmEx focuses Corporate & Other 2% -11% 36% 22%
primarily on member spending and secondarily on Total net income margin 14% 14% 15% 10%
finance charges. Spending per cardmember is higher Returns on segment capital:
than at Visa or Mastercard, enabling AmEx to U.S. Card Services 41% 47% 40% 17%
charge a higher discount rate. This allows AmEx to International Card Services 16% 18% 15% 17%
Global Commercial Services 28% 26% 25% 15%
offer rewards to cardmembers and marketing Global Network & Merchant Svcs 49% 60% 91% 76%
programs to merchants, which help boost spending. % of net revenue by geography:
• Targeting long-term revenue growth in high U.S. 69% 69% 70% n/a
Europe 13% 13% 13% n/a
single digits, EPS growth in mid teens, and ROE
Asia Pacific 8% 8% 8% n/a
in the mid thirties. Management has articulated the Other 10% 10% 9% n/a
goal of growing revenue, net of interest expense, by % of pretax income by geography:
at least 8%, and EPS by 12%-15%, “on average and U.S. 84% 84% 85% n/a
over time.” The company targets 33-36% ROE. Europe 6% 6% 7% n/a
Asia Pacific 3% 3% 3% n/a
• Ken Chenault has been chairman/CEO since 2001. Other 8% 8% 5% n/a
• Improved liquidity by raising $6 billion from new
retail CD program and $3 billion from the Treasury. COMPARABLE PUBLIC COMPANY ANALYSIS
• Shares trade at 1.5x tangible book, 7x trailing P/E Price
Market Price to This Next
FY End
and 14x forward P/E. Value Tangible FY FY
($) Date
($mn) Book P/E P/E
V 56.00 47,330 87.0x 21x 18x Sep-30
INVESTMENT RISKS & CONCERNS
MA 161.90 20,920 16.9x 16x 13x Dec-31
• Operating environment “among the harshest we
DFS 7.00 3,370 .6x n/m 11x Nov-30
have seen in decades.” The company has recently
AXP 15.70 18,258 1.5x 14x 10x Dec-31
fallen well short of its prior forecast of 4-6% EPS
growth. Loss reserves have increased to highest
level in three years. Nonetheless, the company RATINGS
remained profitable in Q4 and full-year 2008. VALUE Intrinsic value materially higher than market value?
• Maintains “cautious” outlook for ‘09 and expects MANAGEMENT Capable and properly incentivized?
cardmember spending to “remain soft with past-due FINANCIAL STRENGTH Solid balance sheet?
loans and write-offs rising from current levels.” MOAT Able to sustain high returns on invested capital?
EARNINGS MOMENTUM Fundamentals improving?
MAJOR HOLDERS MACRO Poised to benefit from economic and secular trends?
EXPLOSIVENESS 5%+ probability of 5x upside in one year?
Insiders 1% │ Berkshire Hathaway 13% │ Davis 7%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 27 of 241
…additional insight into AXP: Share of Payments Volume by Operator, 2007
(industry-wide electronic payments volume: $5.0 trillion)
BUSINESS OPERATIONS Discover,
• In normal times, up to 70% of earnings available JCB, Diners
for repurchases and dividends, based on the ROE Am erican 4%
target of 33-36% and an implied target of ~10% net Express
income growth. According to the formula, 13%
reinvestment rate = growth rate / ROE, AmEx
Visa
needs to reinvest roughly 30% of earnings to
49%
achieve the targeted net income growth. Share MasterCard
repurchases at or near recent AXP stock prices 34%
should be highly accretive to EPS.
• Divestitures have streamlined business. The
Source: Company, The Manual of Ideas.
company spun off the financial planning and
financial services business—now known as
Ameriprise (NYSE: AMP)—in 2005. Following the Share of Payments and Cash Volume by Operator, 2007
spinoff, American Express increased its targeted (industry-wide payments and cash volume: $7.0 trillion)
ROE from 18-20% to 33-36%. In 2007, the Discover,
company sold its international banking subsidiary, Am erican JCB, Diners
American Express Bank, to Standard Chartered for Express 3%
$1.1 billion. In 2006-07, American Express sold its 9%
merchant-related activities in Russia, Malaysia and
Brazil for a total of ~$600 million, opting to sign
Visa
Global Network Services deals with the acquirers.
MasterCard 55%
• Global Network Services works with ~120
financial institutions globally that issue cards 33%
accepted on the AmEx merchant network.
• Won $2.25 billion settlement from Visa, Source: Company, The Manual of Ideas.
continuing to pursue MasterCard suit. AmEx is
alleging illegal actions by MasterCard to block U.S. Share of Total Transactions by Operator, 2007
banks from working with AmEx Global Network (industry-wide card transactions: 85 billion)
Services. Visa settled in 4Q07, generating a $1.1
billion pre-tax gain for AmEx. Visa is also paying Discover,
Am erican
up to $70 million per quarter over four years, tied to JCB, Diners
Express
the performance of AmEx’s U.S. network business. 3%
6%
• Securitization. When the company securitizes
cardmember loans, it retains two types of
subordinated interests: (1) investments in tranches MasterCard
of the securitization (subordinated securities), 32%
Visa
accounted for as available-for-sale securities and 59%
reported in investments on the balance sheet, with
changes in fair value recorded in accumulated other
comprehensive income; and (2) an interest-only Source: Company, The Manual of Ideas.
strip, accounted for at fair value and reported in
other assets on the balance sheet, with changes in Share of Payment Cards by Operator, 2007
fair value recorded in net securitization income. (industry-wide cards in circulation: 2.7 billion)
Discover,
Am erican JCB, Diners
Express 4%
3%
MasterCard Visa
34% 59%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 28 of 241
American Express — Normalized Long-Term Growth Profile, by Line Item
Note: The following growth profile does not reflect the impact of the ongoing recession and credit contraction. This profile conforms to the
company’s long-term goals pre-crisis. Whether American Express can return to the following growth profile over time remains unclear.
Estimated
Factors driving incremental change in growth rate
Growth Rate
Nominal GDP: 3%-5%
Payment card spending: 6%-9% Continued adoption of card payments at expense of cash and checks
AmEx card billed business: 8%-10% Market share gains by American Express
Non-interest revenue: 8%-10% Change in merchant discount rate, average annual card fee, and other
Revenue, net of interest cost:* 8%-10% Change in net interest margin
Income before loss provisions: 9%-11% Change in operating expenses as % of revenue
Pre-tax income: 9%-11% Change in loss provisions as % of revenue
Net income: 9%-11% Change in effective tax rate
EPS:* 12%-15% Reduction in shares outstanding due to share repurchases
* Management has articulated goal of growing revenue, net of interest expense, by at least 8%, and EPS by 12%-15% over the long
term, "on average and over time."
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 29 of 241
MOI’s Peek Inside: The American Express “Earnings Machine”
($ in millions,
2006 2007 2008
unless stated otherwise)
Selected Performance Drivers
A Basic cards in force - U.S. 37 41 42
B Basic cards in force - int'l 25 29 33
C Basic cards in force - total 63 70 75
D Card billed business - U.S. $406,800 $459,300 $471,100
E Card billed business - int'l $154,700 $188,000 $212,200
F Card billed business - total $561,500 $647,300 $683,300
G Avg fee per card ($) $32 $32 $34
H Avg other comm & fees / card $36 $34 $33
I Avg discount rate 2.57% 2.56% 2.55%
J Travel sales - Global Corporate $18,500 $20,500 $21,000
K Travel sales - U.S. Consumer $2,400 $3,000 $3,113
L Travel sales - Int'l Consumer $922 $1,113 $1,267
M Travel fees - Global Corporate 8.1% 7.7% 7.8%
N Travel fees - U.S. Consumer 8.4% 8.0% 8.2%
O Travel fees - Int'l Consumer 8.7% 8.6% 8.1%
P Avg cash & investments (b/s) $25,860 $25,431 $30,801
Income Statement (GAAP, ie, on-book basis; excluding non-recurring items)
Interest expense, members ($1,192) ($1,734) ($1,015) Interest incurred to fund cardmember lending
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 30 of 241
American Express Company—Income Statement (GAAP Basis), by Segment
U.S. Card Services issues card products and services to U.S. consumers and small businesses, and provides consumer travel services.
International Card Services issues proprietary consumer and small business cards outside the U.S.
Global Commercial Services offers global corporate payment and travel-related products and services to large and mid-sized companies.
Global Network & Merchant Services operates a payment card network, which includes proprietary cards and cards issued under network
partnership deals. It also signs merchants to accept cards and processes and settles card transactions for those merchants.
Corporate & Other includes overhead and auxiliary businesses such as publishing, Travelers Cheques and other prepaid products.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 31 of 241
American Express Company—Income Statement (Managed Basis), by Segment
“Managed” basis—as opposed to GAAP or “owned” basis—presents the financials as if there had been no off-balance sheet securitizations,
i.e., all securitized cardmember loans and related income effects are reflected in the financials. On a managed basis, there is no securitization
income, as the managed basis assumes that no securitizations have occurred. The difference between the GAAP and managed-basis income
statements of American Express is evident in the accounting for U.S. Card Services discount revenue, cardmember lending revenue, interest
expense, and provisions for losses. Other segments show no difference between the GAAP and managed-basis presentations.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 32 of 241
AmeriCredit (NYSE: ACF) Fort Worth, TX, 817-302-7000
Financial: Consumer Financial Services, Member of S&P MidCap 400 http://www.americredit.com
$70
$60
$50
$40
$30 c
$20
$10
$0
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 33 of 241
BUSINESS OVERVIEW • Shares trade at .3x tangible book value.
AmeriCredit provides auto financing indirectly through U.S.
auto dealers on a non-exclusive basis. The company has $15 INVESTMENT RISKS & CONCERNS
billion in managed auto receivables. Of the contracts • Adverse impacts on liquidity in FY09, including
purchased from 18,000 dealers in FY08, 89% were higher credit enhancement levels in securitizations
originated by manufacturer-franchised dealers and 81% caused by a reduction in excess spread and, to a
related to used vehicles. AmeriCredit was founded in 1992. lesser extent, credit deterioration in the loan
portfolio. Capital market disruptions are making
SELECTED OPERATING DATA securitizations more expensive. Finally, the
FYE June 30 2006 2007 2008 1H09 company is receiving less cash from securitization
Branch count 79 65 24 n/a
Producing dealers 17,111 19,114 17,872 n/a
trusts due to weaker credit performance.
Origination volume
1
6,208 8,455 6,294 900 • Swung to loss in 1H09 due in part to higher loan
Loans securitized
1
5,000 7,660 4,634 1,289 loss provisions. The company lost $39 million on a
Managed auto receivables (period average):
1
pre-tax basis in the six months ended December 31.
Owned receivables 9,993 13,621 16,059 14,045
Serviced receivables
1
1,223 106 7 0
• Exposure to consumers with weak credit. The
Total portfolio
1
11,217 13,727 16,066 7,114 company maintains a “significant share” of the sub-
Net margin - on book 13.2% 11.7% 10.6% 9.6% prime auto finance market and has participated in
Return on equity 15.3% 18.8% n/m n/m prime and near-prime to a “more limited extent.”
Delinquent loans as % of total managed receivables (period end):
31 to 60 days 5.1% 4.7% 6.0% 7.8%
• Tangible book of $2 billion versus tangible assets
Greater than 60 days 2.1% 2.1% 2.9% 4.2% of $14 billion as of December 31. Net finance
In repossession 0.3% 0.3% 0.3% 0.3% receivables amount to $12 billion, while on-
Total delinquencies 7.5% 7.1% 9.2% 12.3% balance-sheet securitization notes payable amount
1
Net charge-offs 579 643 1,000 591
Charge-offs/ portfolio
2
5.2% 4.7% 6.2% 8.3%
to $9 billion (maturity dates range from 2011-2014).
Net recoveries
3
48% 49% 45% 39% • Other risks include dependence on third parties,
1, 4
Loan loss allowance
5
679 820 951 923 as discussed on the next page.
Allowance/ receivables 5.8% 5.2% 6.3% 7.1%
1
U.S. dollars in millions.
2
Net charge-offs as an annualized percentage of average gross receivables.
COMPARABLE PUBLIC COMPANY ANALYSIS
3
Net recoveries as a percentage of gross repossession charge-offs. Market Price to This Next
4 Price FY End
Allowance for loan losses and nonaccretable acquisition fees (on book). Value Tangible FY FY
5
Allowance for loan losses and nonaccretable acquisition fees (on book) as a ($) Date
($mn) Book P/E P/E
percentage of finance receivables owned.
COF 12.10 4,710 .4x 27x 8x Dec-31
CACC 17.90 550 1.6x n/a n/a Dec-31
INVESTMENT HIGHLIGHTS NICK 2.90 30 .4x n/a n/a Mar-31
• Conserving liquidity, working to emerge from CPSS 0.50 10 .1x n/m n/m Dec-31
current crisis with franchise value intact. The ACF 5.20 689 .3x n/m n/m Jun-30
revised operating plan calls for funding far fewer
originations (less than $1.2 billion, down from $6
MAJOR HOLDERS
billion in FY08). The company increased the
Insiders 4% │ Leucadia 25% │ Fairholme 24% │ Yacktman
minimum credit score required for new loans,
9% │ Columbia Wanger 8% │ Barclays 5%
closed locations, cut the number of dealers from
whom it buys loans, and reduced headcount. It has
RATINGS
discontinued originations in Canada and in direct
VALUE Intrinsic value materially higher than market value?
lending, leasing and specialty prime platforms.
MANAGEMENT Capable and properly incentivized?
• Repurchased six million shares for $128 million FINANCIAL STRENGTH Solid balance sheet?
in FY08 ($22 per share), 13 million shares for $324 MOAT Able to sustain high returns on invested capital?
million in FY07 ($24 per share), and 21 million EARNINGS MOMENTUM Fundamentals improving?
shares for $528 million in FY06 ($25 per share). MACRO Poised to benefit from economic and secular trends?
• Chairman Clifton Morris (72), CEO Dan Berce EXPLOSIVENESS 5%+ probability of 5x upside in one year?
(54) and CFO Chris Choate (45) have worked 1
together since before the early-1990s recession. Provisions for loan losses, recorded in the income statement, affect loan
loss allowance, which reduces net finance receivables on balance sheet.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 34 of 241
…additional insight into ACF: CLOSER LOOK AT BUSINESS RISKS
• Dependence on monoline insurers. AmeriCredit’s
BUSINESS OPERATIONS securitizations have used monoline insurers to
• AmeriCredit funds the purchased loans in two ways: achieve triple-A ratings. As insurers have suffered
− Credit facilities: Loans are funded initially using credit rating downgrades, their ability to credit-
credit facilities administered by agents on behalf of enhance deals has diminished. As a result, the
commercial paper or medium term note conduits. company is trying to utilize senior subordinated
These advances are included in the company’s securitization structures for credit enhancement.
financial statements and bear interest at commercial • Dependence on credit facilities. As of June 30,
paper, LIBOR or prime rates plus specified fees. AmeriCredit had $5.0 billion of total capacity and
− Securitizations: The asset-backed market allows the $2.0 billion of available capacity under facilities
company to finance originations at high investment- used to buy loans pending securitization. The
grade rates over the life of the securitization, company was in compliance with all covenants.
enabling AmeriCredit to lock in the excess spread • Dependence on securitizations in asset-backed
on the loans. From 1994 to 2H08, AmeriCredit securities market. Current market conditions
securitized $57 billion of auto receivables. include increased risk premiums, reduced demand
Securitizations have declined essentially to zero for securities backed by sub-prime collateral,
recently, and it is doubtful whether the company financial stress impacting financial guaranty
will rely on this financing route in the future. providers, and a general tightening of credit.
• Economic conditions, interest rates, gas prices. AmeriCredit’s dependence on securitizations has
Macro weakness leads to higher delinquencies, been lowered due to recent capital injections by
defaults, repossessions and losses. Sharply higher Leucadia and Fairholme.
gas prices increase the supply of autos sold at • Sensitivity of loan loss allowance. AmeriCredit
auctions, depressing recovery rates, particularly for maintains an allowance considered adequate to
“gas guzzlers.” Higher interest rates have a negative cover probable credit losses inherent in the
impact, as the rates charged on the auto loans are company’s finance receivables.1 The allowance is
limited by competitive and other conditions. established systematically based on the estimated
amount of probable credit losses. Such estimate is
SUPERINVESTOR INSIGHT INTO ACF affected by factors including the cumulative net
• Bruce Berkowitz, interview with Robert Huebscher credit losses recorded over a so-called loss
(www.advisorperspectives.com) on December 24, 2008: confirmation period. A 10% and 20% increase in
− “We bought ACF because we believed there was such cumulative losses would increase the loan loss
significant value in the company through its ability allowance by $95 million and $190 million, as of
to generate FCF. Then we looked at ways in which June 30. Book value would be reduced accordingly.
we could “kill” the company – i.e., what kinds of • Cash flow impact of weak portfolio performance.
mistakes or misfortunes could impair our The company’s agreements with financial guaranty
investment. …we believe that in some of those insurers require it to forgo excess cash flows from
scenarios – such as in run-off mode – we could get securitization trusts if the portfolio performance
significantly higher value. The tangible book value ratios (delinquency, cumulative default and
should start to approximate the liquidation value. cumulative net loss) on trust receivables exceed
But then we look for what is not included in the specified limits. Some limits were exceeded in
tangible value, such as the time value of money FY08, and the company funded the higher credit
(e.g., the present value of future insurance enhancement requirements. All such requirements
premiums) and whether the tangible values are were fully funded as of June 30.
really tangible (e.g., whether their fixed assets are • Sales of repossessed automobiles fail to cover
fairly valued on their balance sheet). In the worst loan balances. Proceeds from the sale of vehicles at
case, we will make some pretty good money.” wholesale auctions and other recoveries usually fail
− “I look at my Board seat as a way to protect our to cover the outstanding loan balance; the resulting
shareholders’ value. It does not affect my deficiency is charged off. Net recoveries were 45%
relationships with or ability to invest in any other of repossession charge-offs in FY08, down from
companies. In fact, it expands my knowledge of 49% in FY07 and 48% in FY06.
related industries, from automobile lending to
dealerships to insurance. When the time comes to
sell our investment, I will leave the Board. I do not
accept any compensation, such as fees or restricted
stock grants. Only my travel expenses are
reimbursed. I will only stay on the Board to help our
shareholders.”
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 35 of 241
MOI’s Bird’s-Eye View: The AmeriCredit “Earnings Machine”
Producing dealers Demand for auto loans; availability and terms of financing
Loans securitized
Net charge-offs Est. recoveries Serviced auto receivables Owned auto receivables Net interest margin
Provision for loan losses Servicing income Finance charge income + other income – interest expense
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 36 of 241
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 37 of 241
MOI’s Peek Inside: The AmeriCredit “Earnings Machine”
($mn, FYE FYE
unless stated otherwise) 6/30/07 6/30/08
Selected Performance Drivers
A Origination volume $8,455 $6,294 affected by macro conditions, number of producing dealers, etc.
}
B Owned receivables (avg) $13,621 $16,059
C Serviced receivables (avg) $106 $7
affected by origination volume (row A)
D Managed receivables (avg) $13,727 $16,066
}
E Finance charge % 15.7% 14.8%
F Other income % 1.0% 1.0%
net interest margin = E + F + G
G Interest expense % -5.0% -5.2%
H Opex as % of receivables 2.9% 2.5% closely watched measure of operating efficiency
I Net charge-offs (managed) $643 $1,000 loans that are 120+ days delinquent minus est. net sale proceeds
J Recoveries / charge-offs (net) 48.8% 44.8% historical experience influences est. net sale proceeds in row I
K Leased vehicles, net $34 $211 balance sheet item (long-term asset)
Income Statement (excluding non-recurring items)
Owned receivables multiplied by finance charge
L Finance charge income $2,142 $2,382 =B*E percentage (finance charge income accrual suspended
on accounts 61+ days delinquent)
Owned receivables multiplied by other income
M Other income $136 $160 =B*F
percentage
=L+M+
O Total revenue $2,288 $2,543
N
Affected by anticipated or targeted growth in origination
P Operating expenses $398 $398 =D*H
volume; tracked as % of receivables (row H)
Depreciation on automobiles leased to consumers;
correlates
Q Leased vehicles depreciation $1 $36 recorded on straight-line basis over lease term; vehicles
with K
depreciated to estimated residual value
S Interest expense $681 $837 =B*G Owned receivables multiplied by interest expense %
=P+Q+
T Total expenses $1,808 $2,403
R+S
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 38 of 241
EchoStar (Nasdaq: SATS) Englewood, CO, 303-723-1000
Services: Broadcasting & Cable TV http://www.echostar.com
$45
$40
$35
$30
$25
$20 c
$15
$10
$5
$0
Jan 00 Jan 00 Jan 00 Jan 00 Jan 00 Jan 00 Jan 00 Jan 00 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 39 of 241
BUSINESS OVERVIEW • Capable, interested management led by Charlie
EchoStar was spun off from DISH Network in early 2008. Ergen (54). Ergen co-founded DISH Network in
The company operates a digital set-top box business and is 1980. He still serves as chairman and CEO of both
developing a fixed satellite services business using its fleet of DISH and EchoStar. Ergen owns 50% of EchoStar.
owned and leased in-orbit satellites. • $500 million buyback commenced in 3Q08.
EchoStar owns most of the real estate it uses. The assets are • Shares trade at .4x EV to trailing revenue and .5x
located primarily in the Western U.S. and include the tangible book value.
headquarters in Englewood, CO (476,000 sq ft), engineering
offices, digital broadcast centers, and call and data centers. INVESTMENT RISKS & CONCERNS
• DISH accounted for 84% of revenue in 2007 —
SELECTED OPERATING DATA concentration risk mitigated by Ergen’s control.
FYE December 31 2005 2006 2007 • Set-top box competition from Motorola, Pace and
% of revenue by customer: Cisco/SFA. Barriers include long-term deals and the
DISH Network 86% 84% 84%
Bell ExpressVu 11% 12% 11% fact that some competitors own the conditional
Other 3% 3% 6% access technology deployed by their customers.
Revenue growth by customer: • Fixed satellite services competition from Intelsat,
DISH Network -16% -1% 0%
SES Americom and Telesat Canada.
Bell ExpressVu 38% 8% -12%
Other -13% 12% 70% • Tivo case. In January 2008, an appeals court upheld
Total revenue growth -12% 1% 1% a jury verdict that EchoStar infringed a Tivo patent.
% of revenue by geography: The company has appealed to the Supreme Court.
U.S. 96% 95% 93%
Europe 4% 5% 7%
• Does not carry insurance for in-orbit satellites.
• Technology obsolesce risks. If viewers become
INVESTMENT HIGHLIGHTS able to use PCs, TVs or network-based DVRs
• Post-spinoff EchoStar well-positioned to pursue instead of set-top boxes, sales might decline.
new customers. Set-top box buyers may have • Dependent on competitiveness of satellite TV
perceived EchoStar as a competitor when it was versus cable TV and alternatives, at least for now.
owned by DISH Network. Some may still hesitate • Cross officerships with DISH. EchoStar has a
to partner with the company due to Charlie Ergen’s management services deal in place with DISH.
continuing control of both EchoStar and DISH.
• High-ROIC, non capital-intensive set-top box COMPARABLE PUBLIC COMPANY ANALYSIS
Market Enterprise Price This Next
business. Growing market acceptance of HDTV is Value Value
EV /
to T. FY FY
driving demand for set-top boxes, which account for Rev.
($mn) ($mn) Book P/E P/E
the vast majority of EchoStar’s revenue. CSCO 94,270 71,590 1.8x 4.2x 13x 13x
• Cost-plus deal with top customer DISH Network, MOT 8,770 5,980 .2x 1.3x n/m 18x
with pro forma gross margin of 13% in 2007. This SATS 1,360 760 .4x 0.5x n/m 47x
below-market margin may expand over time.
• Potential replacement cycle, as HDTV requires MAJOR HOLDERS
advanced compression and security in set-top boxes. There are 42 million Class A shares out (one vote per share)
• Regulatory changes benefit EchoStar: (1) It has and 48 million Class B shares out (ten votes per share).
entered millions of homes with digital converter Charlie Ergen 50% (80% voting power) │ Other insiders 5%
devices that help consumers meet a digital broadcast │ Harris Associates 5% │ Greenlight 3% │ Blue Ridge 3%
mandate. (2) An FCC mandate that cable providers
use removable modules for conditional access RATINGS
security improves EchoStar’s ability to compete. VALUE Intrinsic value materially higher than market value?
• Growing international sales of set-top boxes. MANAGEMENT Capable and properly incentivized?
Global markets offer the “best opportunities” for FINANCIAL STRENGTH Solid balance sheet?
new customer acquisition. EchoStar sees strong MOAT Able to sustain high returns on invested capital?
demand for direct-to-home satellite service in EARNINGS MOMENTUM Fundamentals improving?
countries without extensive cable infrastructure. MACRO Poised to benefit from economic and secular trends?
EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 40 of 241
…additional insight into SATS: FIXED SATELLITE SERVICES (FSS) BUSINESS
• This business segment utilizes EchoStar’s nine
SET-TOP BOX BUSINESS in-orbit satellites, related FCC licenses, seven full-
• This business segment provides set-top boxes for service digital broadcast centers, and leased fiber
satellite TV service providers. Most of the boxes optic capacity with POPs in 150 cities. The segment
are sold to DISH, but it also sells set-top boxes to leases transponders, primarily to DISH. Former SES
Bell ExpressVu and other international customers. Americom CEO Dean Olmstead joined EchoStar as
Equipment sales also include Slingboxes. Digital president of the FSS business in January.
broadcast operations include satellite uplinking/ • FSS utilizes six owned and two leased in-orbit
downlinking, transmission services, signal satellites. EchoStar has five regional broadcast
processing, conditional access management, centers that allow it to utilize the spot beam
telemetry, tracking and control, and other services. capabilities of its satellites. Programming is
• Set-top box business employs 700 engineers, received at these centers by fiber or satellite and
allowing the company to customize infrastructure then “uplinked” to EchoStar’s satellites for
solutions for customers. transmission to consumers. The company’s
• Advanced set-top box technology. EchoStar’s set- transponder capacity is used by applications
top boxes allow consumers to control and record including broadcasting, government services
programming through DVR technology integrated (including homeland security and emergency
with satellite receivers. Some of the set-top boxes response), network services (dedicated private
include IPTV functionality, which enables viewers networks for corporations), and satellite transport
to download movies and other content from the services for IP-encapsulated programming.
Internet. EchoStar provides a family of digital set- 2
top boxes, including SD (“standard definition”), Launch Useful Life Gross BV
1
Satellite Status Year (years) ($mn)
SD-DVR, HD (“high definition”), and HD-DVR EchoStar III Owned 1997 12 234
boxes. EchoStar IV Owned 1998 n/a 79
• Sling Media’s Slingbox DVR technology, EchoStar VI Owned 2000 12 244
acquired for $342 million in 2007, allows EchoStar VIII Owned 2002 12 176
EchoStar IX Owned 2003 12 127
consumers to watch and control TV programming at EchoStar XII Owned 2003 10 190
any time, from any location, using PCs, PDAs, AMC-15 Leased 2004 10 3
552
smartphones, and other devices. EchoStar chairman 1
AMC-16 Leased 2005 10
Charlie Ergen was an early investor in Sling Media. In April, the company suspended construction of the owned CMBStar satellite,
due to issues relating to certain performance criteria.
• Outsources manufacturing of set-top boxes, 2
3
Gross book value excludes accumulated depreciation.
primarily to Sanmina-SCI and Jabil. Represents the un-depreciated value of satellites under capital leases.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 41 of 241
A CLOSER LOOK AT INVESTMENT RISKS • Cross officerships and directorships with DISH.
• Set-top box competitors include Motorola, Charlie Ergen serves as chairman and CEO of both
Scientific Atlanta (acquired by Cisco), and Pace. companies; the latter also have significant overlap
Pace (www.pace.com) is a British company trading in directors. In addition, Charlie Ergen has voting
on the LSE under ticker symbol PIC. Key barriers to control and a large economic interest in both
displacing competitors include longstanding companies. EchoStar has a management services
customer relationships and the fact that some agreement in place with DISH. These circumstances
competitors own the conditional access technology not only create conflicts of interest but may also
deployed by their customers. EchoStar would have make it more difficult for EchoStar to convince
to license this technology from the competitors. potential customers that it does not compete against
• Fixed satellite services competitors include them.
Intelsat, SES Americom and Telesat Canada. • Large contingencies and commitments, including
Key barriers to displacing competitors include long- Tivo legal dispute. In January 2008, an appeals
term leases and high switching costs. In addition, court upheld a jury verdict that EchoStar infringed a
Intelsat and SES Americom maintain key North Tivo patent. The company has appealed to the
American orbital slots. The company’s fixed Supreme Court. A settlement involving a substantial
satellite services also compete with terrestrial payment by DISH Network and/or EchoStar may be
communications alternatives. likely in the foreseeable future.
• Tivo patent infringement case. In January, the
U.S. Court of Appeals upheld a Texas jury verdict WHY THE SHARES MAY BE MISPRICED
that certain EchoStar DVRs infringed a Tivo patent. • Growth prospects not evident in historical
The company has appealed to the U.S. Supreme financials. Revenue was $1.51 billion, $1.53 billion
Court. If Tivo ultimately prevails, EchoStar could and $1.54 billion in 2005, 2006 and 2007,
be prohibited from distributing DVRs or be required respectively. While this may give the impression
to modify certain features. The company may also that EchoStar is a stagnant company, it ignores the
have to pay damages. fact that independence from DISH significantly
• Does not carry insurance for in-orbit satellites, improves EchoStar’s ability to win new business.
bearing the risk of any failures. In addition, • Historical income statements understate
satellites have a limited useful life, with EchoStar “normalized” profitability. The company’s
satellites having a “minimum” design life of 12 historical income statements reflect the sale of set-
years. top boxes to DISH at cost, resulting in losses from
• Highly dependent on DISH Network, which operations. The 2007 pro forma income statement
accounted for 84% of revenue in 2007. The shown in the company’s 10-K assumes a weighted-
concentration risk is mitigated by the fact that average gross margin of 13.1% on sales to DISH.
Charlie Ergen effectively controls both companies, EchoStar appears likely to widen this margin over
and that DISH would likely incur large switching time, perhaps significantly. Note that Cisco/SFA
costs if it opted for a new provider. EchoStar and and Motorola’s set-top box margins are roughly
DISH have agreed to a two-year supply deal with twice the margin EchoStar generates on DISH sales.
set prices but no minimum purchase requirement. • Spin-off was completed with no fanfare effective
On the fixed satellite side, DISH has a right to January 1, 2008, a date when most investors pay
cancel the services on short notice. The companies little attention to corporate events. The company has
have no equity stake in each other. had a minimal investor relations effort, perhaps
• Technology evolution and obsolescence risks. reflecting a desire to keep the share price low given
EchoStar’s success depends on the strength of its Charlie Ergen’s 50% economic interest in the value
set-top boxes versus other boxes and various created by the $1 billion authorized stock buyback.
alternatives. If television viewers become able to
use PCs, TVs or network-based DVRs instead of
set-top boxes, EchoStar’s sales would decline.
• Dependent on competitiveness of satellite TV
versus cable TV and other alternatives. As
EchoStar’s current set-top box customers comprise
direct-to-home satellite video providers, the
company’s sales would suffer if those providers lost
market share against alternative programming
delivery channels. We note that EchoStar’s growth
strategy includes expanding the target market for its
set-top boxes to cable TV operators.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 42 of 241
WHAT ARE THE SHARES WORTH?
• We value SATS at $28-44 per share, based on the valuation analysis summarized below.
1
Potential impairments consist of $200 million related to AMC-15 and AMC-16 leased satellites and $100 million related to CMBStar.
2
Based on $13.5 million annual lease payment from DISH to EchoStar and 10% assumed cap rate.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 43 of 241
Buybacks Would Increase Value Beyond $28-$44 per Share
h Repurchases would boost intrinsic value, as the company would trade cash for undervalued shares.
The math works as follows:
How much would EchoStar be worth per share after the buyback?
Assumed $100 million $250 million $500 million
purchase price: buyback buyback buyback
$10 per share $30-$48 per share $35-$57 per share $50-$87 per share
$14 per share $29-$47 per share $31-$52 per share $37-$64 per share
$15 per share $29-$46 per share $31-$51 per share $35-$61 per share
$20 per share $28-$46 per share $29-$48 per share $31-$53 per share
Source: The Manual of Ideas estimates.
Most realistic fair value
scenario by end of 2009
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 44 of 241
Greenlight Capital Re (Nasdaq: GLRE) Grand Cayman, Cayman Islands, 345-745-4573
Financial: Insurance (Property & Casualty) http://www.greenlightre.ky
$30
$25
$20
$15
$10
$5
$0
Jan 00 Jan 00 Jan 00 Jan 00 Jan 00 Jan 00 Jan 00 Jan 00 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 45 of 241
BUSINESS OVERVIEW • Disciplined, differentiated underwriting strategy.
Greenlight Re is a reinsurer whose investment portfolio is Greenlight Re offers excess of loss and quota share
managed by David Einhorn’s investment firm. Greenlight Re products in the property and casualty market,
provides custom-tailored specialty property and casualty focusing on customized solutions rather than
reinsurance to the insurance, risk retention group, captive, participating in broadly available opportunities. The
and financial markets. Established in 2004, Greenlight Re company seeks to maximize long-term results rather
selectively offers customized solutions in markets where than manage for interim or GAAP performance.
capacity and alternatives are limited. The company has a goal Management is compensated based on multi-year
of maximizing long-term growth in book value per share. underwriting performance rather than premium
volume or short-term results. Greenlight Re seeks to
SELECTED OPERATING DATA act as lead underwriter for most premiums written.
($ in millions) YTD • Business sourced mostly through reinsurance
FYE December 31 2005 2006 2007 9/30/08
1 brokers, providing the company with variable-cost
Gross premiums written by risk category:
Frequency -- $58 $77 $105 global distribution (commissions are based on gross
Severity -- 16 50 28 premiums written). Brokers have no authority to
Total -- $74 $127 $134 bind the company to any reinsurance contract.
Gross premiums written by line of business:
Property
2
-- $68 $59 $10
• A- (excellent) financial strength rating from
Casualty
3
-- 6 46 67 A.M. Best — the 4th-highest of 15 ratings. The
Specialty
4
-- 0 23 57 outlook is stable. The rating assumes that the
Gross premiums written by geographic area of risk: investment portfolio may be 100% in equities.
U.S. -- $64 $80 $114 Greenlight Re has an unencumbered balance sheet,
Non-U.S. -- 5 3 1
Worldwide
5
-- 4 45 19 with book value of $518 million and liabilities of
Selected underwriting ratios (based on GAAP results):
6
$598 million at Q3-end (includes $370 million of
Loss ratio -- 36% 40% 45% securities sold short in the investment portfolio).
Acquisition cost ratio -- 39% 40% 39%
• “Cradle to grave” service philosophy, with
Internal expense ratio -- 34% 12% 14%
Combined ratio -- 110% 92% 97% reinsurance contracts administered by the same
Investment return
7
14% 24% 6% -13% individuals who underwrote the contracts.
Book value per share $11.63 $14.27 $16.57 $14.22 • No direct “open-end fund” risk. Greenlight Re’s
Change (y-y) 14% 23% 16% -10% equity base is committed and cannot be withdrawn,
1
Retrocessional contracts related to frequency reinsurance had gross ceded
premiums of $26 million in 2007 (no retrocessional coverage in 2006). unlike assets in a mutual or hedge fund. As such,
2
3
Includes commercial lines and personal lines. Greenlight Re can invest almost exclusively for
Includes General liability, marine, motor liability, and professional liability.
4
Includes health and medical malpractice.
long-term return maximization. (We note that
5
6
Worldwide risk comprises policies that insure risks on a worldwide basis. Einhorn’s hedge fund is open-ended—withdrawals
The composite ratio of frequency and severity business was 94% and 42%, there could pressure Re’s mark-to-market portfolio.)
respectively, in 2007 (compared to 97% and 45%, respectively, in 2006).
7
Investment return was -13% in October and +3% in November 2008. • Little leverage in investment operations. While
8
Numerator includes assumed proceeds from future exercise of stock options. Greenlight’s portfolio entails some gross leverage
due to short-selling activities, net exposure is
INVESTMENT HIGHLIGHTS typically well below 100% of net equity. The low
• David Einhorn is one of the most successful leverage lowers the long-term risk profile.
investors of the past decade. Since inception in • $50 million personal investment by Chairman
1996, Greenlight Capital’s flagship long-short fund David Einhorn. Einhorn purchased Class B shares
has posted annualized net returns of 20+%.* at the IPO price of $19 per share in conjunction with
• Focus on superior returns from both sides of the company’s public offering in May 2007. While
balance sheet. Traditional reinsurers focus Einhorn has certain conflicts of interest in his
primarily on one side of the balance sheet, seeking various roles, the purchase of shares indicates his
to grow their underwriting businesses while commitment to the success of Greenlight Re. We
managing their float portfolio primarily for also note Einhorn’s strong track record of creating
avoidance of loss or drastic underperformance. This value for his hedge fund investors. Einhorn’s
results in most reinsurers making large investments management fee of 1.5% is below the industry
in high-grade fixed-income and other low-yielding “standard” of 2.0%, despite the fact that Einhorn’s
securities. Greenlight Re, on the other hand, appears superior performance may warrant a higher fee.
likely to derive at least as much value from its • Share repurchase authorized in August. The
investment activities as it may from underwriting. Board authorized a buyback of two million shares.
• Favorable tax treatment due to Cayman Islands We view buybacks at multiples of less than 1.5x
location. Greenlight Re pays income taxes neither book value as accretive to intrinsic value per share.
in the Cayman Islands nor in the U.S., effectively • Shares trade at .9x tangible book value.
making it a “pass-through” entity for investors.
*
Source: The Manual of Ideas estimates.
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INVESTMENT RISKS & CONCERNS COMPARABLE PUBLIC COMPANY ANALYSIS
• Limited loss experience. While Greenlight Re has Market Price to This Next
Price FY End
an experienced management team, the company has ($)
Value Tangible FY FY
Date
paid relatively few claims to date, and it is difficult ($mn) Book P/E P/E
BRK.A 88,140 136,540 1.6x 16x 15x Dec-31
to evaluate the appropriateness of loss reserves.
TRV 40.40 23,620 1.1x 7x 7x Dec-31
• Exposure to natural disasters. The maximum
CB 41.50 14,630 1.1x 8x 8x Dec-31
aggregate loss exposure to any series of natural peril
ACE 42.30 14,120 1.0x 6x 5x Dec-31
events was $76 million at yearend 2007.
FFH 325.80 5,970 1.3x n/a n/a Dec-31
• Underwriting dependent on A.M. Best rating. PRE 67.60 3,820 1.0x 7x 7x Dec-31
Should A.M. Best downgrade the company—either LUK 15.70 3,650 .6x n/a n/a Dec-31
as a result of higher-than-expected losses on MKL 308.90 3,030 1.5x 14x 13x Dec-31
policies, or large losses in the fairly concentrated TRH 36.00 2,390 .7x 6x 5x Dec-31
investment portfolio—Greenlight Re may become AIG 0.90 2,290 .0x n/m 6x Dec-31
unable to write new business on favorable terms. XL 4.30 1,430 .2x 2x 2x Dec-31
• Needs to maintain letters of credit to write GLRE 13.10 473 .9x n/a n/a Dec-31
certain business, as the company is licensed and
admitted as a reinsurer in the Cayman Islands only.
Many banks prefer fixed-income collateral to the MAJOR HOLDERS
company’s non-traditional investment portfolio.
Chairman David Einhorn 17% │ CEO Len Goldberg 1% │
• Risk of Passive Foreign Investment Company Other insiders 1% │ Khronos 8% │ Morgan Stanley 7% │
treatment. PFIC investors face adverse U.S. tax Montpellier 6% │ Royal Capital 4% │ Third Point 2%
consequences. Greenlight Re does not believe it is a
PFIC, as the determination criteria exclude income RATINGS
derived while conducting an insurance business. VALUE Intrinsic value materially higher than market value?
• Competitive industry. Both the reinsurance and MANAGEMENT Capable and properly incentivized?
investment management industries are highly FINANCIAL STRENGTH Solid balance sheet?
competitive, and perceived sustainable competitive MOAT Able to sustain high returns on invested capital?
advantage often proves fleeting. Nonetheless, we EARNINGS MOMENTUM Fundamentals improving?
believe Greenlight Re enjoys a sustainable MACRO Poised to benefit from economic and secular trends?
advantage on the investment side, and it is likely to EXPLOSIVENESS 5%+ probability of 5x upside in one year?
do above average on the underwriting side.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 47 of 241
GREENLIGHT CAPITAL RE – BOOK VALUE MULTIPLE: WHAT IS “FAIR”?
We argue that Greenlight Re deserves to trade at a premium to book value due to the likelihood that Greenlight’s
investment portfolio, managed by David Einhorn, will beat the market over time.
h As the following table shows, Greenlight Re may deserve a book value multiple of 2.1x, assuming a 12%
net investment return for Greenlight versus 8% for the broader market and a 20-year horizon of outperformance.
Assuming outperformance over the next ten years only, the fair value multiple drops to 1.4x.
Analysis of Fair Book Value Multiple Assuming 12% Long-Term Investment Return vs. 8% Market Return (1)
Compounding of $1 at Performance Difference Current "Fair" Multiple
Selected Rates of Return Future Present of Book Value Based
12% 8% Value Value on Length of Assumed
Year 0 $1.00 $1.00 (8% rate) Future Outperformance
Year 1 1.12 1.08 $0.04 $0.04 1.0x
Year 2 1.25 1.17 0.09 0.08 1.1x
Year 3 1.40 1.26 0.15 0.12 1.1x
Year 4 1.57 1.36 0.21 0.16 1.2x
Year 5 1.76 1.47 0.29 0.20 1.2x
Year 6 1.97 1.59 0.39 0.24 1.2x
Year 7 2.21 1.71 0.50 0.29 1.3x
Year 8 2.48 1.85 0.63 0.34 1.3x
Year 9 2.77 2.00 0.77 0.39 1.4x
Year 10 3.11 2.16 0.95 0.44 1.4x
Year 11 3.48 2.33 1.15 0.49 1.5x
Year 12 3.90 2.52 1.38 0.55 1.5x
Year 13 4.36 2.72 1.64 0.60 1.6x
Year 14 4.89 2.94 1.95 0.66 1.7x
Year 15 5.47 3.17 2.30 0.73 1.7x
Year 16 6.13 3.43 2.70 0.79 1.8x
Year 17 6.87 3.70 3.17 0.86 1.9x
Year 18 7.69 4.00 3.69 0.92 1.9x
Year 19 8.61 4.32 4.30 1.00 2.0x
Year 20 9.65 4.66 4.99 1.07 2.1x
h As the following table shows, Greenlight Re may deserve a book value multiple of 3.5x, assuming a 15%
net investment return for Greenlight versus 8% for the broader market and a 20-year horizon of outperformance.
h It is reasonable to cap the fair value multiple at 2x-3x, as the company may issue stock at higher multiples in
order to “arbitrage” the spread between market value and book value.
Analysis of Fair Book Value Multiple Assuming 15% Long-Term Investment Return vs. 8% Market Return (1)
Compounding of $1 at Performance Difference Current "Fair" Multiple
Selected Rates of Return Future Present of Book Value Based
15% 8% Value Value on Length of Assumed
Year 0 $1.00 $1.00 (8% rate) Future Outperformance
Year 1 1.15 1.08 $0.07 $0.06 1.1x
Year 2 1.32 1.17 0.16 0.13 1.1x
Year 3 1.52 1.26 0.26 0.21 1.2x
Year 4 1.75 1.36 0.39 0.29 1.3x
Year 5 2.01 1.47 0.54 0.37 1.4x
Year 6 2.31 1.59 0.73 0.46 1.5x
Year 7 2.66 1.71 0.95 0.55 1.6x
Year 8 3.06 1.85 1.21 0.65 1.7x
Year 9 3.52 2.00 1.52 0.76 1.8x
Year 10 4.05 2.16 1.89 0.87 1.9x
Year 11 4.65 2.33 2.32 1.00 2.0x
Year 12 5.35 2.52 2.83 1.12 2.1x
Year 13 6.15 2.72 3.43 1.26 2.3x
Year 14 7.08 2.94 4.14 1.41 2.4x
Year 15 8.14 3.17 4.96 1.57 2.6x
Year 16 9.36 3.43 5.93 1.73 2.7x
Year 17 10.76 3.70 7.06 1.91 2.9x
Year 18 12.38 4.00 8.38 2.10 3.1x
Year 19 14.23 4.32 9.92 2.30 3.3x
Year 20 16.37 4.66 11.71 2.51 3.5x
(1) Analysis assumes that entire book value participates in performance of investment portfolio. Adjusting this assumption downward would also
result in a downward adjustment to the current fair multiple of book value.
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WHAT ARE THE SHARES WORTH? NEAR-TERM CATALYSTS
• We value GLRE at $19-26 per share, based on • Strong quarter of investment performance may
fair value multiples of book of 1.4x-1.9x. We lead to swift price-to-book revaluation, as
believe this to be a conservative range, based on investor skittishness about Einhorn might be
expected long-term investment outperformance. alleviated. While timing is speculative, Greenlight
− At the low end, we assume that outperformance could turn around results as early as 1Q09.
persists for the next 10 years, with net returns of • Second-largest recent investment loser has high
12% per year versus market returns of 8% per year. likelihood of turning into winner. Greenlight has
− At the high end, we assume that outperformance suffered large mark-to-market losses from a
persists for the next 10 years, with net returns of long/short trade in Porsche and Volkswagen shares.
15% per year versus market returns of 8% per year. While this trade has been a spectacular failure to
• Underwriting: Our value estimate assumes that date, we have developed high conviction in this
reinsurance underwriting operations neither create position through our own research. As a result, we
nor impair material shareholder value over time. We believe Greenlight will be vindicated—possibly in
believe this to be a conservative assumption. the next few months—providing a major positive
• Share repurchases: Our value estimate assumes catalyst to investment performance. We note that
that management does not increase per-share Greenlight is not at the mercy of margin calls due to
intrinsic value through opportunistic buybacks. We a policy of avoiding portfolio leverage.
believe this to be a very conservative assumption, as
the company has commenced a buyback program. SELECTED OPERATING DATA AND METRICS
GLRE – Gross Premiums Written, 2Q06-3Q08
Greenlight Capital Re — Valuation Summary
The company has succeeded in the goal of making frequency
Fair Value Range business a large percentage of overall underwriting volume, thereby
Low High lowering exposure to catastrophe losses. In addition, as the volatility
of underwriting volume suggests, management has been disciplined
Diluted book value per share at 9/30/08 $14.22 $14.22
and opportunistic about the kind of business it has written. The
10/1/08-1/30/09 investment result -4.7% -4.7% company’s stated goal is not to grow premium volume but to seek out
Assumed decline in per-share book value -6.7% -4.7% business with favorable risk-return characteristics.
Est. book value per share at 2/1/09 $13.27 $13.55 $80mn
Fair value multiple of book value 1.4x 1.9x Severity
Frequency
Estimated per-share value of GLRE $19 $26 $60mn
Source: Company filings, The Manual of Ideas estimates and analysis.
$40mn
WHY THE SHARES MAY BE MISPRICED
• Investors myopically focused on recent losses. In $20mn
predictable fashion, the market has abandoned
Greenlight Re during a period of weak investment $0mn
results, ignoring Einhorn’s track record and likely
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
future outperformance. Conceptually, the ideal time
to buy into any “closed-end” vehicle managed by a Source: Company, The Manual of Ideas.
top-notch investor is during a temporary period of
underperformance, as the vehicle might be available GLRE – Net Investment Performance, 3Q04-4Q08
at a big discount to fair value — this is such a time. Greenlight Re reported positive investment performance in 14 of the
• Investors ignore the fact that recent losses are 17 quarters since it commenced investment operations in 3Q04. Prior
to the 3Q08 record loss of 16%, the largest quarterly investment loss
“good” in the context of S&P 500 performance.
was 4% in 1Q07. Annual data is as follows: +5% in 2004, +14% in
Greenlight Re’s investment portfolio declined 18% 2005, +24% in 2006, +6% in 2007, and -18% in 2008.
in 2008, compared to a decline of 37% for the S&P
10%
500 (total return index). While it’s true that the
performance of Greenlight’s long/short portfolio 5%
might be more appropriately measured against 0%
short-term government yields, the point is that -5%
Einhorn’s investment skill has enabled Greenlight to
outperform major stock market indices in times -10%
good and bad. There is no reason to believe this will -15%
change. In fact, recent market turmoil has likely -20%
taught Einhorn some important lessons and made
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 49 of 241
GREENLIGHT CAPITAL RE – SELECTED OPERATING DATA AND DRIVERS
($ in millions, except per share data) FYE December 31, YTD
2005 2006 2007 9/30/07 9/30/08 3Q07 3Q08
Diluted book value per share (8) $11.63 $14.27 $16.57 $15.78 $14.22 $15.78 $14.22
Change (y-y) 14% 23% 16% n/a -10% n/a -10%
(1) Retrocessional contracts related to frequency reinsurance had gross ceded premiums of $26 million in 2007 (no coverage in 2006).
(2) Includes commercial lines and personal lines.
(3) Includes General liability, marine, motor liability, and professional liability.
(4) Includes health and medical malpractice.
(5) Worldwide risk comprises policies that insure risks on a worldwide basis.
(6) The composite ratio of frequency and severity business was 94% and 42%, respectively, in 2007 (compared to 97% and 45% in 2006).
(7) Subsequent to 3Q08, investment return was -13% in October and +3% in November 2008.
(8) Numerator includes assumed proceeds from future exercise of stock options.
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Microsoft (Nasdaq: MSFT) Redmond, WA, 425-882-8080
Technology: Software & Programming, Member of S&P 500 http://www.microsoft.com
$70
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$50
$40
$30
$20
$10
$0
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 51 of 241
BUSINESS OVERVIEW • Lowered outlook in January; expects revenue and
Microsoft, founded in 1975, is the world’s largest software EPS to fall in 2H09. Management did not provide
firm. It operates in five segments: Client (Windows OS), specific revenue or earnings guidance but set opex
Server and Tools (Windows & SQL Server), Online Services target of $27 billion for FY09.
(MSN), Microsoft Business (Office, Project, Visio, • Cheaper than EBIT-to-EV yield suggests. As
Exchange, Live Meeting), and Entertainment and Devices MSN and Xbox are still roughly breaking even,
(Xbox, Zune, Windows Mobile, Windows Embedded). their value is not reflected in the EBIT-to-EV yield
metric. As a result, investors should value MSN and
SELECTED OPERATING DATA Xbox based on metrics other than trailing earnings.
FYE June 30 2006 2007 2008 1H09 • Shares trade at 10% trailing FCF yield, 10x
% of revenue by segment:
Client 30% 29% 29% 26%
trailing P/E and 11x forward P/E.
Server & Tools 21% 22% 22% 23%
Online Services Business 6% 5% 5% 5% INVESTMENT RISKS & CONCERNS
Microsoft Business Division 33% 33% 32% 31% • To lay off 5,000 people as part of $1.5 billion opex
Entertainment and Devices 9% 11% 12% 16%
Revenue growth by segment: reduction and $700 million capex reduction.
Client 10% 15% 13% -3% • Competitive threats from Google, open source
Server & Tools 16% 15% 18% 16% software, SaaS, etc. Microsoft is aggressively trying
Online Services Business -2% 6% 32% 7% to win business away from Google and appears to
Microsoft Business Division 9% 13% 15% 10%
Entertainment and Devices 38% 26% 34% -1% be the front runner on a competitive deal to supply
∆ revenue 11% 15% 18% 5% search and advertising on Verizon mobile phones.
•
1
∆ deferred revenue 19% 16% 21% 7% Lower-than-expected demand for Vista, Office or
EBIT margin by segment: Xbox 360 could significantly slow top-line growth.
Client 79% 77% 77% 76%
Server & Tools 33% 33% 35% 37% • Pursuit of Yahoo may reflect limited high-ROC
Online Services Business 5% -25% -38% -58% reinvestment opportunities and concerns regarding
Microsoft Business Division 67% 66% 65% 66% Google. Microsoft does not plan to rebid for Yahoo.
Entertainment and Devices -27% -32% 5% 7%
Total EBIT margin 37% 36% 37% 38%
% of revenue by geography:
COMPARABLE PUBLIC COMPANY ANALYSIS
U.S. 63% 61% 59% n/a Market Enterprise Price This Next
EV /
Other countries 37% 39% 41% n/a Value Value to T. FY FY
Rev.
Revenue growth by geography: ($mn) ($mn) Book P/E P/E
U.S. 10% 12% 15% n/a GOOG 112,580 96,730 4.4x 5.0x 17x 15x
Other countries 14% 21% 24% n/a ORCL 89,420 90,010 3.8x n/m 12x 11x
1
Represents y-y change in period-end deferred (unearned) revenue. Deferred YHOO 17,790 14,340 2.0x 2.4x 34x 29x
revenue was $13 billion at 2Q09-end, equal to one-fifth of annual revenue.
MSFT 169,720 151,010 2.4x 8.4x 11x 10x
INVESTMENT HIGHLIGHTS
• Parlayed ownership of PC operating systems into
MAJOR HOLDERS
leadership in enterprise software, Internet services, Bill Gates 9% │ Steve Ballmer 4% │ Other insiders <1% │
and gaming. The company now generates almost as Barclays 4% │ State Street 3% │ Cap Re 3%
much EBIT from business software as it does from
Windows OS. While MSN online services and RATINGS
Xbox are not yet contributing to profitability, they VALUE Intrinsic value materially higher than market value?
have the potential to become major profit drivers. MANAGEMENT Capable and properly incentivized?
FINANCIAL STRENGTH Solid balance sheet?
• Sales, EBIT, EPS up 18%, 21%, 32% in FY08.
MOAT Able to sustain high returns on invested capital?
Performance drivers included Windows Vista,
EARNINGS MOMENTUM Fundamentals improving?
Office 2007, server software, and Xbox 360.
MACRO Poised to benefit from economic and secular trends?
• Authorized $40 billion repurchase in September; EXPLOSIVENESS 5%+ probability of 5x upside in one year?
has returned $115 billion to shareholders through
buybacks and dividends in the last five years.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 52 of 241
…additional insight into MSFT: POTENTIAL EPS ACCRETION FROM SHARE REPURCHASES
• We estimate EPS accretion of $0.11-$0.13 over
WHAT ARE THE SHARES WORTH? the next twelve months (NTM), assuming $40
• We value Microsoft at $36-47 per share, based on billion spent on incremental share repurchases and
the sum-of-the-parts valuation analysis summarized an average price paid of $26-30 per share.
below. Upside to our value estimate could come • Microsoft treasurer George Zinn: “…strong
from share repurchases and improving profitability credit quality coupled with investors’ current
of the Xbox and MSN.com businesses. appetite for high quality paper provides a unique
• Deserves premium valuation due to defensible opportunity for the company to establish its first-
moat and stability of earnings and free cash flow. ever commercial paper program and enhance its
capital structure.” (September 22, 2008)
Microsoft — Sum-of-the-Parts Valuation Summary1 • The following analysis shows EPS accretion
($ in millions, except per share data) Low High sensitivity to various assumptions of repurchase
2
Value Value amount and purchase price per share.
Value of excess marketable assets:
Cash and equivalents $8,346 $8,346
Short-term investments 12,369 12,369 Potential NTM Share Repurchases
Long-term investments 3,922 3,922 ($ and shares in millions, except per share data)
Short-term debt (2,469) (2,469) NTM Repurchase Amount
Price paid
Net cash and investments $22,168 $22,168 per share
3 $20,000 $40,000 $60,000
Cash needed to run business (2,000) (1,000)
Total $20,168 $21,168 $20.00 1,000 2,000 3,000
$22.00 909 1,818 2,727
Value of Client:
$24.00 833 1,667 2,500
LTM EBIT 12,493 12,493
Fair value multiple of LTM EBIT
4
8x 9x $26.00 769 1,538 2,308
Total $99,944 $112,437 $28.00 714 1,429 2,143
Value of Business Division: $30.00 667 1,333 2,000
LTM EBIT 12,921 12,921 $32.00 625 1,250 1,875
5
Fair value multiple of LTM EBIT 7x 9x $34.00 588 1,176 1,765
Total $90,447 $116,289
Value of Server and Tools:
LTM EBIT 22,128 22,128
NTM Weighted-Average Shares Outstanding1,2
Fair value multiple of LTM EBIT
6
7x 9x ($ in millions, except per share data)
Total $154,896 $199,152 Price paid NTM Repurchase Amount
Value of Entertainment and Devices: per share $20,000 $40,000 $60,000
LTM revenue 8,113 8,113 $20.00 8,880 8,380 7,880
7
Fair value multiple of LTM revenue 1x 2x $22.00 8,925 8,471 8,016
Total $8,113 $16,226
$24.00 8,963 8,547 8,130
Value of Online Services Business: $26.00 8,995 8,611 8,226
LTM revenue 3,316 3,316
8 $28.00 9,023 8,666 8,309
Fair value multiple of LTM revenue 2x 4x
Total $6,632 $13,264 $30.00 9,047 8,713 8,380
$32.00 9,068 8,755 8,443
Value Offset of Corporate Overhead:
$34.00 9,086 8,792 8,498
LTM operating loss (6,947) (6,947) 1
Based on 9.4 billion diluted shares outstanding currently.
Fair value multiple of LTM loss 8x 9x 2
Assumes weighted average repurchase date six months from today.
Total ($55,576) ($62,523)
Estimated fair value of MSFT $324,624 $416,013 NTM EPS Accretion From Incremental Buybacks3,4
per share $36 $47 ($ in millions, except per share data)
1
Does not include incremental value of $40 billion buyback plan.
2
Based on balance sheet values as of December 31, 2008. Price paid NTM Repurchase Amount
3
Represents MOI estimate. per share $20,000 $40,000 $60,000
4
Multiples reflect near-monopoly status and 14% FY08 EBIT growth.
5
Multiples reflect very strong margin profile and 15% FY08 EBIT growth. $20.00 $0.09 $0.20 $0.31
6
Multiples reflect strong margin profile and 26% FY08 EBIT growth. $22.00 $0.08 $0.17 $0.27
7
Multiples reflect strong Xbox market position and 34% FY08 revenue growth.
8
Multiples reflect large online opportunity and 32% FY08 revenue growth. $24.00 $0.07 $0.15 $0.24
Source: Company filings, The Manual of Ideas estimates and analysis. $26.00 $0.06 $0.13 $0.21
$28.00 $0.06 $0.12 $0.19
WHY THE SHARES MAY BE MISPRICED $30.00 $0.05 $0.11 $0.17
• Viewed as unexciting by many technology $32.00 $0.05 $0.10 $0.15
investors, despite 18% revenue growth in FY08. $34.00 $0.04 $0.09 $0.14
3
• Headline earnings ignore value of Xbox and 4
Assumes 2.0% interest rate and 40% effective tax rate.
Assumes NTM net income of $20.0 billion (prior to lost interest income).
MSN businesses, making a sum-of-the-parts
valuation analysis necessary to judge fair value.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 53 of 241
MANAGEMENT’S VIEW OF BUSINESS
Selected slides from 2Q09 call on January 22:
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 54 of 241
HISTORICAL RANGE OF P/E MULTIPLES, CY 1986-2009 MSFT – Y-Y EPS Growth, FY 2001–1H09
At less than 10x EPS, Microsoft recently traded at the bottom of its EPS growth has been volatile this decade, driven by major new
historical P/E trading range. product releases and investments in emerging businesses. EPS
declined 1% y-y in 1H09, and management is guiding for an
additional decline in 2H09. The company has quite a bit of latitude in
influencing FY09 EPS due to the large size and accretive nature of
the share repurchase plan announced in September 2008.
60%
45%
30%
15%
0%
-15%
-30%
1H09
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
Source: Company, The Manual of Ideas. Source: Company, The Manual of Ideas.
$25bn 30%
$0bn 20%
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
1H09
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
Source: Company, The Manual of Ideas. Source: Company, The Manual of Ideas.
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY02
FY03
FY04
FY05
FY06
FY07
FY08
Source: Company, The Manual of Ideas. Source: Company, The Manual of Ideas.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 55 of 241
SEGMENT #1: CLIENT • Revenue primarily from online ads and
(29% of FY08 revenue, 77% EBIT margin) secondarily from subscriptions and transactions
• Comprises Windows OS, including Vista, XP, related to paid services, as well as ancillary services.
Media Center, and Tablet PC Edition. The segment • Competitors include AOL, Google and Yahoo,
leads the ongoing development of Windows and whose Internet search and media properties connect
manages relationships with PC makers. users and advertisers. Google leads in online ad
• Key revenue driver is worldwide PC shipments, revenue related to search and syndication.
with OEMs accounting for 80% of revenue. • Launched new releases of Windows Live and
• Competitors include Unix and Apple’s operating adCenter in FY08. It also acquired aQuantive, a
system. Linux is available for free under a general next-generation advertiser and publisher solution.
public license, with variants sold by HP, IBM and
Sun. Apple has gained share, particularly in the U.S. SEGMENT #4: BUSINESS
consumer segment where it has benefited from the (32% of FY08 revenue, 65% EBIT margin)
enormous success of the iPod and iPhone. • Includes Microsoft Office, Project, Visio,
• Released Windows Vista in FY07, with advances SharePoint Server, Exchange Server, Live Meeting,
in security, digital media, and user interfaces. Tellme, and other business software.
• 90%+ of revenue from Office system offerings,
SEGMENT #2: SERVER AND TOOLS with growth driven by new Office features and new
(22% of FY08 revenue, 35% EBIT margin) offerings in areas such as content management,
• Includes Windows Server operating system, collaboration, and unified communications.
Microsoft SQL Server, Microsoft Enterprise • 80% of revenue from businesses, 20% from
Services, Visual Studio, System Center products, consumers. Businesses buy Office through volume
Forefront security products, and Biz Talk Server. licensing, with revenue driven by the number of
• Revenue from multi-year licensing deals (45% of workers using Office (not highly correlated with PC
revenue), fully packaged product and transactional shipments). Consumers buy products through OEMs
volume licensing programs (25%), OEM licenses in connection with new PC shipments.
(10%), and services (20%). • Competitors to Office system products include
• Competitors in server operating systems include Apple, Corel (WordPerfect), Google (Apps), IBM
(1) vertically integrated computer makers such as (Smartsuite, Notes, Workplace), Novell, Oracle,
HP, IBM, Sun, which sell versions of Unix along Red Hat, and Sun. OpenOffice.org provides a free
with hardware; (2) companies such as Novell and cross-platform application. Web-based offerings
Red Hat, which provide versions of Linux; and (3) such as AjaxWrite, gOffice, iNetOffice, SimDesk,
server virtualization providers such as VMware. ThinkFree, and wikiCalc also compete with Office.
• Competitors in enterprise-wide computing However, the alternatives generally lack rich
include (1) companies that provide J2EE-compliant functionality and are marketed with low-priced PCs.
solutions, including IBM and Sun; (2) server • Competitors to business management products
application providers such as CA, IBM and Oracle; (Microsoft Dynamics) include Intuit and Sage in
(3) open source software, including Linux, Apache, the SMB market, and Oracle and SAP in the
MySQL, and PHP; and (4) Java middleware, enterprise market. These competitors have much
including JBoss, Geronimo and Spring Framework. greater market share and stronger product offerings
• Other competitors include (1) System Center than do competitors in the Office market segments.
competitors HP, BMC, CA, and IBM; (2) Forefront
competitors McAfee, Symantec and Trend Micro; SEGMENT #5: ENTERTAINMENT AND DEVICES
(3) Adobe, BEA, Borland, IBM, Oracle, Sun, and (12% of FY08 revenue, 5% EBIT margin)
the Eclipse open source project, which compete • Includes Xbox 360 console and games, Zune,
against Microsoft products for software developers. Mediaroom, mice and keyboards, Windows Mobile
• Released new versions of Windows Server and software, and Windows Embedded device OS.
Visual Studio in FY08; plans to release new • Competitors to Xbox video game consoles
version of SQL Server in FY09. Windows Server include Sony’s PlayStation and Nintendo’s Wii.
includes virtualization technologies that compete Zune competes with Apple’s iPod. Windows
with VMware’s software offerings. Mobile software Apple, Nokia, Openwave, Palm,
Qualcomm, RIM, and Symbian.
SEGMENT #3: ONLINE SERVICES BUSINESS • Released Xbox 360 in 2005, while Nintendo and
(5% of FY08 revenue, -38% EBIT margin) Sony released new versions of their consoles in
• Consists of MSN online portals, Live Search, an 2006. The console life cycle averages 5-7 years.
online advertising platform for web publishers and
advertisers, Hotmail email, instant messaging, and
AvenueA Razorfish media agency services.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 56 of 241
Premier Exhibitions (Nasdaq: PRXI) Atlanta, GA, 404-842-2600
Services: Recreational Activities http://www.prxi.com
$20
$18
$16
$14
$12
$10
$8 c
$6
$4
$2
$0
Jan 00 Jan 00 Jan 00 Jan 00 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 57 of 241
BUSINESS OVERVIEW • 16% holder Mark Sellers succeeded in removing
Premier develops touring, museum-quality exhibitions former CEO Geller in January. Four individuals
presented in museums, exhibition centers, and other venues. chosen by Sellers have been appointed to the Board,
The exhibitions, including Bodies…The Exhibition and with Chris Davino as interim CEO.
Titanic: The Artifact Exhibition, have attracted 20 million • Repurchased $7 million of stock in FY08.
visitors. Since 1994, Premier subsidiary RMS Titanic has • Shares trade at negative trailing FCF yield and
been Salvor-in-Possession of the wreck of the Titanic, as 6x forward P/E (trailing GAAP EPS loss reported).
ordered by a federal district court. RMS has conducted
multiple expeditions, recovering 5,500 artifacts. INVESTMENT RISKS & CONCERNS
Revenue sources include exhibition ticket sales, merchandise • Performing “well below” expectations, with sharp
sales, licensing activities, and sponsorship agreements. declines in per-venue gross margin, sharp rise in
opex and weak international results from Bodies.
SELECTED OPERATING DATA • Disruption due to management turnover. Former
YTD CEO Arnie Geller was terminated in January after
FYE February 28 2006 2007 2008 11/30/08
losing a consent solicitation to Mark Sellers. This
% of revenue by theme:
Bodies 37% 72% 81% 68% change follows the resignations of CEO Eskowitz
Titanic 63% 28% 19% <32%
1
and legal counsel Wainger in August 2008.
% of revenue by type: • May not retain Titanic Salvor-in-Possession
Exhibition 94% 96% 96% 85%
rights indefinitely. While the U.S. Court of
Merchandise and other 6% 4% 4% 15%
% of revenue by geography: Appeals for the Fourth Circuit in 2006 recognized
U.S. 80% 96% 79% 82% Premier’s exclusive right to recover objects from
International 20% 4% 21% 18% the Titanic site, the same court left Premier with
1
Titanic accounted for the vast majority of non-Bodies revenue YTD. non-exclusive rights to photograph and film the
wreck site. In order for Premier to maintain Salvor-
INVESTMENT HIGHLIGHTS in-Possession status, it “must maintain a presence
• Bodies attended by more than five million over the wreck site as interpreted by the courts.” In
visitors since FY05, including in New York, Las addition, an international treaty that does not
Vegas, San Diego, Prague, and Sao Paulo. In FY08, recognize Premier’s Salvor-in-Possession rights was
Premier presented 15 separate human anatomy signed by the U.K. in 2003 and the U.S. in 2004.
exhibitions at 28 venues. The exhibitions include The treaty has yet to take effect, however, as the
displays of dissected human bodies kept from U.S. has not enacted implementing legislation.
decaying through a process known as plastination. • Bodies comprised 68% of revenue YTD 11/30/08.
The 2005 acquisition of Exhibitions International The exhibitions have several competitors. In
gave Premier multi-year licenses and exhibition addition, in May 2008, Premier settled an NYAG
rights to multiple human anatomy exhibitions. inquiry into the sourcing of specimens, allowing the
• Exclusive right to recover objects from the company to operate Bodies without interruption.
Titanic due to Salvor-in-Possession status. Public
interest in the Titanic story remains strong 96 years MAJOR HOLDERS
after she set sail, and Premier’s Titanic exhibitions Non-Sellers insiders 3% │ Mark Sellers 16% │ Former CEO
have attracted audiences in 60+ venues worldwide. Geller 10% │ Tricadia 7% │ Morgan Stanley 5%
In 1993, Premier acquired Titanic Ventures, which
started exploring the Titanic wreck site in 1987. RATINGS
• New exhibitions in pipeline. The exhibitions will VALUE Intrinsic value materially higher than market value?
be conducted under long-term licensing deals and MANAGEMENT Capable and properly incentivized?
may open in late FY09. Sports Immortals will FINANCIAL STRENGTH Solid balance sheet?
present sports memorabilia consisting of one million MOAT Able to sustain high returns on invested capital?
artifacts from great athletes. Dialog in the Dark will EARNINGS MOMENTUM Fundamentals improving?
“provide insight and experience to the paradox of MACRO Poised to benefit from economic and secular trends?
learning to ‘see’ without the use of sight.” EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 58 of 241
…additional insight into PRXI: REVENUE AND MARGIN ANALYSIS
Premier – Revenue, Gross Profit and EBIT, 1Q04-3Q09
WHAT ARE THE SHARES WORTH?
Premier scaled up dramatically from “startup mode” in FY04, as the
• We estimate value at $1.50-7.50 per share. Titanic and Bodies exhibitions came to market. The company lost its
• On the low end, we ascribe zero value to the cost discipline in 2H08, with gross and operating profits declining
company’s ongoing business, zero value to the dramatically even as revenue remained fairly stable.
company’s net cash position of $6 million, and $46 $20mn
million of value to the Titanic assets (equal to
appraised value of 2,000 artifacts owned by $15mn
Premier; includes neither >$100 million appraised
$10mn
value of additional artifacts nor the value of
potential future recoveries). $5mn
• On the high end, we estimate fair value at 15x
normalized earning power of $0.50 per share. While $0mn
our estimate of earning power is highly subjective, 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09
-$5mn
we believe it is reasonably conservative considering
Net Revenue Gross Profit EBIT
the significant unrealized potential of the company’s
new exhibitions, including Dialog, Sports Immortals Source: Company, The Manual of Ideas.
and Star Trek. We note that the company achieved
EPS of $0.17 in 2Q08 (quarter ended August 31, Premier – Y-Y Revenue Growth, 1Q05-3Q09
2007) before earnings declined sharply due to poor Premier showed explosive revenue growth without the need for
significant capital investment from FY05-08. Revenue has stagnated
execution. 2Q08 results were achieved based solely
recently, as some exhibitions have concluded while new ones have
on the Bodies and Titanic exhibitions. With other yet to ramp up. However, with Dialog, Sports Immortals and Star Trek
exhibitions in the pipeline, it is conceivable the in the pipeline — and the possibility of improved international
company could surpass $0.17 per quarter in the next execution of Bodies — Premier has a credible path to growth.
1-3 years (assuming strong management execution). 250%
As a result, our estimate of normalized EPS may
200%
ultimately prove conservative.
• Premier shares are difficult to value given the 150%
significant disparity between current earnings and 100%
likely earning power. With earnings highly sensitive
not only to opex discipline but also to the ramp-up 50%
and execution of new exhibitions, it is impossible to 0%
project income with any certainty. However, with -50%
activist shareholder involvement and asset 1Q05 1Q06 1Q07 1Q08 1Q09
protection in the form of Titanic artifacts, the
downside appears to be reasonably protected. As a Source: Company, The Manual of Ideas.
result, we find the shares less speculative than might
be assumed given the difficulty of projecting EPS. Premier – Gross and EBIT margin, 1Q04-3Q09
Gross margins have declined in recent quarters, as the company has
shifted to operating more self-run venues (six in FQ2 versus three in
the year-ago period). Gross margin has declined below the
company’s target for >50%. EBIT margins have deteriorated even
more dramatically in recent quarters, reflecting a bloated cost
structure, including extremely generous executive pay. The latter is
already changing following the firing of former CEO Arnie Geller.
100%
50%
0%
-50%
1Q04 1Q05 1Q06 1Q07 1Q08 1Q09
EBIT Margin Gross Margin
Source: Company, The Manual of Ideas.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 59 of 241
WHY THE SHARES MAY BE MISPRICED EXHIBITIONS OVERVIEW
• Value of Titanic assets not reflected on balance Exhibition Timeline Comments
Titanic Named salvor-in- 2,000 artifacts carried at $3
sheet. The company’s ownership of 2,000 Titanic (6 current possession in 1994 million but appraised at
artifacts is reflected in a $3 million balance sheet exhibitions) $46 million; seeking
asset even as the collection has been appraised at salvage award on 3,500
$46 million. In addition, the company has not additional artifacts,
appraised at >$100 million;
reflected any value for additional artifacts that are additional value in potential
the subject of litigation (appraised at >$100 future recoveries
million), nor for the potential value of future
recoveries from the Titanic shipwreck site. As we Bodies Signed deal for first Accounted for 81% of
(11 current exhibition in 2004 revenue in FY08
approach the 100-year anniversary of the sinking of exhibitions)
the Titanic in 2012, these assets may become even
more highly prized. Star Trek Opened in June in Exclusive rights to present
• Loss of investor confidence, due to history of (1 current San Diego; looking exhibition worldwide; no
exhibition) for second venue capital investment required
disappointing investor expectations and lavishing with 50/50 split of profits
excessive pay on senior executives. Investors appear
to have “written off” Premier, as the company has Dialog in Announced in Sold out events in >20
repeatedly ratcheted down expectations and failed to the Dark February; opened countries in Europe, Asia,
(1 current August 30 in South America
execute in line with its potential. exhibition) Atlanta; second
• Messy recent fight for control of the company. location under
Mark Sellers successfully challenged incumbent review
CEO Arnie Geller for control of Premier. While we
Sports Signed long-term >1 million artifacts from
view this as a strong positive, investors may be Immortals licensing deal in worlds of baseball, football,
worried that the recent management turnover and March 2008; goal is basketball, hockey, tennis,
legal expense associated with the fight may have to open at least one golf, Olympics
further weakened the company. new exhibition by
the end of FY09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 60 of 241
Sears Holdings (Nasdaq: SHLD) Hoffman Estates, IL, 847-286-2500
Services: Retail (Department & Discount), Member of S&P 500 http://www.searsholdings.com
$250
$200
$150
$100
$50
$0
Jan 00 Jan 00 Jan 00 Jan 00 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 61 of 241
BUSINESS OVERVIEW • Large real estate ownership, with carrying value
Sears Holdings is a broadline retailer with 2,300 full-line and not reflective of fair value. Sears owns ~800 stores
1,200 specialty stores in the U.S., operating through Kmart with ~100 million in owned square footage.
and Sears, and 380 full-line and specialty stores in Canada • Guiding for FQ4 adjusted EPS of $2.44-3.09,
operating through 72%-owned Sears Canada. Seasonality is with net income of $300-380 million. The company
strongest in Q4, which accounts for 30-33% of revenue. expects to have $600 million of cash domestically
Sears Holdings was formed in 2005 through the merger of and $740 million at Sears Canada as of January 31.
Kmart and Sears, each with origins dating to the late 1800s. • Repurchased 2.9 million shares at $41 in CQ4;
$506 million remained authorized as of January 7.
SELECTED OPERATING DATA • Shares trade at 6% trailing FCF yield, 19x
YTD trailing P/E and 89x forward P/E.
FYE February 2 2006 2007 2008 11/1/08
Stores (period end):
Kmart 1,416 1,388 1,382 1,378
INVESTMENT RISKS & CONCERNS
Sears Domestic – full-line 924 935 935 933 • Same-store sales fell 8% in CY08, with SSS down
Sears Domestic – specialty 1,128 1,095 1,150 1,198 6% at Kmart and down 9% at Sears Domestic (no
Sears Canada – full-line 123 123 121 122 disclosure of Sears Canada SSS). December SSS
Sears Canada – specialty 252 250 259 263
Selected growth rates: fell 7% (-1% at Kmart, -13% at Sears Domestic).
Stores – Kmart n/a -2% 0% -1% • Market share losses continue despite attempts at
Stores – Sears Domestic n/a -1% 3% 4% changing store formats, rebranding locations, and
Stores – Sears Canada n/a -1% 2% 2% improving merchandising.
U.S. same store sales -5% -4% -4% -8%
Revenue n/m 7% -4% -6% • Inventory of $11 billion versus tangible book of
% of revenue by segment: $5 billion at November 1, exposing shareholders to
Kmart 39% 35% 34% 34% the risk of obsolescence. Some have accused Sears
Sears Domestic 52% 55% 55% 55%
Sears Canada
1
9% 10% 11% 12%
of reluctance to mark down slow-moving inventory.
Gross margin by segment:
Kmart 24% 25% 23% 23% COMPARABLE PUBLIC COMPANY ANALYSIS
Sears Domestic 30% 31% 30% 28% Market Enterprise Price This Next
EV /
Sears Canada 32% 30% 31% 31% Value Value to T. FY FY
Rev.
Total gross margin 28% 29% 28% 27% ($mn) ($mn) Book P/E P/E
EBIT margin by segment: WMT 182,520 223,670 .6x 3.6x 14x 13x
Kmart 4% 5% 2% -1% HD 35,980 46,480 .6x 2.1x 12x 15x
Sears Domestic 4% 5% 3% -1%
Sears Canada 10% 5% 7% 6% LOW 26,160 30,720 .6x 1.5x 12x 14x
Total EBIT margin 4% 5% 3% 0% TGT 22,640 42,020 .6x 1.7x 10x 12x
D&A as % of revenue 2% 2% 2% 2% COST 18,530 18,080 .2x 2.1x 16x 14x
Capex as % of revenue 1% 1% 1% 1% BBY 12,550 15,280 .3x 6.4x 12x 13x
Equity to assets (tangible) 26% 31% 25% 21% KSS 11,010 13,110 .8x 1.8x 13x 15x
∆ diluted shares out (avg) n/m 1% -7% -13%
1 JCP 3,500 5,380 .3x 0.7x 6x 121x
Includes total revenue of Sears Canada (Sears Holdings owns 72%).
SHLD 4,820 8,130 .2x 1.0x 29x 89x
INVESTMENT HIGHLIGHTS
• Fourth-largest U.S. broadline retailer, with MAJOR HOLDERS
leadership in home appliances. Owned brands Chairman Eddie Lampert and affiliates 50% │ Fairholme
include Kenmore, Craftsman, DieHard, Lands’ End, 10% │ Legg Mason 7% │ State Street 3% │ Clearbridge 3%
and Joe Boxer. The company is also the exclusive
retailer of Martha Stewart Everyday products. RATINGS
• Controlled by chairman Eddie Lampert, who VALUE Intrinsic value materially higher than market value?
built a track record at ESL Investments featuring MANAGEMENT Capable and properly incentivized?
annualized returns of >20% prior to seizing control FINANCIAL STRENGTH Solid balance sheet?
of Kmart in a bankruptcy reorg process in 2003. MOAT Able to sustain high returns on invested capital?
EARNINGS MOMENTUM Fundamentals improving?
• 55% of company beneficially owned by Lampert
MACRO Poised to benefit from economic and secular trends?
and other insiders, with an additional 11% and 7%
EXPLOSIVENESS 5%+ probability of 5x upside in one year?
held by Fairholme and Legg Mason, respectively.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 62 of 241
…additional insight into SHLD: ESTIMATED VALUE OF OWNED REAL ESTATE
Sears Holdings owns the following real estate properties as
SUPERINVESTOR INSIGHT INTO SHLD of the end of fiscal year 2007 (February 2, 2008):
• Bruce Berkowitz, interview with Robert Huebscher • 810 Kmart, Sears Domestic and Sears Canada stores
(www.advisorperspectives.com) on December 24, 2008: (see detailed analysis below)
− “We are not looking at today’s values in the real • 10 of 40 domestic supply chain distribution centers
estate market. We have come to the conclusion that • Small minority of 573 domestic store warehouses,
we cannot snap our fingers and sell. If the value customer call centers and service facilities
from Sears comes from its real estate holdings, then • 200-acre headquarters in Hoffman Estates, Illinois,
it may take a while to sell those properties.” consisting of six interconnected office buildings
− “The value in Sears is in four highly valuable totaling two million gross square feet of office space
brands, the largest appliance retailer and servicer, • 86,000 square foot building in Troy, Michigan
and a large automobile repair operation. I am not
saying that Sears cannot continue in its current
305
412
$150
$14,398
842
$10,472
$151
$2,208
business model. We are coming through the
Christmas season and inventory is down, so this
203
275
$100
$9,599
561
$101
$6,981
$1,472
shares. Sears has $11 billion in inventory with $4
billion in debt, so there are many ways we can
$75
153
206
$7,199
421
$76
$1,104
$5,236
capture the value in our investment.”
• Bruce Berkowitz, conference call with investors in
The Fairholme Fund, November 25, 2008:
$50
102
137
$4,799
281
$50
$736
$3,491
− “At this price and with the few remaining shares
outstanding, Eddie Lampert just has to keep buying
stock back and the [short sellers’] game is over… I
$25
51
69
$2,400
140
$25
1
$368
$1,745
like the guy… I think his strategy is right, and I
believe his strategy isn’t much different than
Warren Buffett’s strategy during the Berkshire
0%
3%
2%
4%
5%
NY
1%
8%
2%
1%
7%
TX
13% 20%
OH
3%
4%
5%
5%
EXCERPT FROM COMPANY STATEMENT, JANUARY 8, 2009
4%
3%
6%
3%
MI
3%
3%
4%
7%
5%
PA
2%
0%
7%
6%
FL
2%
8%
9%
Sq. Ft.
Estimated
2,034,000
2,745,000
5,610,000
95,988,600
14,720,000
1,008,000
57,600
69,814,000
113,000
45,000
165,000
92,000
40,000
100,000
134,000
Retail Store Real Estate Owned By Sears Holdings:
Stores
Owned Stores (1)
24%
62%
12%
61%
5%
1%
8%
160
806
521
18
61
34
10
Discount stores
Sears Domestic
Sears Canada
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 63 of 241
SEARS HOLDINGS – ADDITIONAL INFORMATION ON STORES
YTD
FYE February 2 2006 2007 2008 11/1/08
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 64 of 241
SFK Pulp Fund (Toronto: SFK-UN)
Recent market price: C$ 0.42 per unit
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 65 of 241
BUSINESS OVERVIEW • SFK’s two RBK mills are unique in North
SFK Pulp Fund owns and operates three North American America; there is one other such mill worldwide.
mills that produce pulp, a key input into paper production. • Shares trade at .1x tangible book value and 7%
SFK is organized as a Canadian flow-through entity known trailing EBIT to EV yield.
as an unincorporated open-ended trust or income fund.
NBSK pulp operations. SFK has produced northern bleached INVESTMENT RISKS & CONCERNS
softwood kraft (NBSK) pulp in Quebec for three decades. • Post-3Q08 outlook: “Both demand and prices for
Production capacity is 375,000 tonnes per year. SFK NBSK pulp continue to face world market
acquired the mill from Abitibi for $628 million in 2002. downward pressure. As for the RBK pulp, the
RBK pulp operations. SFK acquired two U.S.-based recycled impact is a similar downward pressure, in light of
bleached kraft (RBK) pulp mills for $194 million in 2006 our market-leading position in the United States.”
(the mills were built for $462 million in mid-1990s). The • Capital-intensive business. The cost of the input
mills have an annual production capacity of 360,000 tonnes. commodities (wood fibre or wastepaper) accounts
for 50%+ of operating costs. Other costs include
SELECTED OPERATING DATA labor, chemicals, maintenance of the mill, energy.
YTD • Weak 2008 performance despite increases in
FYE December 31
1
2005 2006 2007 9/30/08 NBSK pulp price. Higher raw material costs,
NBSK pulp price (avg) 645 721 824 880 particularly the cost of wastepaper used in the RBK
Change (y-y) 1% 12% 14% 8%
% of revenue by segment:
pulp business, and other variable costs hurt results
NBSK mill 100% 88% 50% 49% through 3Q08. However, results improved in 3Q08,
RBK mills 0% 12% 50% 51% suggesting a possible turnaround in profitability.
Revenue growth by segment: • Profitability highly dependent on market price of
NBSK mill -12% 16% -6% 2%
RBK mills n/a n/m 555% 9%
pulp and CAD/USD exchange rate. A US$10 drop
Total revenue growth -12% 32% 63% 5% in the price of NBSK pulp impacts annual earnings
EBIT margin by segment: per unit by C$0.04. Appreciation of the Canadian
NBSK mill 0% 4% 4% 6% dollar versus the U.S. dollar of $0.01 per dollar
RBK mills n/a 4% 5% 2%
Total EBIT margin 0% 4% 4% 4%
reduces annual earnings by C$0.03 per unit.
D&A as % of revenue 13% 10% 8% 7% • No downside protection in liquidation scenario,
Capex as % of revenue 4% 3% 3% 3% as pulp processing equipment accounts for
% of revenue by geography: roughly two-thirds of assets and 100% of equity.
Canada 42% 44% 19% 11%
U.S. 28% 39% 67% 74%
Processing equipment would likely have little scrap
Europe 30% 17% 14% 15% value in liquidation coincident with industry-wide
Distributable FCF per unit
2
0.25 0.44 0.33 0.24 distress. SFK should therefore only be considered
2
Distributions per unit 0.35 0.15 0.44 0.09 for investment under a going-concern scenario.
Units out – basic (avg) (mn) 59 61 89 90
Units out – diluted (avg) (mn) 59 61 89 118
1
In U.S. dollars per tonne for NBSK pulp delivered in North America.
MAJOR HOLDERS
2
In Canadian dollars per basic unit. CEO <1% │ Other insiders <1% │ Fairfax Financial 17%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 66 of 241
Sony (NYSE: SNE) Minato-Ku, TK, Japan, 813-544-8211
Consumer Cyclical: Audio & Video Equipment http://www.sony.net
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© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 67 of 241
BUSINESS OVERVIEW • Leader in game consoles. PlayStation competes
Sony operates in five major segments: against Microsoft’s Xbox and Nintendo’s Wii.
Electronics provides audio-visual, informational and • Game segment has untapped profit potential.
communicative equipment, instruments and devices. PlayStation is still losing money but could become
Game provides PlayStation game consoles and software. meaningful positive contributor over time.
• Participates in mobile phone and recorded music
Pictures produces and distributes film and TV programming. businesses through 50-50 joint ventures with
Financial Services represents insurance businesses, leasing Ericsson and Bertelsmann, respectively. Both JVs
and credit financing businesses and a bank business in Japan. are accounted for under the equity method.
Other includes a music business, a network service business, • Shares trade at 19x trailing P/E (forward loss
an animation business, and an advertising agency. projected) and .7x tangible book value.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 68 of 241
Travelzoo (Nasdaq: TZOO) New York, NY, 212-484-4900
Technology: Computer Services http://www.travelzoo.com/select
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BUSINESS OVERVIEW • Founded and managed by Bartel brothers.
Travelzoo’s free Internet media properties reach 12 million Chairman Ralph Bartel (42) founded Travelzoo in
consumers in the U.S., Europe and Asia. The properties 1998 and served as CEO until September 2008
include the Travelzoo website, the Top 20 list of weekly when Holger Bartel (41) assumed the role.
deals, email alerts, and a travel search engine. Travelzoo Previously, Holger oversaw Travelzoo’s operations
publishes offers from 900 advertisers, with Travelzoo deal in North America and worked at McKinsey.
experts reviewing offers to find the best travel deals. • Repurchased 1 million shares for $20 million in
2007, and 1 million shares for $29 million in 2006.
SELECTED OPERATING DATA Travelzoo did not repurchase shares in 2008.
• Material insider buying above current price.
FYE December 31 2005 2006 2007 2008
Unpaid subscribers by geography (mn) (period end):
North America 9.4 10.2 11.0 11.3 INVESTMENT RISKS & CONCERNS
Europe 0.3 0.7 1.4 2.2 • Global expansion may not work. Travelzoo is
Asia Pacific -- -- 0.2 1.1 losing money overseas as it attempts to scale. The
Unpaid subscriber growth by geography (mn) (period end):
North America 15% 9% 8% 3%
company’s model may not succeed abroad.
Europe n/m 120% 111% 61% • North America EBIT margin has declined from
Asia Pacific n/m n/m n/m 417% 47% in 2006 to 40% in 2007 and 30% in 2008.
∆ total subscribers 19% 12% 16% 16% • Dependent on ad revenue. Travelzoo may suffer if
∆ total revenue 51% 37% 14% 3%
travel declines due to economic weakness, high oil
Average subscriber acquisition cost ($):
North America 2.66 2.10 3.16 4.03
1 prices, terrorist threats or other factors.
Europe 1.86 2.17 4.04 4.44
1
1
• High ROIC has attracted new entrants, while
Asia Pacific n/a n/a 2.88 2.98 Google AdWords has lowered barriers to entry.
% of revenue by geography:
North America 99% 95% 93% 88%
Sherman’s Travel is the #2 travel deals email
Europe 1% 5% 7% 12% distribution company, with four million subscribers.
Asia Pacific 0% 0% 0% 1%
EBIT margin by geography: COMPARABLE PUBLIC COMPANY ANALYSIS
North America 32% 47% 40% 30% Market Enterprise Price This Next
Europe -148% -49% -89% -82% EV /
Value Value to T. FY FY
Asia Pacific n/a n/a n/m n/m Rev.
($mn) ($mn) Book P/E P/E
Total EBIT margin 29% 43% 26% 4%
MSFT 169,721 151,006 2.4x 8.4x 11x 10x
% of revenue by customer:
Travelport 12% 16% 15% 15%
1 GOOG 112,581 96,736 4.4x 5.0x 17x 15x
1
Expedia <10% 14% 11% 11% YHOO 17,794 14,342 2.0x 2.4x 34x 29x
1
Sabre 15% <10% <10% <10% PCLN 2,949 2,964 1.6x 18.3x 13x 12x
1
Represents YTD data through September 30, 2008. EXPE 2,631 3,116 1.0x n/m 7x 8x
OWW 279 796 .9x n/m n/m n/m
INVESTMENT HIGHLIGHTS TZOO 77 63 .8x 3.7x n/m n/m
• $1.3 billion in newspaper advertising by travel
companies is moving to Internet. Travelzoo is MAJOR HOLDERS
well-positioned to benefit from this transition. The Ralph Bartel 60% │ Holger Bartel 1% │ Other insiders <1%
company’s revenue increased from $18 million in │ JP Morgan 12% │ Dimensional 2%
2003 to $79 million in 2007, a 34% CAGR.
• Profitable, non-capital-intensive U.S. business. RATINGS
Travelzoo generated EBIT of $21 million in North VALUE Intrinsic value materially higher than market value?
America in 2008 while employing minimal capital. MANAGEMENT Capable and properly incentivized?
• Large global opportunity. Travelzoo is attempting FINANCIAL STRENGTH Solid balance sheet?
to replicate worldwide the success it has had in the MOAT Able to sustain high returns on invested capital?
U.S. Travelzoo entered the U.K. in 2005; Canada, EARNINGS MOMENTUM Fundamentals improving?
Germany and Spain in 2006; Australia, China, MACRO Poised to benefit from economic and secular trends?
France, Hong Kong, Japan, and Taiwan in 2007. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 70 of 241
…additional insight into TZOO: Estimated Enterprise Value
(based on various scenarios of normalized EBIT)
WHAT ARE THE SHARES WORTH? ($ in millions)
• We value Travelzoo at $18 per share, based on a North America EBIT
probability-weighted scenario analysis that includes ROW EV/EBIT $10 $15 $20 $25 $30
estimated ranges of annualized EBIT for North EBIT Multiple 5x 8x 10x 11x 12x
America and the rest of the world. -$20 5x -$50 $20 $100 $175 $260
• Normalized EBIT for North America and rest of -$10 5x $0 $70 $150 $225 $310
the world (ROW) are key valuation drivers. As $0 n/m $50 $120 $200 $275 $360
Travelzoo generates strong EBIT in North America $10 10x $150 $220 $300 $375 $460
while investing heavily in global expansion, we $20 12x $290 $360 $440 $515 $600
value the company on a sum-of-the-parts basis.
Travelzoo is a non-capital-intensive business with Probability-Weighted Enterprise Value
few excess assets, and the value of the enterprise (sum of probability-weighted contributions of scenarios)
depends on profit generation. While Travelzoo’s 12
($ in millions)
million-strong subscriber base and brand name may
North America EBIT
have strategic value to an acquirer, we have not
ROW $10 $20 $25 $30 $40
used M&A transaction multiples in our analysis, as
EBIT Probability 6% 25% 50% 15% 4%
such a valuation might be too speculative.
-$20 5% $0 $0 $3 $1 $1
• In North America, our most likely scenario (50%
-$10 10% $0 $2 $8 $3 $1
probability) has Travelzoo roughly maintaining
$0 25% $1 $8 $25 $10 $4
normalized EBIT at approximately $20 million per $10 40% $4 $22 $60 $23 $7
year. We assign a fair value multiple of 10x in such $20 20% $3 $18 $44 $15 $5
a scenario. If EBIT declines, we anticipate multiple Probability-weighted enterprise value: $267 million
contraction due to likely business model concerns.
If EBIT increases, we anticipate multiple expansion
due to likely renewed optimism regarding growth. Estimated Equity Value per Share
Our analysis conservatively assumes that EBIT ($ and shares in millions, except per share data)
deterioration is more likely than EBIT growth. Probability-weighted enterprise value $267
• In the rest of the world, our most likely scenario Net cash $14
(40% probability) has Travelzoo earning normalized Estimated equity value $281
EBIT of $10 million, less than half the current Shares outstanding 15.5
North American EBIT run rate. This may be a fairly
Estimated equity value per share $18.12
conservative assumption, as we see little reason why
Travelzoo’s international business, particularly in
Europe, could not emulate the success achieved in
the U.S. We have assigned a 5% probability to the
scenario that Travelzoo continues to suffer an
annualized operating loss of roughly $20 million
COMMENTS ON BUSINESS MODEL
internationally. The company is highly likely to take • Travelzoo employs virtually no capital in
decisive action to eliminate the operating loss even running the business. The company has no
if international growth does not materialize, as the inventory cost, as its services are entirely web-
Bartel brothers own ~60% of Travelzoo shares. based. No elaborate infrastructure is required to
create the services, resulting in minimal PP&E
WHY THE SHARES MAY BE MISPRICED investment. The only major input is the time and
effort of Travelzoo employees, yet the company
• Steady-state EBIT materially understated.
does not depend on specific employees to maintain
Startup losses in Europe and Asia mask continued
current operations (we do believe that the services
strong U.S. profitability.
of the Bartel brothers are crucial to growing value
• High taxes lower net income yield. As U.S.
over time). Enterprise value is embedded primarily
income is fully taxed and foreign losses generate no
in the Travelzoo consumer brand, an online
current tax benefit, effective tax rate is temporarily
distribution channel (including email), and a 12
elevated, lowering the after-tax earnings yield.
million-strong subscriber base. With this
infrastructure in place, Travelzoo can maintain
current operations at low cost, creating a quasi-
recurring business model.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 71 of 241
• Per-employee performance metrics are quite • A corollary of the previous point is that
impressive, as the following table shows. Per- Travelzoo is in a strong position to grow new-
employee results have declined primarily due to the country Top 20 lists from a low base. As the
startup of international operations. The company company launches new Top 20 lists, it has the
could boost per-employee performance substantially luxury of including deals without much regard for
if it opted to maintain rather than grow operations. capacity. As a result, the quality of the deals in
However, we believe investment in new country- startup countries may be higher than the quality of
specific Travelzoo websites will earn favorable risk- deals presented in the U.S. This quality advantage
adjusted returns for shareholders. may make it easier for Travelzoo to grow by word
of mouth in new countries, potentially helping to
($’000) 2005 2006 2007 2008 keep subscriber acquisition costs low. As a result,
Revenue per employee 853 915 660 447 investors may overestimate the difficulty Travelzoo
N.A. EBIT per employee 269 412 242 116
EBIT per employee 250 391 173 17 will encounter in scaling up new markets.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 72 of 241
Candidates—Special Situations
We present the following companies:
h Dr Pepper Snapple (NYSE: DPS)
h EMC (NYSE: EMC)
h KHD Humboldt Wedag (NYSE: KHD)
h PRIMEDIA (NYSE: PRM)
h Target (NYSE: TGT)
h Visa (NYSE: V)
h Yahoo! (Nasdaq: YHOO)
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 73 of 241
Dr Pepper Snapple (NYSE: DPS) Plano, TX, 972-673-7000
Consumer Non-Cyclical: Beverages (Non-Alcoholic), Member of S&P 500 http://www.drpeppersnapplegroup.com
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BUSINESS OVERVIEW • Growing Snapple in ready-to-drink tea market,
Dr Pepper Snapple is an integrated brand owner, bottler and with 4Q08 rollout of mainstream flavors/packaging.
distributor of non-alcoholic beverages in North America with Market Volume Mix Retail $ Snapple Share
a portfolio of flavored (non-cola) carbonated soft drinks Super Prem. 2% $0.3bn 59%
(CSDs) and non-carbonated soft drinks (non-CSDs), Premium 22% $2.0bn 51%
including ready-to-drink teas, juices, juice drinks and mixers. Mainstream 76% $3.5bn “minimal”
Brands include Dr Pepper, Snapple, 7up, Mott’s, Sunkist, Source: Company, MOI.
Hawaiian Punch, A&W, Canada Dry, and Schweppes.
• Targeting long-term revenue growth of 3-5%
The company was spun off from Cadbury in April 2008. and high single-digit EPS growth. Growth drivers
DPS has made a series of acquisitions starting in the 1980s, include price/mix, premium innovation, distribution
including Dr Pepper/Seven Up in 1995, Snapple in 2000 and gains, and cold drink equipment. Earnings drivers
DPS’s largest independent bottler in 1999 and 2006/07. include operating efficiencies, “below-the-line”
leverage and abatement of commodity headwinds.
SELECTED OPERATING DATA • Applying FCF to debt repayment; considering
FYE December 31 2006 2007 2008
% of revenue by segment:
bolt-on M&A; to maintain investment-grade rating.
Beverage concentrates 25% 21% • Shares trade at 3% trailing FCF yield, 9x trailing
Finished goods 29% 24% P/E and 10x forward P/E.
Bottling 38% 49%
Mexico and Caribbean 8% 6%
Revenue growth by segment:
INVESTMENT RISKS & CONCERNS
Beverage concentrates 2% 1% • 2009: “challenging year for the industry and for us”
Finished goods 0% 3% • Lost Monster distribution deal in October, which
Bottling 730% 57%
Mexico and Caribbean 15% 2%
generated run-rate EBIT of $40 million in 2008.
Total revenue growth 48% 21% • Owns distribution business, a capital intensive and
Pre-tax margin by segment: lower-return business (accounts for 1/3 of volume).
Beverage concentrates 53% 54% • Competitors include Coca-Cola and Pepsi and
Finished goods 11% 11%
Bottling 6% 4% alternatives targeting health-conscious consumers.
Mexico and Caribbean 25% 24% • Volatility of input costs, which include aluminum
Corporate and eliminations -7% -5% cans, glass bottles, PET bottles, and paperboard.
Total pre-tax margin 17% 14%
Selected items as % of revenue:
Net income 11% 9% COMPARABLE PUBLIC COMPANY ANALYSIS
EBITDA 24% 20% Market Enterprise Price This Next
EV /
D&A 3% 3% Value Value to T. FY FY
Rev.
Capex 3% 4% ($mn) ($mn) Book P/E P/E
1
ROE 18% 12% KO 101,380 105,710 3.3x 12.7x 14x 13x
1
Equity to total assets (avg) 34% 42% PEP 81,640 87,590 2.0x 15.9x 14x 14x
1
The company has negative tangible book value, rendering these ratios HANS 3,260 2,990 2.9x 6.7x 20x 17x
meaningless if tangible equity is considered instead of total equity.
FIZZ 420 360 .6x 2.9x 18x 18x
DPS 4,210 7,590 1.3x n/m 9x 10x
INVESTMENT HIGHLIGHTS
• #3 North American liquid refreshment beverage
business, behind Coca-Cola and Pepsi.
MAJOR HOLDERS
Franklin 10% │ Trian 7% │ Pershing Square 4%
• #1 non-cola CSD company in U.S. Owned non-
alcoholic beverage brands are leaders in their
categories, with significant consumer awareness and
RATINGS
VALUE Intrinsic value materially higher than market value?
long histories that evoke strong emotional
MANAGEMENT Capable and properly incentivized?
connections with consumers in North America.
FINANCIAL STRENGTH Solid balance sheet?
• Company-owned distribution covers 2/3 of U.S.
MOAT Able to sustain high returns on invested capital?
• CEO Larry Young (53) has been with the EARNINGS MOMENTUM Fundamentals improving?
company’s predecessors since 2006. He served as MACRO Poised to benefit from economic and secular trends?
COO of Pepsi-Cola Bottlers from 1997-2005. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 75 of 241
…additional insight into DPS: DPS — INDUSTRY POSITIONING AND DIFFERENTIATORS
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 76 of 241
DPS — BRANDS1
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 77 of 241
EMC (NYSE: EMC) Hopkinton, MA, 508-435-1000
Technology: Computer Storage Devices, Member of S&P 500 http://www.emc.com
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© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 78 of 241
BUSINESS OVERVIEW SELECTED OPERATING DATA
EMC provides data storage hardware, software and services. YTD
FYE December 31 2005 2006 2007 9/30/08
Information Infrastructure helps customers store and protect % of revenue by type:
electronic data. It consists of three segments: storage, content Hardware 46% 46% 44% 42%
management and archiving, and RSA Security. Software – EMC 23% 22% 21% 17%
Software – VMware 3% 4% 7% 8%
Virtual Infrastructure includes EMC’s 84% stake in VMware Services 27% 28% 29% 33%
(NYSE: VMW), the leader in virtualization software. Revenue growth by type:
Hardware 16% 15% 12% 12%
1
Software – EMC 11% 9% 13% -5%
INVESTMENT HIGHLIGHTS Software – VMware
1
61% 72% 83% 39%
• Leading data storage provider, selling hardware, Services 22% 16% 24% 30%
software and services. While sales of Symmetrix Total revenue growth 17% 15% 19% 16%
and Clariion boxes have historically driven EMC’s % of revenue by segment:
Storage 91% 86% 80% 78%
growth, management has emphasized software sales Content management 5% 6% 6% 5%
growth in recent years, including via M&A. RSA Security 0% 1% 4% 4%
• Digital data created and replicated to grow from VMware 4% 6% 10% 13%
173 exabytes in 2006 to 1,773 exabytes by 2011 Revenue growth by segment:
Storage 15% 9% 10% 12%
worldwide,* driving continued demand for storage. Content management 22% 42% 13% 8%
• Well-positioned to benefit from major IT trends RSA Security n/a n/a 246% 13%
via technology assets in information infrastructure, VMware 78% 83% 86% 50%
virtualization (VMware) and cloud computing. Gross margin by segment:
Storage 54% 52% 52% 51%
• $213 million Iomega acquisition, closed in 2Q08, Content management 70% 69% 68% 61%
expands EMC’s reach in consumer and small RSA Security n/a 75% 73% 70%
business markets. EMC remains quite acquisitive, VMware 90% 89% 88% 85%
announcing several tuck-in deals during 2008. Corporate and other -2% -3% -3% -2%
Total gross margin 54% 53% 55% 55%
• Repurchased $1.5 billion of stock in 2007, $3.7 EBIT margin by major segment:
billion in 2006 and $1.0 billion in 2005. EMC 17% 17% 17% 16%
• Shares trade at 11% trailing FCF yield, 19x VMware 34% 28% 24% 26%
Corporate and other -2% -5% -4% -5%
trailing P/E and 13x forward P/E. Special items -1% -2% -0% -1%
Total EBIT margin 15% 11% 13% 11%
INVESTMENT RISKS & CONCERNS Selected items as % of revenue:
• Exposed to IT spending cuts by large enterprises, D&A 7% 7% 7% 7%
Capex 6% 6% 5% 5%
including financial firms such as Goldman Sachs. Capitalized software 2% 2% 2% 2%
• Technology evolution; competitive market. EMC Acquisitions, net of cash
2
7% 23% 4% 6%
has had to evolve over the years, seeking to grow its % of revenue by geography:
software business to offset margin pressure on the U.S. 57% 57% 56% 54%
EMEA 28% 29% 30% 31%
hardware side. EMC competes against giants such Asia 11% 10% 11% 11%
as IBM and HP as well as data storage startups. Americas ex. U.S. 4% 4% 4% 4%
• VMware may be less valuable than its market cap Dell as % of revenue 12% 15% 14% 12%
suggests, with threats looming from Microsoft et al. ROE 11% 15%
Equity to total assets (avg) 63% 56%
∆ shares out (avg) -6% -6%
COMPARABLE PUBLIC COMPANY ANALYSIS 1
Software license revenue only. Software maintenance is included in services.
Market Enterprise Price This Next 2
Net of Cisco’s $150 million investment in VMware in 2007.
EV /
Value Value to T. FY FY
Rev.
($mn) ($mn) Book P/E P/E
RATINGS
IBM 126,070 147,090 1.4x 9.4x 10x 10x
VALUE Intrinsic value materially higher than market value?
HPQ 86,360 93,970 .8x n/m 9x 9x
MANAGEMENT Capable and properly incentivized?
EMC 24,280 20,920 1.4x 4.7x 13x 12x
FINANCIAL STRENGTH Solid balance sheet?
MOAT Able to sustain high returns on invested capital?
MAJOR HOLDERS EARNINGS MOMENTUM Fundamentals improving?
Insiders 1% │ Capital World 9% │ Barclays 4% │ State MACRO Poised to benefit from economic and secular trends?
Street 3% │ Pershing Square 3% │ Greenlight <1% EXPLOSIVENESS 5%+ probability of 5x upside in one year?
* Source: IDC.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 79 of 241
KHD Humboldt Wedag (NYSE: KHD) Hong Kong SAR, China, 60-4-683-8286
Capital Goods: Construction & Agricultural Machinery http://www.khdhumboldt.com
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BUSINESS OVERVIEW • Backlog amounts to 2.3 years of LTM revenue,
KHD operates in two segments: Industrial Plant Engineering providing several quarters of visibility.
and Equipment Supply provides technologies, equipment, • Order cancellations manageable so far. Cancelled
and engineering for cement, coal, and minerals processing. orders amounted to $51 million and orders
The segment also builds plants that produce clinker, cement, postponed by more than one year were $18 million
clean coal, and minerals. Resource Property consists of a as of December 5. KHD has another $164 million of
mining sublease on which the Wabush iron ore mine is “contract value at risk, meaning it had verbal
situated that commenced in 1956 and expires in 2055. indications from customers that contract variations
The company spun off Mass Financial, a merchant banking or cancellations are a possibility.” Order backlog at
business, in January 2006. KHD completed several other was $1.1 billion as of September 30.
strategic actions subsequent to the Mass Financial spin-off. • Holds 471 patents, including innovations in kiln
design, pyro processing, calciners, coolers, grinding
SELECTED OPERATING DATA technologies, and separators and roller presses.
YTD • Chairman Michael Smith (59) has a history of
FYE December 31 2005 2006 2007 9/30/08 shareholder value creation. Smith’s M&A,
∆ revenue 120% 28% 44% 14%
corporate finance and global taxation background
∆ order intake n/a 55% 19% 28%
∆ order backlog (period end) n/a 70% 38% 39% have benefited investors, as he has created value
% of revenue by segment: through various entities over the years, including
Industrial plant engineering
2
1
100% 100% 100% 100% MFC Bancorp, Mass Financial, Sasamat Capital,
Iron ore mine royalty 0% 0% 0% 0% Cathay Merchant Group, and Blue Earth Refineries.
% of pre-tax income by segment:
Industrial plant engineering
1
84% 95% 93% 85%
• KHD owns non-core assets, including an ore mine
Iron ore mine royalty
2
14% 12% 25% 27% royalty interest (LTM income of $27 million);
Corporate and other 2% -7% -18% -13% preferred shares of Mass Financial of $86 million;
% of industrial plant engineering revenue by customer group: and (3) net cash and equivalents of $395 million.
Cement 90% 84% 89% 86%
Coal and minerals 10% 16% 11% 14% • Shares trade at 38% trailing FCF yield, 4x
% of industrial plant engineering revenue by geography: trailing P/E and 9x forward P/E.
Americas 7% 19% 20% n/a
Asia 21% 26% 34% n/a INVESTMENT RISKS & CONCERNS
Europe and Russia 23% 18% 21% n/a
Middle East 42% 34% 21% n/a • Q3 orders down 65% y-y due to “delays in project
Africa and other 6% 4% 4% n/a awards by customers revisiting their financing
1
2
Includes industrial plant engineering and equipment supply. alternatives in light of credit market dynamics.”
KHD has a royalty interest in the Wabush iron ore mine. “Income from interest
in resource property” is earned from an unincorporated JV operating in • Tax rate likely to increase over time. Smart tax
Canada. KHD does not report any revenue related to this JV. planning and NOLs have historically kept KHD’s
tax rate in a range of 5-10%. Management expects
INVESTMENT HIGHLIGHTS the rate to increase to about 20% going forward.
• Third-largest player with 20% global market
share, based on new contracted cement kiln MAJOR HOLDERS
capacity, behind Danish firm FL Smidth (29%) and Chairman Smith <1% (may own more through various
Chinese firm Sinoma (28%), and ahead of German vehicles) │ CEO Busche <1% │ Peter Kellogg 21% (long-
firm Polysius (part of ThyssenKrupp). Unlike time association with Smith) │ Apis 4%
cement manufacturers, KHD is a service provider
operating under an asset-light business model. RATINGS
• Low exposure to U.S., which represented 6% of VALUE Intrinsic value materially higher than market value?
KHD backlog going into 2008. The Middle East, MANAGEMENT Capable and properly incentivized?
where cement consumption is growing 10-15%, was FINANCIAL STRENGTH Solid balance sheet?
33% of backlog. Asia, where consumption is MOAT Able to sustain high returns on invested capital?
growing 10%+, accounted for 29% of backlog. EARNINGS MOMENTUM Fundamentals improving?
Russia and Eastern Europe, where consumption is MACRO Poised to benefit from economic and secular trends?
growing 10-15%, represented 29% of backlog. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 81 of 241
…additional insight into KHD: OVERVIEW OF SELECTED OPERATING DATA
KHD – Engineering Revenue and Backlog, 2005-YTD’08
WHAT ARE THE SHARES WORTH?
The company has grown cement plant engineering revenue rapidly in
• We value KHD at $25-37 per share, based on the recent years, with backlog reaching $1.1 billion as of September 30.
sum-of-the-parts valuation summarized below. While the large backlog bodes well for near-term revenue, KHD saw
• In addition to strong upside potential, we note a sharp decline in Q3 order intake, and management expects that
some customers will seek to delay or cancel projects.
significant downside protection, with estimated
excess cash and investments of $331-381 million. $600mn $1.2bn
Our calculation of excess assets conservatively $1.0bn
excludes $100-150 million, which we estimate is $400mn $0.8bn
needed to run the core cement engineering business. $0.6bn
$200mn $0.4bn
KHD — Sum-of-the-Parts Valuation Summary $0.2bn
($ in millions, except per share data) Low High $0mn $0.0bn
Value Value
1 05 06 07 YTD YTD
Value of excess net assets:
Cash and equivalents $373 $373 Engineering Revenue (left axis) 07 08
Short-term cash deposits 27 27 Backlog (right axis)
Securities 9 9
Notes: Engineering revenue equals total revenue, as iron ore income is
Restricted cash 31 31
accounted for below the revenue line. Backlog represents period-end backlog.
Preferred shares of Mass Financial 86 86 YTD represents period from January 1 through September 30.
Long-term debt (13) (13) Source: Company, The Manual of Ideas.
Pension liability (32) (32)
Net cash and investments $481 $481
Cash needed to run business
2
(150) (100)
KHD – Engineering Income and Margin, 2005-YTD’08
Total $331 $381 Engineering pre-tax margin has expanded since 2005, causing
income growth to outstrip revenue growth over the same time period.
Value of iron ore interest: Margins may get squeezed going forward, as the company attempts
LTM earnings to KHD $27 to keep customers from postponing or cancelling projects.
Fair value multiple of LTM earnings 5x $75mn 15%
Annualized Q3 earnings to KHD $35
Fair value multiple of ann. Q3 earnings 5x $60mn
Total $133 $175 10%
$45mn
Value of cement engineering business: $30mn
5%
LTM pre-tax segment income 85
$15mn
LTM corporate/other expenses (12)
3
LTM net interest income (13) $0mn 0%
Fair value multiple of LTM pre-tax income 5x 05 06 07 YTD YTD
Annualized Q3 pre-tax segment income 145
Annualized Q3 corporate/other expenses (11) Engineering Income (left axis) 07 08
3
Annualized Q3 net interest income (16) Engineering Margin (right axis)
Fair value multiple of ann. Q3 income 5x
Notes: Income and margin represent pre-tax segment income and margin;
Total $296 $593 corporate and other expenses are excluded from segment income. YTD
represents period from January 1 through September 30.
Estimated fair value of KHD $759 $1,148 Source: Company, The Manual of Ideas.
per share $25 $37
1
Based on balance sheet values as of September 30, 2008. KHD – Iron Ore Royalty Income, 2005-YTD’08
2
MOI estimate of cash needed to run engineering business; reflects deferred
revenue liability, which could become cash-draining amid order slowdown. The company’s income from an interest in the Wabush iron ore mine
3
A portion of net interest income is subtracted from segment income to reflect has grown as iron ore prices have risen, with YTD income reaching
the separate consideration of excess assets in our valuation analysis. $22 million and Q3 income reaching $9 million.
Source: Company filings, The Manual of Ideas estimates and analysis.
$30mn
WHY THE SHARES MAY BE MISPRICED $20mn
• Investors not looking beyond current slowdown
in cement engineering business. KHD’s earnings $10mn
report on November 12 spooked investors due to a
$0mn
65% y-y drop in Q3 order intake and concerns about
05 06 07 YTD YTD
potential order cancellations. While the Q3 result
07 08
represents a sharp reversal from earlier strength in
orders, investors are myopically focusing on the Notes: YTD represents period from January 1 through September 30.
Source: Company, The Manual of Ideas.
current woes of cement engineering business,
ignoring (1) the long-term earning power of the
engineering business, (2) very large excess assets,
and (3) the valuable Wabush iron ore interest.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 82 of 241
MANAGEMENT’S VIEW OF BUSINESS • KHD participates in royalty interest in Wabush
Notes from 3Q08 earnings call on November 12: iron ore mine sublease, which expires in 2055.
• Operating environment: “rapidly changing;” • Description of Wabush mine, adopted from
expects credit shortage to negatively impact global Cleveland Cliffs (CLF) 10-K dated February 29:
construction and infrastructure markets; past trend “The mine and concentrator are located in Wabush,
of robust demand growth to “moderate;” customers Labrador, Canada, and the pellet plant is located in
facing “unprecedented” challenges; some customers Pointe Noire, Quebec. The Wabush mine has been
have approached KHD to renegotiate contracts; in operation since 1965. Over the past five years,
customer capex spending likely to decline; KHD the mine has produced 3.8-5.2 million tons of iron
“should expect some projects to be delayed, some ore pellets annually. CLF own 27% of Wabush,
projects to be cancelled, and a general decrease in ArcelorMittal subsidiary Dofasco owns 29% and
the number of project opportunities” U.S. Steel Canada owns 45%.” In March, Dofasco
• Management response to weak environment: sued U.S. Steel Canada and CLF to compel them to
changing focus from “business growth” to complete the sale of their interests to Dofasco.
“sustaining equity” during uncertainty; expects to • Holder of royalty interest receives royalties from
develop plan to cut costs by yearend (will present an unincorporated JV that operates the mine.
plan to shareholders); a key objective is to preserve The JV pays a royalty that was set in 1987 at a base
cash by operating in cash flow-neutral way rate of C$1.685 per ton, with escalations as defined
(“excluding working capital movements”) by agreement. In 2005, KHD sued the JV
• Q3 review: order intake down 65% due to project participants for alleged underpayment of royalties.
award delays (55% of orders from Middle East, • Demand for iron ore is driven by raw material
23% from Russia and Eastern Europe) – intake requirements of integrated steel producers.
weakened progressively throughout Q3; backlog of Demand for blast furnace steel is cyclical and
$1.1 billion at Q3-end (39% from Russia and influenced by macroeconomic factors.
Eastern Europe, 27% from Asia, 26% from Middle
East) – initial assessment is that backlog solidity is Wabush Iron Ore Mine
“reasonable” (but also “dynamic” and “changing”) 2005 2006 2007
Iron ore shipments (mn tons) 4.9 4.1 4.8
• Outlook: “not in position to confirm” prior
Pre-tax income to KHD ($mn) 4.3 6.4 16.6
guidance for earnings and order intake; “don’t have
a feel” for how quickly business may pick up again
Major Iron Ore Producers
• Balance sheet: majority of cash is held in Austrian 1Q08
banks with strong credit ratings (government has Production Market
1
announced intention to support banks if necessary); URL (mn tons) Share
largest portion of cash is denominated in euros; Vale do Rio vale.com 83 42%
$100 million set aside in dollars for business growth Rio Tinto riotinto.com 37 19%
• M&A strategy: “hesitant” to spend cash BHP Billiton bhpbilliton.com 28 14%
Kumba kumba.co.za 8 4%
• Iron ore: income up due to price increases; mine
LKAB lkab.com 6 3%
output has been relatively consistent in recent years 2
Others -- 36 18%
• Investment in Mass Financial preferred shares: Source: EconStats, The Manual of Ideas.
negotiating with Mass to distribute to KHD 1
Represents approximate share of ocean trade in iron ore.
2
shareholders a portion or all of KHD’s interest in Represents estimates.
Mass by way of newly created common shares in
Mass; mechanism will likely be conversion of a Iron Ore Prices, 1976-20081
($ per ton)
portion of KHD shares held into shares of Mass
$140
ROYALTY INTEREST IN WABUSH IRON ORE MINE $120
(0% of 2007 revenue, 25% of pre-tax income) $100
• KHD’s income from Wabush mine correlates $80
$60
closely with iron ore prices. As prices have risen,
$40
KHD’s income from its interest in Wabush has
$20
increased, from $4 million in 2005 to $6 million in
$0
2006 and $17 million in 2007. For a primer on iron
1976 1984 1992 2000 2008
ore supply, demand and pricing drivers, see the
April 2008 letter by the chairman and president of Source: EconStats, CVRD, Wall Street Journal, steel producers.
1
Leucadia National (NYSE: LUK): Represents Brazil-to-Europe prices. Contracts are generally made in the
spring/early summer between iron ore and steel producers. Prices shown
http://tinyurl.com/moi14 (pages 2-4). are prices arranged at the beginning of May of each year. They represent
price of fines, i.e., the most heavily-traded category of iron ore.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 83 of 241
PRIMEDIA (NYSE: PRM) Norcross, GA, 678-421-3000
Services: Printing & Publishing http://www.primedia.com
$250
$200
$150
$100
$50
$0
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 84 of 241
BUSINESS OVERVIEW • EBIT of $31 million YTD, up from $18 million in
PRIMEDIA publishes and distributes ad-supported print and year-ago period, driven by move of HQ from NYC
online consumer guides for the apartment leasing and new to Atlanta, opex reductions, improved distribution,
home sale segments of residential real estate. The guides are and exit from two Auto Guide markets.
provided for free to end users. In 2007, it distributed 38 • New CEO Charles Stubbs (35) joined PRIMEDIA
million guides to 60,000 locations through DistribuTech, in April 2008 from Yellowpages.com, which he had
which also distributes 2,000 third-party publications. built into a cohesive brand and Top 30 Internet site.
PRIMEDIA owns websites associated with its print guides, • Reduced corporate overhead to $12 million run
as well as Rentals.com, the leading paid listings website for rate, down from $29 million in 2007. The company
residential real estate rentals. The company monetizes visits has moved headquarters from New York to Atlanta.
to the sites through ad formats such as cost per lead, cost per • Shares trade at negative trailing FCF yield, 3x
impression, cost per click, cost per action, and flat fees. trailing P/E and 3x forward P/E.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 85 of 241
Target (NYSE: TGT) Minneapolis, MN, 612-304-6073
Services: Retail (Department & Discount), Member of S&P 500 http://www.target.com
$80
$70
$60
$50
$40
$30
$20
$10
$0
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 86 of 241
BUSINESS OVERVIEW • Repurchased $2.8 billion of stock in first nine
Target is a discount retailer of general merchandise and food, months of FY08, $2.5 billion in FY07, $900
operating ~1,700 stores and Target.com. The company also million in FY06, and $1.2 billion in FY05.
offers branded proprietary and Visa credit cards (sold 47% • Shares trade at 1.7x tangible book value, 9x
interest in credit card receivables to JP Morgan in 2Q08). trailing P/E and 12x forward P/E.
Target employs up to 400,000 people during peak periods.
Seasonality: One-third of sales are typically generated in Q4. INVESTMENT RISKS & CONCERNS
• Directly impacted by weak consumer spending.
SELECTED OPERATING DATA • December sales up 0.2%, with same store sales
YTD
FYE February 1 2006 2007 2008 11/1/08
down 4.1%. The SSS decline was within the guided
% of revenue by segment: range, reflecting “stronger results in the last two
Retail 97% 97% 97% 97% weeks of the month.” 4Q08 sales fell 2.3%, with
Credit cards 3% 3% 3% 3% SSS off 6.6%. 2008 sales rose 2.4%, with SSS down
Revenue growth by segment: 2.9%. Target ended the year with 1,683 stores.
Retail 12% 13% 6% 4%
Credit cards 17% 19% 18% 12% • Expects “additional pressure” on 4Q08 results
∆ revenue 12% 13% 7% 4% from markdowns designed to “gain market share”
∆ comparable store sales 6% 5% 3% -2% and produce “very clean inventories.”
∆ stores (period end) 7% 7% 7% 6% • Weak credit card segment metrics, with 4Q08
∆ square feet (period end) 8% 8% 8% 7%
annualized net write-off rate of 10-11% (9%+ in
% of revenue by type:
Consumables and commodities 30% 32% 34% n/a FY08). FY-end receivables should be up 10% y-y.
Electronics and entertainment 23% 23% 22% n/a • Low-margin, capital-intensive business, with
Apparel and accessories 22% 22% 22% n/a formidable competition from Wal-Mart, Costco,
Home furnishings and other 25% 23% 22% n/a
Selected items as % of revenue:
Home Depot, and selected specialty retailers.
EBIT 8% 9% 8% 7% • Potentially inefficient capital and business
D&A 3% 3% 3% 3% structure, marrying a competitive retail business
Capex 6% 7% 7% 6% with ownership and management of real estate. The
Equity to total assets 41% 42% 34% 29%
company may be better off separating these distinct
∆ diluted shares out (avg) -3% -2% -2% -9%
assets into two entities, as suggested by Pershing.
INVESTMENT HIGHLIGHTS
COMPARABLE PUBLIC COMPANY ANALYSIS
• Uniquely positioned as fashionable discounter, Market Enterprise Price This Next
enabling it to compete successfully against Wal- EV /
Value Value to T. FY FY
Rev.
Mart’s price leadership (by contrast, Kmart has been ($mn) ($mn) Book P/E P/E
unable to carve out a defensible competitive niche). WMT 182,520 223,670 .6x 3.6x 14x 13x
• Significant real estate value, as Target owns the HD 35,980 46,480 .6x 2.1x 12x 15x
land and buildings associated with the vast majority COST 18,530 18,080 .2x 2.1x 16x 14x
of its stores and distribution centers. In November SHLD 4,820 8,130 .2x 1.0x 29x 89x
2008, management rejected a proposal from holder JCP 3,500 5,380 .3x .7x 6x 121x
Pershing Square to spin off the owned land and TGT 22,640 42,020 .6x 1.7x 10x 12x
facilities management functions into a REIT, citing
the complexity of the transaction and its negative MAJOR HOLDERS
impact on the company’s financial flexibility. Insiders 1% │ Pershing Square 10% │ Cap Re 8%
Pershing expected the transaction to result in
revaluation of the real estate, as inflation-protected RATINGS
securities trade at mid teens EBITDA multiples.* VALUE Intrinsic value materially higher than market value?
• Target veteran Gregg Steinhafel (53) became MANAGEMENT Capable and properly incentivized?
CEO in May 2008 and chairman in January 2009, FINANCIAL STRENGTH Solid balance sheet?
replacing Target “lifer” Bob Ulrich. Steinhafel MOAT Able to sustain high returns on invested capital?
joined Target’s merchandising division in 1979. EARNINGS MOMENTUM Fundamentals improving?
Douglas Scovanner (52) has been CFO since 2000. MACRO Poised to benefit from economic and secular trends?
*
EXPLOSIVENESS 5%+ probability of 5x upside in one year?
Access Pershing presentation at www.manualofideas.com/files/target.pdf
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 87 of 241
Visa (NYSE: V) San Francisco, CA, 415-932-2100
Financial: Consumer Financial Services http://www.visa.com
$100
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
Jan 00 Jan 00 Jan 00 Jan 00 Jan 00 Jan 00 Jan 00 Jan 00 Jan 00 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 88 of 241
BUSINESS OVERVIEW SELECTED OPERATING DATA
Visa operates a global retail electronic payments network and FYE September 30 2006 2007 2008 1Q09
manages one of the most recognized global financial services % of revenue by type:
Service fees 55% 54% 49% 46%
brands. The company engages in the following activities: Data processing fees 42% 39% 33% 32%
− owns and licenses to customers payment brands, International transaction fees 14% 13% 27% 29%
including Visa, Visa Electron, PLUS and Interlink; Other revenues 9% 8% 9% 9%
Volume and support incentives -20% -14% -19% -15%
− promotes its brands through marketing initiatives % of revenue by geography:
and by encouraging usage and merchant acceptance; U.S. 90% 92% 59% n/a
− offers platforms that customers use to develop ROW 10% 8% 41% n/a
credit, debit and prepaid programs for cardholders; Selected items as % of revenue:
Personnel 23% 20% 19% 16%
− provides authorization, clearing and settlement to Network and communications 7% 7% 5% 5%
customers through VisaNet, a processing platform; Advertising and marketing 16% 16% 16% 12%
− provides value-added services: risk management, Professional and consulting 10% 9% 7% 5%
debit processing, loyalty, and dispute management; Administrative and other 8% 6% 5% 4%
Litigation provision 1% 74% 23% 0%
− enforces rules to ensure efficient functioning of the EBIT 26% 36% 45% 56%
payments network and the promotion of its brands. D&A 5% 4% 4% 3%
Capex 3% 4% 7% 4%
Following reorganization in 2007, Visa U.S.A., Visa Int’l, Return on tangible equity
1
n/m n/m n/m n/m
Visa Canada and Inovant became subsidiaries of Visa Inc. Tangible equity to assets (avg)
1
n/m n/m n/m n/m
Visa Europe did not become a subsidiary of Visa Inc. but ∆ diluted shares out (avg) n/a 0% 80% 51%
remained owned by its member financial institutions. In 1
Visa has negative tangible book value.
October 2008, the company redeemed of 135 million shares
• Open-loop model depends on third-party merchant
of class C stock held by Visa Europe for $2.7 billion.
acquirers and card issuers. While Mastercard has a
Visa went public in March 2008. Class A shares trade on the similar model, American Express operates a closed-
NYSE; B and C shares are held by financial institutions. loop network that gives it more revenue streams and
more control over the functioning of the network.
INVESTMENT HIGHLIGHTS
• World’s largest electronic payments network, COMPARABLE PUBLIC COMPANY ANALYSIS
ahead of MasterCard and American Express, based Market Price to This Next
Price FY End
on branded credit and debit cards in circulation, ($)
Value Tangible FY FY
Date
transaction volume and dollar volume. ($mn) Book P/E P/E
MA 161.90 20,920 16.9x 16x 13x Dec-31
• Centralized VisaNet platform provides financial
AXP 15.70 18,260 1.5x 14x 10x Dec-31
institutions and merchants with wide range of
DFS 7.00 3,370 0.6x n/m 11x Nov-30
products, transaction processing and value-added
V 56.00 47,333 87.0x 21x 18x Sep-30
services. Financial institutions are Visa’s primary
customers; the former are responsible for merchant
acquiring and card issuance to consumers. MAJOR HOLDERS
• Derives revenue from fees based on payments The company had 449 million class A, 246 million class B
volume, processed transactions, related services. and 152 million class C shares as of November 12, 2008.
• Visa, MasterCard and Discover settled litigation CEO <1% │ Other insiders <1%;
in October 2008, with Visa agreeing to pay $1.8 Class A shares: Fidelity 10% │ Marsico 8% │ TCI 2%
billion (to be funded via dilutive adjustment in
Class B shares: JPM 23% │ BofA 12% │ National City 8%
conversion ratio of class B shares to class A shares).
│ Citigroup 6% │ U.S. Bancorp 5% │ Wells Fargo 5%
• Shares trade at 0% trailing FCF yield, 50x
trailing P/E and 21x forward P/E. RATINGS
VALUE Intrinsic value materially higher than market value?
INVESTMENT RISKS & CONCERNS MANAGEMENT Capable and properly incentivized?
• Exposed to downturn in consumer spending. FINANCIAL STRENGTH Solid balance sheet?
Despite the global recession, consensus estimates MOAT Able to sustain high returns on invested capital?
still have Visa growing earnings in FY09 and FY10. EARNINGS MOMENTUM Fundamentals improving?
• Regulatory scrutiny of interchange fees may MACRO Poised to benefit from economic and secular trends?
increase over time and may negatively affect model. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 89 of 241
…additional insight into V: Share of Payments Volume by Operator, 2007 (industry-
wide electronic payments volume: $5.0 trillion)
SELECTED SLIDES FROM COMPANY PRESENTATIONS, Discover,
FEBRUARY 4 & 10, 2009 JCB, Diners
American 4%
Express
13%
Visa
49%
MasterCard
34%
Source: Company, The Manual of Ideas.
Visa
MasterCard 55%
33%
MasterCard
32% Visa
59%
MasterCard
32% Visa
59%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 90 of 241
VISA – SELECTED OPERATING MATERICS
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 91 of 241
Yahoo! (Nasdaq: YHOO) Sunnyvale, CA, 408-349-3300
Services: Business Services, Member of S&P 500 http://www.yahoo.com
$140
$120
$100
$80
$60 c
$40
$20
$0
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 92 of 241
BUSINESS OVERVIEW • Rock-solid balance sheet, with cash of $2.3 billion,
Yahoo! is a leading global Internet brand and one of the most short-term investments of $1.2 billion, long-term
trafficked Internet destinations. The company serves users, equity investments of $3.2 billion, and no debt.
advertisers, publishers, and developers. • Shares trade at 6% trailing FCF yield, 46x
Yahoo! was founded by David Filo and Jerry Yang while trailing P/E and 34x forward P/E.
they were graduate students at Stanford University in 1994.
INVESTMENT RISKS & CONCERNS
SELECTED OPERATING DATA • Unclear whether value will be maximized. While
FYE December 31 2006 2007 2008 Carl Icahn disclosed a 5.5% stake in late 2008 and
Revenue growth 22% 8% 3% intends to keep pressuring management, Yahoo! has
Selected items as % of revenue:
not committed either to approaching Microsoft or to
Gross profit 58% 59% 58%
R&D 13% 16% 17% divesting stakes in Alibaba or Yahoo Japan. The
EBIT 15% 10% 0% company spent only $79 million buying back stock
D&A 8% 9% 11% in 2008, compared to $1.6 billion in 2007.
Capex 11% 10% 10%
% of revenue by geography:
• Reported operating loss of $278 million in 4Q08,
U.S. 68% 68% 72% compared to operating profit of $191 million in
International 32% 32% 28% 4Q07, on a 1% decline in revenue. FCF declined
EBIT margin by geography: from $330 million in 4Q07 to $219 million in 4Q08.
U.S. 33% 30% 4% U.S. revenue rose 2% y-y on a GAAP basis in 4Q08
International 22% 22% -9%
Corporate -15% -18% 0% while international revenue declined 10%.
Total EBIT margin 15% 10% 0% • Guiding for 1Q09 revenue of $1.525-$1.725
Return on tangible equity 14% 12% 7% billion and non-GAAP operating cash flow of $365-
Tangible equity to assets (avg) 70% 68% 70%
415 million, compared to 1Q08 revenue of $1.818
∆ diluted shares out (avg) -2% -4% 0%
billion and operating cash flow of $433 million.
• Ad serving technology inferior to that of Google.
INVESTMENT HIGHLIGHTS
While Yahoo! serves targeted search ads and
• Most visited website globally, ahead of Google, integrates its ad offerings into affiliate websites, the
YouTube, Live.com, and MSN.com, according to company trails Google on most ad-related metrics.
Alexa (as of February 16).
• Former CEO Yang was forced out in November,
• Second-most visited website in U.S., behind following his failure to agree on a sale of Yahoo! to
Google and ahead of YouTube, MySpace, and Microsoft. The latter had made an unsolicited offer
Facebook, according to Alexa (as of February 16). of $31 per share for Yahoo! in February 2008.
• Advertising revenue-driven model. Publisher
affiliates, such as eBay, WebMD, Cars.com, and COMPARABLE PUBLIC COMPANY ANALYSIS
Forbes, attract users by providing relevant content, Market Enterprise Price This Next
presented on web pages that have space for ads. EV /
Value Value to T. FY FY
Rev.
• Fee revenue complements ad revenue. Although ($mn) ($mn) Book P/E P/E
many of Yahoo!’s user services are free, the MSFT 169,720 151,010 2.4x 8.4x 11x 10x
company charges for a range of premium services. GOOG 112,580 96,730 4.4x 5.0x 17x 15x
• Strategic objectives: become Internet starting point YHOO 17,794 14,342 2.0x 2.4x 34x 29x
for users; establish Yahoo! as “must buy” for
advertisers; deliver platforms that attract developers. MAJOR HOLDERS
• Carol Bartz became CEO in January 2009, Former CEO Jerry Yang 4% │ Other insiders 6% │ Capital
replacing co-founder Jerry Yang, who resigned Research 11% │ Carl Icahn 4% │ Barclays 4%
under shareholder pressure following weak
operating performance and botched M&A RATINGS
negotiations with Microsoft. Bartz was previously VALUE Intrinsic value materially higher than market value?
CEO of Autodesk, where she had spent 14 years. MANAGEMENT Capable and properly incentivized?
• $3.2 billion book value of long-term equity stakes FINANCIAL STRENGTH Solid balance sheet?
includes investments in Alibaba.com (Hong Kong: MOAT Able to sustain high returns on invested capital?
1688), the largest online B2B marketplace, and EARNINGS MOMENTUM Fundamentals improving?
Yahoo Japan (Tokyo: 46890). These investments MACRO Poised to benefit from economic and secular trends?
are accounted for under the equity method. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 93 of 241
…additional insight into YHOO:
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 94 of 241
YAHOO! – SELECTED NON-GAAP FINANCIAL TABLES
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 95 of 241
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 96 of 241
YAHOO! – SEGMENT DATA, 2006-2008
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 97 of 241
Candidates—Super Investor Favorites
We present the following companies:
h Barnes & Noble (NYSE: BKS)
h Burlington Northern Santa Fe (NYSE: BNI)
h Canadian Natural Resources (NYSE: CNQ)
h ConocoPhillips (NYSE: COP)
h Depomed (Nasdaq: DEPO)
h Dish Network (Nasdaq: DISH)
h Eaton (NYSE: ETN)
h Forest Laboratories (NYSE: FRX)
h GeoResources (Nasdaq: GEOI)
h Helix Energy Solutions (NYSE: HLX)
h Horsehead Holding (Nasdaq: ZINC)
h Jefferies Group (NYSE: JEF)
h Leucadia National (NYSE: LUK)
h Lorillard (NYSE: LO)
h Mastercard (NYSE: MA)
h Sonae Capital (Lisbon: SONC)
h St. Joe Company (NYSE: JOE)
h UnitedHealth Group (NYSE: UNH)
h URS (NYSE: URS)
h USG (NYSE: USG)
h WellCare Health Plans (NYSE: WCG)
h WellPoint (NYSE: WLP)
h Winthrop Realty Trust (NYSE: FUR)
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 98 of 241
Barnes & Noble (NYSE: BKS) New York, NY, 212-633-3300
Services: Retail (Specialty Non-Apparel), Member of S&P MidCap 400 http://www.barnesandnoble.com
$60
$50
$40
$30
$20
$10
$0
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 99 of 241
BUSINESS OVERVIEW • Sourcing greater portion of inventory through
Barnes & Noble is the largest bricks-and-mortar bookseller own distribution centers, resulting in more direct
in the U.S. with 798 bookstores. 89% of the stores operate buying from publishers rather than wholesalers.
under the Barnes & Noble name, with 9% branded B. Dalton. • B. Dalton winddown nearly complete, with nearly
Other assets include BarnesandNoble.com, trade book 900 stores closed since 1989. 85 stores remain, 93%
publisher Sterling Publishing and 74% of seasonal kiosk of which have leases expiring in the near future.
operator Calendar Club. Store size ranges from 10,000 to • Shares trade at .2x EV to trailing revenue, 10x
60,000 square feet depending upon market size, with an trailing P/E and 15x forward P/E.
overall average store size of 26,000 square feet.
INVESTMENT RISKS & CONCERNS
SELECTED OPERATING DATA • Holiday B&N store sales down 5%, with SSS
YTD
FYE January 31 2006 2007 2008 11/1/08
1 down 8%, in line with prior guidance (SSS rose in
Growth metrics of Barnes & Noble stores:
2 last two weeks of season). Online comp sales fell
Stores (period end) 2% 2% 3% 3% 11%. Management maintained FY08 EPS guidance
Sq. footage (period end) 3% 4% 4% 4% of $1.30-1.60 following the holiday results.
Comparable store sales 3% 0% 2% -5%
Store revenue 6% 4% 3% -2%
• Price competition. B&N stores sell bestsellers and
Number of stores by trade name (period end): selected feature titles at 20-30% off publishers’
Barnes & Noble stores
3
681 695 713 728 suggested retail prices. Mass merchandisers such as
B. Dalton Bookseller stores 118 98 85 71 Wal-Mart and Costco also compete aggressively on
% of revenue by type: price, though their book selection is more limited.
Barnes & Noble stores 85% 86% 86% 88%
B. Dalton stores 3% 2% 2% 1% • Less personalization than Amazon.com. Still,
Barnes & Noble.com 9% 8% 9% 9% each B&N store has 60K-200K unique titles, of
Other 3% 4% 4% 2% which 50K are common across stores. The balance
Revenue growth by type: reflects the interests of each store’s customers.**
Barnes & Noble stores 6% 4% 3% -2%
Barnes & Noble.com 5% -1% 10% 3% • Absence of hard asset protection, as the company
Total revenue growth 5% 3% 3% -2% owns the real estate associated with only one store.
Selected items as % of revenue:
Gross profit 31% 31% 30% 30% COMPARABLE PUBLIC COMPANY ANALYSIS
EBIT ex. pre-opening costs 5% 5% 4% 0%
D&A 3% 3% 3% 4% Market Enterprise Price This Next
EV /
Capex 4% 3% 4% 5% Value Value to T. FY FY
Rev.
($mn) ($mn) Book P/E P/E
∆ average diluted shares out -5% -4% -3% -19%
1 AMZN 27,110 23,850 1.2x 12.1x 43x 33x
Does not include seasonally strong FQ4.
2
Excludes legacy B. Dalton stores. BAMM 40 90 .2x 0.4x n/a n/a
BGP 30 520 .1x 0.1x n/m n/m
INVESTMENT HIGHLIGHTS BKS 950 1,060 .2x 1.8x 12x 15x
• 17% share of U.S. consumer book market, which
is expected to grow from $21 billion in 2006 to $24 MAJOR HOLDERS
billion in 2011, a 2.6% CAGR.* The company has Chairman Leonard Riggio 32% │ CEO Stephen Riggio 4%
four decades of bookselling experience. │ Other insiders 1% │ Arnhold & S. Bleichroeder 11%
• Focused on gaining share via new stores; expects
to open 35-40 new B&N stores in FY08. RATINGS
• Popular “community store” concept, with typical VALUE Intrinsic value materially higher than market value?
stores offering a comprehensive title base, a café, a MANAGEMENT Capable and properly incentivized?
children’s section, a music/DVD department, a FINANCIAL STRENGTH Solid balance sheet?
magazine section and a calendar of in-store events. MOAT Able to sustain high returns on invested capital?
• Less dependent on bestsellers than might be EARNINGS MOMENTUM Fundamentals improving?
assumed (3-5% of store sales from bestsellers). MACRO Poised to benefit from economic and secular trends?
• Company-owned publisher Sterling, founded in EXPLOSIVENESS 5%+ probability of 5x upside in one year?
1949, is a leading publisher of non-fiction. Imprints **
The company displays a lack of sophistication on the Internet by referring
include Hearst Books and Union Square Press. to its online unit as Barnes & Noble.com. The company should instead label
the unit BarnesandNoble.com, a URL customers can actually visit (if you
*
Source: Veronis Suhler Stevenson Communications Industry Forecast. type Barnes&Noble.com into a web browser, you receive an error message).
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 100 of 241
Burlington Northern Santa Fe (NYSE: BNI) Fort Worth, TX, 800-795-2673
Transportation: Railroads, Member of S&P 500 http://www.bnsf.com
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BUSINESS OVERVIEW SELECTED OPERATING DATA
Burlington Northern provides freight rail transportation of FYE December 31 2006 2007 2008
coal and consumer, industrial and agricultural products. % of revenue by business group:
Freight – consumer products 37% 36% 34%
Freight – industrial products 24% 23% 22%
PRIMARY ROUTES* Freight – coal 19% 21% 22%
Freight – agricultural products 16% 17% 19%
Other 3% 3% 3%
Revenue growth by business group:
Freight – consumer products 15% 1% 7%
Freight – industrial products 15% 3% 9%
Freight – coal 19% 12% 21%
Freight – agricultural products 14% 12% 26%
∆ revenue 15% 5% 14%
∆ units 6% -3% -3%
*
Includes trackage rights. Source: Company. ∆ revenue per unit (avg) 9% 9% 18%
Selected operating metrics:
Locomotives (period end) 6,330 6,400 n/a
INVESTMENT HIGHLIGHTS Freight cars (period end) 85,121 85,338 n/a
• One of North America’s largest rail networks, Track miles of rail laid 854 994 933
with 32,000 route miles in 28 states and Canada. Track resurfaced (miles) 12,588 11,687 13,005
1
Productivity 27,092 27,222 27,360
• Balanced revenue base, with four major sources of
Cars/units ('000) 10,637 10,318 9,994
freight revenue: intermodal, industrial products, Revenue ton miles (RTN) (mn) 647,857 657,572 664,384
coal, and agricultural products. Freight revenue per '000 RTN $22.45 $23.34 $26.34
• Competitive advantage versus trucking. The Opex ex. D&A as % of revenue:
Compensation and benefits 25% 24% 22%
company’s intermodal transport lags the delivery
Fuel 18% 20% 26%
time of trucking slightly but offers big cost savings. Purchased services 13% 13% 12%
• Strong intermodal franchise, with one-third of Equipment rents 6% 6% 5%
revenue from consumer products transportation, Materials and other 6% 7% 6%
Total opex ex. D&A 69% 70% 71%
which interfaces with other types of transportation. D&A as % of revenue 8% 8% 8%
• Balanced agri business, with 26% and 8% of Maintenance capex as % of rev. 10% 11% 11%
segment sales from corn and ethanol, respectively. Expansion capex as % of rev. 3% 4% 1%
• May benefit from higher infrastructure spending ROE 19% 17% 19%
Equity to total assets (avg) 32% 33% 32%
under Obama, particularly in industrial products. Adjusted net debt to total cap.
2
52% 52% n/a
• Shares trade at 4% trailing FCF yield, 11x ∆ diluted shares out (avg) -3% -3% -3%
trailing P/E and 12x forward P/E. 1
2
Calculated as thousand gross ton miles divided by avg number of employees.
Net debt to cap, adjusted for long-term operating leases and other items.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 102 of 241
SELECTED SLIDES FROM PRESENTATION AT BB&T CAPITAL
MARKETS CONFERENCE, FEBRUARY 11, 2009
Source: http://www.bnsf.com/investors/presentations/pdf/2009bbt.pdf
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 103 of 241
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 104 of 241
Canadian Natural Resources (NYSE: CNQ) Calgary, AB, Canada, 403-517-7345
Energy: Oil & Gas Operations http://www.cnrl.com
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© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 105 of 241
BUSINESS OVERVIEW • Oil sands leases near Fort McMurray, Alberta
Canadian Natural Resources is a senior producer of crude oil, contain 6 billion barrels of potentially recoverable
NGL, natural gas and bitumen, operating in western Canada, bitumen using existing technologies.
the North Sea and Offshore West Africa. Natural gas is the • Canadian Natural seeks large ownership stakes,
largest single commodity sold (~45% of production). Light/ operates the properties and attempts to dominate the
medium oil and NGLs (23% of production) are located in the local land position and operating infrastructure.
North Sea and West Africa. Heavy crude oil in Alberta and • Multi-year organic growth prospects due to 13
Saskatchewan accounts for one-quarter of production. Other million net acres of core undeveloped land base.
heavy crude oil (6% of production) is at Pelican Lake in • Forecasts 2008 pre-royalty production of ~1,500
north Alberta and has medium crude netback characteristics. mmcf/d natural gas and ~315,000 bbl/d crude/NGL.
In 2006, the company paid $4.6 billion for Anadarko • Long-standing management with strong track
Canada, which operates natural gas-weighted assets with a record and reputation for shareholder orientation.
long reserve life, located in western Canada. • Shares trade at 1.4x tangible book value and 6x
trailing P/E (no EPS estimates available).
SELECTED OPERATING DATA
YTD INVESTMENT RISKS & CONCERNS
FYE December 31 2005 2006 2007 9/30/08
∆ production of oil & NGLs 11% 6% 0% -3%
• Highly sensitive to price of oil. Results depend
∆ production of natural gas 4% 4% 12% -10% directly on market prices of oil and gas. Production
∆ corporate pricing of oil 23% 14% 3% 74% costs in Canada’s oil sands are generally higher than
∆ corporate pricing of gas 32% -22% 2% 26% in other oil regions, resulting in greater operating
∆ revenue 35% 5% 8% 46% leverage for oil sands producers. Should oil prices
∆ revenue net of royalties 35% 6% 7% 44%
return to past lows, the viability of oil sands-based
% of revenue by segment:
North America 80% 78% 81% 83% production might be called into question.
North Sea 15% 14% 13% 11% • Subject to government royalties. Canada regulates
Offshore West Africa 4% 8% 6% 6% oil sands producers. Alberta recently revised its
Midstream 1% 1% 1% 0%
royalty regulations, resulting in higher royalties
Selected items as % of revenue:
Production expense 15% 17% 17% 13% payable by the company. It appears that the royalty
Transportation expense 12% 12% 13% 12% mechanism in general dilutes shareholders’ upside
DD&A expense 18% 21% 23% 15% in the scenario of sharply higher oil and gas prices.
Capex, net of dispositions 44% 103% 51% 41%
Capex, ex. Horizon Project 30% 75% 24% 19%
Cash from ops (non-GAAP)
1
45% 42% 49% 40% COMPARABLE PUBLIC COMPANY ANALYSIS
Netback ($/boe): Market Enterprise Price This Next
EV /
Sales price 48.77 47.92 49.05 76.73 Value Value to T. FY FY
Rev.
Royalties 6.82 5.89 6.26 11.22 ($mn) ($mn) Book P/E P/E
Production expense 8.21 9.14 9.75 11.70 ECA 32,780 40,240 1.4x 1.6x n/a n/a
Netback 33.74 32.89 33.04 53.81 IMO 27,540 26,060 1.0x 3.9x n/a n/a
2
Pricing – oil, NGLs (C$/bbl) 47 54 55 95 SU 18,460 22,670 1.0x 1.6x n/a n/a
2
Pricing – gas (C$/mcf) 8.57 6.72 6.85 8.83
1 PCZ 11,190 12,980 .6x 0.9x n/a n/a
Represents GAAP net income adjusted for non-cash items before working
capital adjustments. Cash from ops, as defined by the company, equals net CNQ 18,660 28,220 2.4x 1.4x n/a n/a
income plus the following items: DD&A, asset retirement obligation accretion,
stock-based comp, unrealized hedging loss, unrealized forex loss, deferred
petroleum revenue tax expense, and future income tax expense. MAJOR HOLDERS
2
Represents corporate average price before hedges. Employees 10% │ Fidelity 11% │ Capital World 5%
INVESTMENT HIGHLIGHTS RATINGS
• Owns oil sands leases in Alberta; commenced VALUE Intrinsic value materially higher than market value?
phase one of Horizon project in 2005. Phase one MANAGEMENT Capable and properly incentivized?
production began in 3Q08 and is expected to ramp FINANCIAL STRENGTH Solid balance sheet?
up to 110,000 bbl/d of synthetic light crude oil MOAT Able to sustain high returns on invested capital?
(SCO). Phases two and three target production EARNINGS MOMENTUM Fundamentals improving?
expansion to 232,000 bbl/d of SCO by 2013. The MACRO Poised to benefit from economic and secular trends?
three phases should deliver 37 years of production. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 106 of 241
…additional insight into CNQ: SUPERINVESTOR INSIGHT INTO CNQ
• Bruce Berkowitz, interview with Kiplinger’s
SELECTED COMPANY SLIDES, FEBRUARY 2009 Personal Finance magazine in January 2009:
− “Earlier this decade, when oil and gas prices were
much lower and people were very down on the
sector, we found a few companies that we thought
did exceptionally well in almost all price
environments. We focused on Canadian Natural
Resources. It wasn’t well known in the U.S., but it
was run by a man named Murray Edwards, who is a
human computer.”
− Question: “You’ve cut back on that position,
haven’t you?” Answer: “Yes. When the stock
approached $100 a share and people started saying
oil had to go to $200 a barrel, we dramatically cut
that position. But lately we’re seeing some energy
stocks at levels that assume oil prices of $35 a
barrel, and so, in a very short period of time, we’ve
reversed course again on energy stocks.”
• Bruce Berkowitz, Semi-Annual Report of The
Fairholme Fund for period ended May 31, 2008:
− “…as energy stocks surged this year, we took
profits in Canadian Natural Resources, reducing our
position … Oil and gas prices have multiplied since
our initial purchases and are now high enough to
increase supply and slow demand. Alternative
sources such as solar and wind are booming while
sales of SUVs and other gas hogs have plunged.”
• Bruce Berkowitz, Annual Report of The Fairholme
Fund for period ended November 30, 2007:
− “Energy continues to be a substantial component of
the Fund with Canadian Natural Resources the
second largest Fund investment [15% of assets].
Notwithstanding the province of Alberta’s proposed
royalty increases, the company has a unique ability
to materially increase production without
acquisition in today’s high price/high cost
environment. Canadian Natural remains
undervalued in a world where most reserves are
subject to significant political risk and long term-
demand threatens to outrun supply.”
• Bruce Berkowitz, interview with Consuelo Mack
in August 2007:
− “…whether it’s Warren Buffett at Berkshire
Hathaway, or the management team that created
Canadian Natural… these are people with great
paper trails, have their family net worth on the line
with these companies.”
− “The company is gushing cash, tremendous
amounts of cash. They have the people, the plan, the
assets to triple production over the next 15 years
without buying another asset. Oil—we’re not
making it any more. It’s a depleting asset. You can’t
recycle it. The cheap stuff is going. Demand from
Asia, from America, from the Middle East—global
demand for energy is increasing. Demand is
growing faster than supply. Get a good management
team… I can't see how they’ll do badly.”
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 107 of 241
CANADIAN NATURAL RESOURCES (NYSE: CNQ)
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 108 of 241
ConocoPhillips (NYSE: COP) Houston, TX, 281-293-1000
Energy: Oil & Gas - Integrated, Member of S&P 500 http://www.conocophillips.com
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BUSINESS OVERVIEW SELECTED OPERATING DATA
ConocoPhillips operates in six integrated segments: FYE December 31 2006 2007 2008
% of revenue by segment:
E&P explores for and produces oil, gas and NGLs. E&P 27% 25% n/a
Midstream processes natural gas and fractionates NGLs. It Midstream 2% 2% n/a
consists of a 50/50 JV with Duke (on books for $1 billion). R&M 69% 69% n/a
1
Lukoil 0% 0% n/a
R&M refines and markets oil and petroleum products, with Chemicals 0% 0% n/a
interests in 17 refineries, 12 of which are in the U.S. Emerging 0% 0% n/a
Corporate and other 0% 0% n/a
Lukoil represents 20% stake (170 million shares) in Lukoil Total sales and operating revenue 97% 96% 98%
(London SE: LKOD), the Russian oil and gas producer (on Equity in earnings of affiliates 2% 3% 2%
books for $11 billion; recent market value: $5 billion). Other income 0% 1% 0%
Chemicals consists of a 50% JV (on books for $2 billion). % of net income by segment:
E&P 63% 39% 79%
Emerging comprises investments outside normal operations. Midstream 3% 4% -3%
ConocoPhillips acquired Burlington Resources for $34 R&M 29% 50% -14%
Lukoil 9% 15% 32%
billion (cash of $18 billion and 270 million shares) in 2006. Chemicals 3% 3% -1%
Emerging 0% 0% 0%
INVESTMENT HIGHLIGHTS Corporate and other -8% -11% 6%
• Sixth-largest in proved reserves (on BOE basis) Selected items as % of revenue:
EBIT 16% 13% -1%
among non-government-controlled firms globally. DD&A, impairments and other
2
4% 7% 5%
The company is also a large U.S. producer of NGLs. Capex and investments, net -8% -4% -7%
• Second-largest U.S. refining capacity, fifth-largest Net income 8% 6% -7%
Selected growth rates – consolidated operations:
among non-government-controlled firms globally.
Revenue 2% 2% 28%
The company’s 50%-owned affiliate CPChem is a Production – crude oil 9% -10% n/a
top ten producer of various types of chemicals. Production – natural gas 52% 2% n/a
• Markets gas and other fuels via 8,750 outlets Production – NGLs 49% 14% n/a
Sales price – crude oil (avg) 21% 11% n/a
under Conoco, Phillips 66 or 76 brands in U.S. Sales price – natural gas (avg) -2% 1% n/a
• Chairman and CEO James Mulva (61) has led the Sales price – NGLs (avg) 8% 14% n/a
company since the Conoco-Phillips merger in 2002. Production cost – BOE (avg) 25% 28% n/a
Standardized DCF measure -4% 30% n/a
• Shares trade at 5% trailing FCF yield and 11x
Selected growth rates – equity affiliates (Lukoil and others):
forward P/E (trailing GAAP EPS loss reported). Equity in earnings of affiliates 21% 21% -16%
Production – crude oil 34% 2% n/a
INVESTMENT RISKS & CONCERNS Production – natural gas 242% 3% n/a
Sales price – crude oil (avg) 13% 15% n/a
• Commodity producer, dependent on market prices. Sales price – natural gas (avg) 24% 77% n/a
• Exposure to global political risks, as 63% of Production cost – BOE (avg) 16% 20% n/a
production and 59% of reserves are outside the U.S. Standardized DCF measure -25%
3
61% n/a
Proved reserves – developed and undeveloped:
Crude oil (mn of barrels) 5,890 5,502 n/a
COMPARABLE PUBLIC COMPANY ANALYSIS NGLs (mn of barrels) 806 818 n/a
Market Enterprise Price This Next Natural gas (bn of cubic ft) 26,835 25,438 n/a
EV /
Value Value to T. FY FY Standardized DCF measure ($bn)
4
$64 $87 n/a
Rev.
($mn) ($mn) Book P/E P/E % in U.S. – Alaska
5
18% 17% n/a
XOM 371,160 342,990 .7x 3.0x 15x 11x % in U.S. – Lower 48
5
23% 18% n/a
5
CVX 141,680 137,660 .5x 1.7x 13x 9x % in Canada 10% 9% n/a
5
BP 136,900 168,650 .5x 1.9x 10x 7x % in Europe 15% 15% n/a
5
% in Asia Pacific 13% 13% n/a
COP 68,090 89,070 .4x 1.1x 11x 8x % from Russia and others
5,6
22% 27% n/a
1
Accounted for under the equity method.
RATINGS 2
3
Includes dry hole costs and expropriation ($4.6 billion expropriated in 2007).
Includes look-through net reserves of equity affiliates.
VALUE Intrinsic value materially higher than market value? 4
Computed using year-end prices and costs and 10% discount rate.
MANAGEMENT Capable and properly incentivized? 5
Represents Manual of Ideas estimate; assumes that net reserves associated
with equity affiliates are located in the Middle East, Africa and Russia.
FINANCIAL STRENGTH Solid balance sheet? 6
Includes Russia, Middle East and Africa.
MOAT Able to sustain high returns on invested capital?
EARNINGS MOMENTUM Fundamentals improving? MAJOR HOLDERS
MACRO Poised to benefit from economic and secular trends? Insiders <1% │ Berkshire Hathaway 5% │ Barclays 4%
EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 110 of 241
Depomed (Nasdaq: DEPO) Menlo Park, CA, 650-462-5900
Health Care: Biotechnology & Drugs http://www.depomedinc.com
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BUSINESS OVERVIEW INVESTMENT RISKS & CONCERNS
Depomed is a specialty pharma company with two approved • Losing money in recurring operations. Depomed
products on the market and other product candidates in the has appeared as cheap on an earnings basis due to
pipeline. GLUMETZA is approved for use in adults with non-recurring gains. The company expects to
type 2 diabetes and promoted by Santarus in the U.S. continue to post adjusted operating losses in the
ProQuin XR is approved in the U.S. for the once-daily foreseeable future.
treatment of uncomplicated urinary tract infections and is • Failed Phase 3 trial for Gabapentin GR.
being marketed by Watson Pharma. Product candidate Depomed announced in July 2007 that the drug
Gabapentin GR is currently in clinical development for the candidate failed to meet the primary efficacy
treatment of neuropathic pain and menopausal hot flashes. endpoint in a trial for postherpetic neuralgia (PHN).
• New GLUMETZA partner yet to be identified. A
DRUG PIPELINE OVERVIEW promotion agreement with King Pharmaceuticals
Preclinical Ph. 1 Ph. 2 Ph. 3 Marketed
GLUMETZA1 U.S. / Canada
was terminated in October 2007, following a
Proquin XR 2
U.S. strategic shift by King. Depomed has yet to identify
Gabapentin GR3 Phase 3 ongoing a new marketing partner for GLUMETZA.
Gabapentin GR4 Phase 3 ongoing
Omeprazole GR5 • Limited in-house sales and marketing resources.
Levodopa 6
Proof of concept The company has engaged a contract sales
Undisclosed7 organization to promote GLUMETZA on a
1
For Type 2 diabetes. Canadian rights held by Biovail.
2
For uncomplicated urinary tract infections. Sold in U.S. and Europe. temporary basis, as Depomed has no sales force and
3
4
For postherpetic neuralgia.
6
limited marketing and sales staff.
For menopausal hot flashes. For Parkinson’s disease.
5
For nighttime acid breakthrough. 7
Two undisclosed compounds. • Dependent on Watson Pharma for ProQuin XR.
Depomed depends on Watson to successfully
INVESTMENT HIGHLIGHTS promote the drug. The company’s prior marketing
• Differentiated drug delivery technology. The partner for ProQuin XR, Esprit Pharma, was unable
company utilizes proprietary AcuForm delivery to successfully commercialize the drug.
technology to improve existing oral medications, • Should not be on “Magic Formula” list. Depomed
allowing for extended, controlled release of became an MF selection due to one-time items. It
medications to the upper gastrointestinal tract. has recorded $42 million of termination fees and
Benefits include convenience of once-daily litigation settlement proceeds over the past year.
administration, improved treatment tolerability and
enhanced compliance and efficacy. COMPARABLE PUBLIC COMPANY ANALYSIS
Market Enterprise Price This Next
• Litigation-tested IP. DepoMed’s AcuForm patents Value Value
EV /
to T. FY FY
expire in 2016-21, with numerous applications Rev.
($mn) ($mn) Book P/E P/E
pending. The company has won two separate BMY 42,930 41,750 2.0x 6.2x 11x 10x
settlements amounting to a total of $28 million. TEVA 35,910 37,320 3.5x 8.0x 16x 15x
• Superior development model. AcuForm provides DEPO 130 70 2.2x 4.1x n/m n/m
new chemical entity (NCE)-like differentiation to
existing pharmaceuticals (KCEs). Development MAJOR HOLDERS
timeframes and costs range from 4-6 years and $20- CEO Smith <1% │ Other insiders 5% │ Third Point 15% │
$40 million vs. 8+ years and $1+ billion for NCEs. Tang 10% │ JP Morgan 10% │ Biovail 10% │ Polygon 6%
• GLUMETZA targets large market. Metformin for
diabetes is 5th most prescribed U.S. drug with 49 RATINGS
million transcriptions. Depomed has so far targeted VALUE Intrinsic value materially higher than market value?
only 13K out of 73K Metformin prescribers. MANAGEMENT Capable and properly incentivized?
• Strong cash position. Depomed had net cash of FINANCIAL STRENGTH Solid balance sheet?
$76 million as of September 30, 2008, providing MOAT Able to sustain high returns on invested capital?
ample liquidity to pursue pipeline development. EARNINGS MOMENTUM Fundamentals improving?
• Shares trade at 24% trailing FCF yield and 6x MACRO Poised to benefit from economic and secular trends?
trailing P/E (forward loss projected). EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 112 of 241
DISH Network (Nasdaq: DISH) Englewood, CO, 303-723-1000
Services: Broadcasting & Cable TV http://www.dishnetwork.com
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BUSINESS OVERVIEW INVESTMENT RISKS & CONCERNS
DISH Network provides satellite television in the U.S., • Lost 10,000 subscribers in Q3 due to “weak
offering hundreds of channels, digital video recording and economic conditions, aggressive promotional
HDTV. The company began subscription TV services in offerings by our competition, our relative discipline
1996 and had 14 million subscribers at yearend 2007. DISH in the amount of discounted programming or
utilizes a satellite fleet that enables it to offer 2,700 video and equipment we currently offer, the heavy marketing
audio channels, including local programming. of HD service by our competition, the growth of
On January 1, 2008, DISH spun off technology and certain fiber-based pay TV providers, signal theft and other
infrastructure assets into EchoStar Corporation (SATS). forms of fraud, and operational inefficiencies.”
• Opex grew faster than revenue in Q3, as SAC and
SELECTED OPERATING DATA retention costs rose. Increased upgrades are likely to
YTD continue at least through 1H09.
FYE December 31 2005 2006 2007 9/30/08 • AT&T deal terminated on January 31. AT&T
Selected growth rates:
Subscriber revenue 19% 17% 13% 8%
accounted for 17% of gross subscriber additions
ARPU 6% 8% 5% 6% YTD 9/30/08. The one million subscribers acquired
Subscribers (average) 13% 10% 7% 3% through AT&T may churn faster than others.
Subscribers (period end) 10% 9% 5% 1% • Competition from DirecTV and cable.
Subscriber acq. cost (SAC) 13% -1% -4% 10%
Selected items as % of subscriber revenue: • Net debt of $4.3 billion, purchase obligations of
Subscriber gross profit 49% 49% 49% 49% $1.5 billion, satellite obligations of $924 million.
SAC 19% 17% 15% 14%
EBIT 15% 13% 15% 18% LIQUIDITY SNAPSHOT1
D&A 10% 12% 12% 9%
Balance sheet items ($mn) 12/31/07 9/30/08
Capex 19% 15% 14% 10%
Cash and ST investments ST $2,788 $1,537
FCF 3% 9% 11% 11%
LT cash and investments LT 173 176
DISH Network subscriber data (mn, except if stated otherwise):
Capital leases, mortgages, notes ST (50) (12)
Subscribers (period end) 12.0 13.1 13.8 13.8
3% convertible note due 2010/11 ST (525) (25)
Subscribers (average) 11.5 12.6 13.4 13.8 1
5 3/4% senior notes due 2008 ST (1,000) (972)
Gross additions 3.4 3.5 3.4 2.3
6 3/8% senior notes due 2011 LT (1,000) (1,000)
Net additions 1.1 1.1 0.7 0.0
6 5/8% senior notes due 2014 LT (1,000) (1,000)
Monthly churn 1.65% 1.64% 1.70% 1.86%
7 1/8% senior notes due 2016 LT (1,500) (1,500)
Monthly ARPU ($) 58 63 66 69
7% senior notes due 2013 LT (500) (500)
SAC ($) 693 686 656 715
7 3/4% senior notes due 2015 LT (0) (750)
SAC / ARPU (months) 11.9 10.9 10.0 10.4
Capital leases, mortgages, notes LT (550) (223)
Net cash and investments ($3,165) ($4,268)
INVESTMENT HIGHLIGHTS 1
Redeemed $972 million of notes on October 1.
• Positioned as low-cost provider of multi-channel
pay TV services, competitive on price and COMPARABLE PUBLIC COMPANY ANALYSIS
programming versus cable television providers and Market Enterprise
EV /
Price This Next
DirecTV. Subscriber growth is driven by equipment Value Value to T. FY FY
Rev.
($mn) ($mn) Book P/E P/E
subsidies and promotional pricing on programming.
DTV 24,410 28,240 1.4x n/m 14x 11x
• Utilizes twelve satellites in geostationary orbit, DISH 6,070 10,620 .9x n/m 7x 6x
five of which are owned by DISH, six are leased
from EchoStar and one is leased from a third party.
MAJOR HOLDERS
• Purchased 700 MHz spectrum for $712 million in
Class A (209 million out): CEO Ergen 50% │ Other insiders
an FCC auction in March 2008. The acquired
8% │ Fairholme 10% │ Barclays 8% │ Dodge 6%; Class B
spectrum covers 76% of the U.S. population.
(238 million out): CEO Ergen 87% │ Other insiders 11%
• Chairman and CEO Charlie Ergen (54) is a well-
respected satellite entrepreneur who has led DISH RATINGS
since co-founding it with James DeFranco in 1980.
VALUE Intrinsic value materially higher than market value?
DeFranco (55) serves as EVP of marketing and MANAGEMENT Capable and properly incentivized?
sales. CFO Bernard Han (43) joined in 2006 from FINANCIAL STRENGTH Solid balance sheet?
Northwest Airlines, where he had served as CFO. MOAT Able to sustain high returns on invested capital?
• DeFranco bought 800K shares at $10 each in Nov. EARNINGS MOMENTUM Fundamentals improving?
• Shares trade at .9x EV to trailing revenue, 7x MACRO Poised to benefit from economic and secular trends?
trailing P/E and 6x forward P/E. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 114 of 241
Eaton (NYSE: ETN) Cleveland, OH, 216-523-5000
Technology: Electronic Instruments & Controls, Member of S&P 500 http://www.eaton.com
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BUSINESS OVERVIEW • Targeting sales of $18+ billion in 2010. The
Eaton is a power management company that provides company’s goal of 10% sales growth consists of 4%
electrical systems for power quality, distribution and control; growth from acquisitions, 4% from end market
hydraulics components, systems and services for industrial growth and 2% from relative outperformance.
and mobile equipment; aerospace fuel, hydraulics and • Strategy: (1) grow aftermarket and services, (2)
pneumatic systems; and truck and automotive drivetrain and expand in higher-growth regions, (3) boost new
powertrain systems. Eaton targets the following markets: product sales to $1.5 billion by 2010.
The electrical segment targets construction, commercial, • Alexander Cutler (56) became chairman and CEO
government, institutional, and telecom customers. in 2000. He joined Cutler-Hammer in 1975, which
The hydraulics segment targets OEMs and after-market was subsequently acquired by Eaton.
customers of off-highway and industrial equipment as well • Shares trade at .7x EV to trailing revenue, 7x
as equipment used in oil and gas, fine chemicals, mining, trailing P/E and 11x forward P/E.
metal forming, and food and beverage applications.
INVESTMENT RISKS & CONCERNS
The aerospace segment targets manufacturers of commercial
• Exposed to downturn in end markets, including
and military aircraft and related after-market customers.
construction, aerospace, industrial, and automotive.
The truck and automotive segments target OEMs and after- • Highly acquisitive. Eaton spent $4+ billion on
market customers of trucks and passenger cars. more than a dozen deals in two years, including
acquisitions in Canada, the Czech Republic, France,
SELECTED OPERATING DATA Germany, India, Spain, and Taiwan. The deals
FYE December 31 2006 2007 2008
% of revenue by segment:
1 include the $2.3 billion purchase of Germany-based
Electrical 34% 37% Moeller Group in April 2008 (sales of $1.5 billion).
Fluid power
2
33% 34% • Vulnerable to supply shortages and input price
Truck 21% 16% inflation. Key raw materials include iron, steel,
Automotive 13% 13%
Revenue growth by segment:
1 copper, nickel, aluminum, brass, silver, olybdenum,
Electrical 11% 14% titanium, vanadium, rubber, and plastic.
2
Fluid power 23% 12%
Truck 10% -15% COMPARABLE PUBLIC COMPANY ANALYSIS
Automotive -3% 7%
Market Enterprise Price This Next
Total revenue growth 12% 7% EV /
Value Value to T. FY FY
Pre-tax margin by segment: Rev.
($mn) ($mn) Book P/E P/E
Electrical 11% 12%
2 LMT 30,820 32,400 .8x n/m 11x 10x
Fluid power 11% 12%
Truck 18% 17% HON 24,310 30,620 .8x n/m 11x 10x
Automotive 8% 13% RTN 19,350 19,400 .8x n/m 10x 9x
Corporate -4% -5% JCI 8,120 12,530 .3x 7.0x 30x 9x
Total pre-tax margin 8% 8%
ITT 7,850 9,030 .8x n/m 12x 12x
D&A as % of revenue 4% 4%
Capex as % of revenue 3% 3% PH 6,540 9,180 .7x 14.2x 10x 11x
ROE 24% 21% MGA 3,440 1,730 .1x 0.5x n/a n/a
Equity to total assets (avg) 36% 39% ETN 7,220 10,960 .7x n/m 11x 10x
% of revenue by geography:
U.S. and Canada 67% 64%
Europe 18% 19% MAJOR HOLDERS
Latin America 8% 9% CEO Cutler 1% │ Other insiders 1% │ Lord Abbett 7% │
Asia/Pacific 7% 8% Fidelity 6% │ Barclays 5% │ MFS 4% │ Chieftain 4%
∆ diluted shares out (avg) -1% -2%
1
Includes acquisitions. 2 Includes hydraulics and aerospace.
RATINGS
VALUE Intrinsic value materially higher than market value?
INVESTMENT HIGHLIGHTS MANAGEMENT Capable and properly incentivized?
• Leader in electrical systems and components for FINANCIAL STRENGTH Solid balance sheet?
power management, with 60,000+ employees. MOAT Able to sustain high returns on invested capital?
• On track to meet goals for 2010 (outlined in EARNINGS MOMENTUM Fundamentals improving?
2006), including 10% sales growth, 15% income MACRO Poised to benefit from economic and secular trends?
growth, 9% FCF to sales, and 15% ROIC. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 116 of 241
Forest Laboratories (NYSE: FRX) New York, NY, 212-421-7850
Health Care: Biotechnology & Drugs, Member of S&P 500 http://www.frx.com
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© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 117 of 241
BUSINESS OVERVIEW • Chairman and CEO Howard Solomon (80) has
Forest Labs provides branded and generic prescription and been a director since 1964 and CEO since 1977.
non-prescription drugs. The company’s central nervous President and COO Lawrence Olanoff (56) has been
system (CNS) franchise accounted for 90% of revenue in with the company for more than a dozen years.
FY08. The company markets products through an in-house • Share repurchases. The company bought back 8.9
salesforce numbering 2,700 people (52% of workforce). million shares for $356 million in FY08, and 10.1
million shares for $332 million so far in FY09.
SELECTED OPERATING DATA • Shares trade at 1.4x EV to trailing revenue, 9x
FYE March 31 2006 2007 2008 1H09 trailing P/E and 7x forward P/E.
% of revenue by therapeutic class:
1
CNS 86% 88% 90% 90%
Cardiovascular, other 14% 12% 10% 10% INVESTMENT RISKS & CONCERNS
Revenue growth by therapeutic class:
1
• Dependent Lexapro and Namenda (66% and 24%
CNS -8% 16% 12% 9% of FY08 revenue, respectively). A Lexapro-related
Cardiovascular, other -14% -1% -6% -3%
Total revenue growth -8% 14% 10% 8% patent was upheld in 2007 by a Court of Appeals,
% of revenue by major line item: and the company is pursuing an infringement suit
Lexapro 67% 66% 65% 64% against a generic maker seeking FDA approval of a
Namenda 18% 21% 24% 26% generic alternative to Lexapro. Forest Labs is also
Contract revenue 4% 6% 6% 6%
All other 11% 8% 5% 5%
suing multiple manufacturers who are seeking FDA
% of revenue by customer:
2 approval to market generic versions of Namenda.
McKesson 35% 37% 38% n/a • Pipeline “is currently dependent on the licensing
Cardinal Health 26% 27% 30% n/a and acquisition of new product opportunities.”
AmeriSource Bergen 20% 13% 15% n/a
Other 19% 23% 17% n/a • FDA approval of milnacipran delayed. Contrary
% of revenue by geography: to management expectations, the FDA has not yet
U.S. 98% 98% 98% n/a acted on the NDA for milnacipran. The company
U.K. and Ireland 2% 2% 2% n/a still expects favorable action “in the near future.”
1
Central nervous system franchise; includes Lexapro, Celexa, and Namenda.
2
The named major customers act as wholesale distributors.
COMPARABLE PUBLIC COMPANY ANALYSIS
INVESTMENT HIGHLIGHTS Market Enterprise Price This Next
EV /
Value Value to T. FY FY
• Key products: Lexapro (65% of revenue), a ($mn) ($mn)
Rev.
Book P/E P/E
selective serotonin reuptake inhibitor for major PFE 98,310 87,870 1.8x 3.7x 7x 6x
depression and generalized anxiety disorder; NVS 96,780 98,030 2.3x 3.3x 11x 10x
Namenda (24% of revenue), an N-methyl-D- GSK 90,740 105,580 3.0x n/m 10x 9x
aspartate antagonist for moderate to severe SNY 82,020 84,290 2.3x 44.5x 8x 7x
Alzheimer’s disease; and Bystolic (since January MRK 60,780 60,870 2.6x 3.5x 9x 8x
2008), a novel beta-blocker for hypertension. LLY 40,280 38,770 1.9x 3.5x 9x 8x
• Bystolic received FDA approval in December NVO 32,490 31,120 3.9x 5.8x 18x 14x
2007 and is being marketed for the treatment of FRX 7,790 5,600 1.4x 2.2x 8x 7x
hypertension. Bystolic is a novel beta-1 selective
beta-blocker. It has received five years of marketing MAJOR HOLDERS
exclusivity under Hatch-Waxman. CEO Solomon 2% │ Other insiders <1% │ Wellington 14%
• Late-stage pipeline has two compounds under │ Clearbridge 8% │ Barclays 7% │ Fairholme 7% │ State
FDA review: milnacipran for the treatment of Street 4% │ LSV 2% │ RenTech 2% │ Capital Guardian 1%
fibromyalgia and Lexapro for the additional
indication in the treatment of adolescent depression. RATINGS
The company has also reported positive clinical VALUE Intrinsic value materially higher than market value?
results for three other late-stage pipeline products. MANAGEMENT Capable and properly incentivized?
• Guiding for FY09 adjusted EPS of $3.30-3.40 FINANCIAL STRENGTH Solid balance sheet?
(excluding charge related to termination of AZOR MOAT Able to sustain high returns on invested capital?
co-promotion), compared to FY08 adjusted EPS of EARNINGS MOMENTUM Fundamentals improving?
$3.55. The company expects to spend $100 million MACRO Poised to benefit from economic and secular trends?
in development milestones in FY09. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 118 of 241
GeoResources (Nasdaq: GEOI) Houston, TX, 281-537-9920
Energy: Oil & Gas Operations http://www.georesourcesinc.com
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BUSINESS OVERVIEW SELECTED OPERATING DATA – GAAP1
GeoResources explores for oil and gas in Texas, Louisiana, YTD
FYE December 31 2006 2007 9/30/08
Oklahoma, North Dakota, Montana, and Colorado. The
% of revenue by type:
company completed a reverse merger in 2007 by issuing 11 Oil and gas revenue 83% 91% 92%
million shares to the owners of Southern Bay Oil & Gas. In Other
2
17% 9% 8%
October 2007, GeoResources acquired AROC Energy for Production data (total period):
$105 million, adding U.S.-based oil and gas properties. Gas production (MMcf) 577 1,648 2,251
Oil production (MBbls) 184 392 553
Oil equivalent production (MBOE) 280 667 928
INVESTMENT HIGHLIGHTS Realized prices for oil and gas sold (average):
• 2007 strategic deals transformed GeoResources Natural gas (per Mcf) $6.83 $6.19 $8.82
from regional player to national exploration and Crude oil (per Bbl) $55 $67 $90
Selected growth rates:
production enterprise. The AROC acquisition Gas – proved reserves -23% 607% n/a
effectively doubled reserves and production. Gas – production 3% 186% 155%
• 20 million BOE of proved reserves (72% proved Gas – price, average realized 0% -9% 41%
developed; 55% oil), with daily production of 3,355 Oil – proved reserves 34% 505% n/a
Oil – production 20% 113% 156%
BOE. Net acreage is 208,000, with three-quarters of Oil – price, average realized 14% 23% 53%
reserves and production located in the southern U.S. Oil and gas revenue n/a 161% 283%
• Strategy: (1) acquire properties with producing Total revenue n/a 139% 260%
Selected items as % of revenue:
reserves; (2) pursue exploration projects and boost
Pre-tax income 25% 20% 38%
direct participation; (3) maintain modest overhead; EBIT 27% 25% 43%
and (4) rationalize assets through divestitures. DD&A 20% 19% 15%
3
• Shares trade at 6x trailing and 14x forward P/E. 1
Capex 86% 269% 29%
Reflects purchase accounting treatment of Southern Bay merger (April 2007)
and AROC Energy acquisition (October 2007). 2005 results are not shown due
INVESTMENT RISKS & CONCERNS to lack of meaningful comparability and lack of availability of most data.
2
Consists of partnership management fees, property operating income, gain on
• Able to sustain positive FCF amid weak pricing? sale of equipment, partnership income, interest, and other.
CEO Lodzinski stated in November, “we can 3
The company spent $110 million on oil and gas capex in 2007 and expects to
remain cash flow positive and fulfill all of our spend $62 million in capex in the 24 months ending December 31, 2009.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 120 of 241
Helix Energy Solutions (NYSE: HLX) Houston, TX, 281-618-0400
Energy: Oil Well Services & Equipment, Member of S&P MidCap 400 http://www.helixesg.com
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BUSINESS OVERVIEW SELECTED OPERATING DATA
Helix is an offshore energy firm that provides reservoir YTD
FYE December 31 2005 2006 2007 9/30/08
development and other contracting services to the energy
% of revenue by segment:
market and its own oil and gas properties. Two segments: Contracting services 40% 34% 37% 39%
Contracting Services utilizes vessels and offshore equipment Shelf contracting 27% 36% 33% 33%
Oil and gas 33% 30% 30% 28%
to deliver services that reduce finding and development costs
Revenue growth by segment:
and cover the lifecycle of an offshore oil and gas field. Contracting services 66% 48% 46% 44%
Oil and Gas engages in prospect generation, exploration, Shelf contracting 76% 128% 22% 29%
Oil and gas 13% 56% 36% 20%
development and production activities primarily in the Gulf
∆ revenue 47% 71% 29% 27%
of Mexico, North Sea, Asia/Pacific, and Middle East; ∆ oil & gas production -21% 47% 33% -13%
standardized measure (2007 after-tax PV-10): $2.8 billion. ∆ oil & gas realized prices 42% 8% 2% 41%
∆ proved oil reserves 41% 144% 9% n/a
1
INVESTMENT HIGHLIGHTS ∆ proved gas reserves 156% 134% 38% n/a
EBIT margin by segment:
• Global services contractor offering offshore field Contracting services 13% 19% 18% 17%
development services. Helix’s services and Shelf contracting 26% 36% 29% 18%
methodologies help maximize production Oil and gas 45% 31% 21% 50%
economics, particularly from marginal fields, i.e., Total EBIT margin 28% 29% 23% 28%
2
reservoirs that are no longer wanted by major DD&A as % of revenue 14% 14% 23% 15%
Capex as % of revenue 59% 36% 54% 45%
operators or are too small to be material to them. Return on capital by segment (EBIT to average assets):
• Strategically focused on deepwater, with new Contracting services 6% 9% 10% 9%
vessels to “significantly expand capacity” in 2009. Shelf contracting 27% 51% 21% 9%
Oil and gas 35% 10% 5% 9%
In oil and gas, Helix expanded its deepwater focus 3
Utilization rate of vessels by category:
via the Remington acquisition in 2006. Subsea construction vessels 86% 86% 90% 96%
• Integration of contracting services operations Well operations 84% 81% 71% 62%
and reservoir ownership may add value, as it Remotely operated vehicles 70% 76% 76% 70%
Shelf contracting 65% 84% 65% 54%
creates additional backlog for the company’s
Tangible equity / tang. assets 34% 28% 20% 21%
services and enables better utilization of new assets. ∆ diluted shares out (avg) 4% 9% 7% -1%
• 2009 objectives: deliver new assets into the fleet; 1
Includes proved reserves of natural gas liquids.
2
reduce debt; drill with partners on a promoted basis; 3
Includes asset impairment charge of $74 million in 2007 (4% of revenue).
Calculated by dividing the number of days the vessels in each category
bring on newly developed deepwater production. generated revenues by the number of calendar days in the applicable period.
• Guiding for flat adjusted EBITDAX of $800 As of September 30, 2008, the company had 10 subsea construction vessels,
two well operations vessels, 47 ROVs, and 30 shelf contracting vessels.
million in 2008. EBITDAX reflects Helix’s equity
investments and Cal Dive minority interest.
COMPARABLE PUBLIC COMPANY ANALYSIS
• 1H09 contracting services visibility “good,” with Market Enterprise Price This Next
shelf contracting boosted by hurricane repair work. EV /
Value Value to T. FY FY
Rev.
• Shares trade at .4x tangible book value, 1x ($mn) ($mn) Book P/E P/E
trailing P/E and 2x forward P/E. OII 1,790 2,070 1.1x 2.1x 9x 9x
GLBL 430 410 .4x 0.6x n/m 7x
INVESTMENT RISKS & CONCERNS HLX 440 2,370 1.1x 0.4x 2x 2x
• Hurricane Ike hurt Gulf of Mexico production,
temporarily cutting it by 70% in late October. MAJOR HOLDERS
• Debt covenant issues due to depressed oil and gas CEO 4% │ Other insiders 1% │ Greenlight 6% │ Robeco
prices. Helix has $1.9 billion of net debt, compared 5% │ Fidelity 5% │ JP Morgan 4% │ Barclays 4%
to $1.0 billion of tangible book.
• Forced to reduce planned capex by 50% in 2009, RATINGS
with no new vessel additions anticipated. VALUE Intrinsic value materially higher than market value?
• May be forced to monetize 58% of Cal Dive, but MANAGEMENT Capable and properly incentivized?
wants to remain a “rational investor.” FINANCIAL STRENGTH Solid balance sheet?
• May have to sell or spin off oil and gas business. MOAT Able to sustain high returns on invested capital?
Such a move may create value by deleveraging the EARNINGS MOMENTUM Fundamentals improving?
balance sheet and refocusing the business. MACRO Poised to benefit from economic and secular trends?
EXPLOSIVENESS 5%+ probability of 5x upside in one year?
THE BOTTOM LINE
Helix is an extremely cheap but distressed oil and gas producer and contracting services provider. Depressed energy prices
have exposed it to covenant issues, making it a speculative equity investment. However, despite the non-negligible possibility
of permanent capital loss, the risk-reward tradeoff is interesting. The company retains a few options that would delever the
balance sheet and enhance value, including a sale of a 58% interest in Cal Dive and a sale of the oil and gas business.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 122 of 241
Horsehead Holding (Nasdaq: ZINC) Monaco, PA, 724-774-1020
Basic Materials: Metal Mining http://www.horsehead.net
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BUSINESS OVERVIEW Horsehead — Sources of Zinc Feedstock1
Horsehead is a U.S. producer of specialty zinc and zinc- % of % of LME Discount
based products used in the galvanizing of fabricated steel and Total
2
Operating
3
Cor- to LME
as components in rubber tires, alkaline batteries, paint, Zinc Feedstock Feedstock Costs relation Price
4 4
EAF dust 56% 9% no 89%
chemicals and pharmaceuticals. It has operated for 150 years. Top dross 8% 8% yes 17%
Bottom dross 8% 8% yes 26%
SELECTED OPERATING DATA Skims 26% 26% yes 37%
YTD Zinc concentrate 2% 2% yes 44%
1
FYE December 31 2005 2006 2007 9/30/08 2006 figures. Source: Horsehead IPO prospectus, August 10, 2007.
2
% of revenue by type: On a tons-of-zinc contained basis.
3
Cost of sales less depreciation and cost of brokered metal purchases.
Zinc material and other goods 83% 90% 92% 89% 4
Net of EAF dust service fees.
EAF dust service fees 17% 10% 8% 11%
Revenue growth by type: • Shares trade at 3x trailing P/E. Analysts expect
Zinc material and other goods 32% 96% 12% -20%
EAF dust service fees 6% 8% -11% 20% the company to post a loss going forward.
∆ revenue 27% 81% 10% -17%
∆ average LME zinc price 31% 137% -1% -39% INVESTMENT RISKS & CONCERNS
Gross margin (ex. D&A) by type: • Commodity producer dependent on zinc market
Zinc material and other goods -5% 21% 27% 14%
EAF dust service fees 91% 85% 86% 74%
price. Zinc prices fell from 2000-04 due to Chinese
Total gross margin 11% 27% 32% 21% exports and consumption declines, but began to
Selected items as % of revenue: recover in 2004 amid higher Chinese demand and
EBIT 5% 19% 27% 15% lower production due to closed or idled capacity.
D&A 3% 2% 2% 3%
Capex 3% 3% 8% 8%
Zinc prices hit a high of $2.08 per pound in late
% of production costs by type: 2006, but recently traded at $0.50 per pound.*
Purchased feedstock n/a 68% 44% 32% • Recession is negatively affecting consumption of
Conversion n/a 32% 56% 68% PW zinc metal and zinc oxide in North America.
1
∆ diluted shares out (avg) 30% 4% 17% 15%
1 • Unit input costs affected by zinc prices, volumes
Increases in shares outstanding relate to equity offerings, including the
following three capital raises in 2006-07: (i) 16 million shares at $13 each for and energy costs. One-third of recent production
net proceeds of $188 million in November 2006; (ii) 14 million shares at $13.50 costs have been driven by the cost of raw materials
each for net proceeds of $249 million in April 2007; and (iii) 5 million shares at
$18 each for net proceeds of $75 million in August 2007). (feedstock), while two-thirds have been conversion-
related. Two-thirds of the feedstock relates to
INVESTMENT HIGHLIGHTS acquired and recycled EAF dust, the cost of which
• Top U.S. zinc producer. The company is the does not correlate with the market price of zinc.
largest North American refiner of zinc oxide, the • Competitive entry into EAF dust recycling due to
value-added zinc-based product from which it high zinc prices in recent years likely to hurt price
generates most sales, and Prime Western zinc metal, realization. In 2Q08, Steel Dust Recycling started
the grade of zinc metal in which it specializes. up the Waelz kiln facility in Alabama. ZincOx
• Largest recycler of electric arc furnace (EAF) broke ground for a plant in Ohio in June 2008.
dust in North America. EAF is a hazardous waste • Staggered Board with three classes of directors
produced in steel mini-mill manufacturing. The lessens shareholders’ ability to influence the Board.
company’s four recycling facilities generate service
fees from mini-mills for recycling their EAF dust. MAJOR HOLDERS
• Utilizes nearly 100% recycled zinc in production, CEO Hensler 1% │ Other insiders <1% │ Wellington 13%
including zinc recovered from EAF dust recycling. │ Fidelity 8% │ Donald Smith 7% │ Aegis 6% │ Pabrai 5%
The conversion of recycled zinc into finished
products generally results in lower feed costs than at RATINGS
smelters that rely on zinc concentrates. VALUE Intrinsic value materially higher than market value?
• Chairman and CEO James Hensler (52) joined in MANAGEMENT Capable and properly incentivized?
2004 after 20+years in the metals industry, FINANCIAL STRENGTH Solid balance sheet?
including as GM the Huntington Alloys business at MOAT Able to sustain high returns on invested capital?
Special Metals. CFO Robert Scherich (47) also EARNINGS MOMENTUM Fundamentals improving?
joined the company in 2004, from Valley National MACRO Poised to benefit from economic and secular trends?
Gases, where he had spent eight years as CFO. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
*
View zinc prices at http://www.metalprices.com/FreeSite/metals/zn/zn.asp
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 124 of 241
Jefferies Group (NYSE: JEF) New York, NY, 212-284-2550
Financial: Investment Services, Member of S&P MidCap 400 http://www.jefferies.com
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Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 125 of 241
BUSINESS OVERVIEW • 40%-owned by employees and 30%-owned by
Jefferies is a 2,500-person full-service investment bank and “strategic partner” Leucadia, improving
institutional securities firm. Its primary operating subsidiary alignment of interests between firm and holders.
was founded in 1962. Jefferies operates in two segments: • Diversified revenue; grew i-banking franchise
Capital Markets includes trading and investment banking. It across industry verticals. Sales and trading was 78%
provides the research, sales, trading and origination effort for of revenue in 2000 and 49% in 2007.
various fixed income, equity and advisory products. • First-class equity-linked franchise. Jefferies is a
Asset Management is primarily comprised of activities top trader in the secondary convertibles market.
related to the company’s private investment funds. • Grown via M&A, including Putnam Lovell (July
2007), European M&A advisory LongAcre (June
SELECTED OPERATING DATA 2007) and technology i-bank Broadview (2003).
FYE December 31 2005 2006 2007 2008 • Shares trade at 1.1x tangible book value. The
% of revenue, net of interest expense, by type: company is expected to post a loss this year.
Commissions 20% 19% 23% 44%
Principal transactions 29% 32% 25% 8%
I-banking -- capital markets 18% 16% 25%
INVESTMENT RISKS & CONCERNS
42% • Scarcity of deals likely to impact results until
I-banking – advisory 23% 21% 23%
Asset management income 7% 8% 2% -5% equity and debt markets stabilize.
Interest 25% 36% 75% 74%
Interest expense -24% -35% -73% -65%
• Claims “strong and liquid capital position,”
Other 2% 2% 2% 3% despite $2 billion of equity vs. $22 billion of total
Growth of revenue, net of interest expense, by type: liabilities. While this represents a lower leverage
Commissions -5% 14% 27% 25% ratio than that of many competitors, it is quite high
Principal transactions -2% 34% -17% -79%
in absolute terms in a period of industry distress.
I-banking -- capital markets 29% 4% 68%
I-banking – advisory 51% 13% 17%
-43% Jefferies maintains investment-grade credit ratings.
Asset management income 1% 34% -79% n/m • Future regulation could make brokerage firm
Interest 126% 74% 122% -36% models fundamentally less attractive.
Interest expense 109% 72% 128% -43%
Total revenue, net of interest 14% 21% 8% 18% • Exposed to counterparty credit risks in normal
% of revenue by geography: course of operations, including in derivatives deals.
U.S. and Americas 95% 92% 87% n/a
Europe 4% 8% 12% n/a COMPARABLE PUBLIC COMPANY ANALYSIS
Asia and Middle East 1% 0% 1% n/a
Market Price to This Next
% of trading and other revenue by asset class: Price FY End
Value Tangible FY FY
Equity 71% 69% 78% 88% ($) Date
($mn) Book P/E P/E
Fixed income and commodities 29% 31% 22% 12%
RJF 19.50 2,390 1.3x 11x 10x Sep-30
Selected items as % of revenue, net of interest expense:
Compensation and benefits 56% 54% 60% 150% SF 36.40 930 2.1x 16x 13x Dec-31
Other non-interest expenses 22% 22% 24% 44% KBW 16.80 560 1.3x 32x 14x Dec-31
Pre-tax income 22% 24% 16% -94% PJC 29.10 550 .9x n/m 25x Dec-31
Net income 13% 14% 9% -53%
TWPG 3.40 110 .5x n/m 340x Dec-31
Return on equity 12% 12% 7% <0%
Fixed charge coverage ratio
1
5.5x 4.5x 3.0x n/m JMP 4.70 90 .8x n/m 14x Dec-31
AUM (period end) 4,031 5,282 5,775 n/a COWN 5.40 80 .5x n/m n/m Dec-31
Change (y-y) 23% 31% 9% n/a JEF 12.30 2,013 1.1x n/m 24x Dec-31
1
Computed by dividing (a) pre-tax income from continuing operations plus fixed
charges by (b) fixed charges. Fixed charges consist of interest expense on
long-term debt and the portion of operating lease rental expense representative MAJOR HOLDERS
of the interest factor (deemed to be one-third of operating lease rentals).
Insiders 11% │ Leucadia 39% │ Advisory Research 6% │
Barclays 4% │ Fairholme 4% │ Bamco 3% │ West Oak 1%
INVESTMENT HIGHLIGHTS
• Integrated, full-service brokerage firm, yet not RATINGS
part of Wall Street’s “bulge bracket” firms. The VALUE Intrinsic value materially higher than market value?
company has 2,100 employees (down from 2,600) MANAGEMENT Capable and properly incentivized?
in 25 cities in the U.S., Europe, India, and China. FINANCIAL STRENGTH Solid balance sheet?
• Strategically focused on mid-sized growth MOAT Able to sustain high returns on invested capital?
companies, both in trading and investment banking. EARNINGS MOMENTUM Fundamentals improving?
A stated priority is to increase share of sales and MACRO Poised to benefit from economic and secular trends?
trading of securities in which the company deals. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 126 of 241
Leucadia National (NYSE: LUK) New York, NY, 212-460-1900
Conglomerates: Conglomerates, Member of S&P 500 http://www.leucadia.com
$60
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© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 127 of 241
BUSINESS OVERVIEW SELECTED OPERATING DATA
Leucadia pursues a value-oriented, long-term investment YTD
FYE December 31 2005 2006 2007 9/30/08
approach. Leucadia owns controlling stakes in firms engaged
Revenue growth 82% 25% 34% 5%
in manufacturing, telecom, property management, gaming, % of revenue by segment:
real estate, medical products, and wineries. Leucadia also has Idaho Timber 35% 40% 25% 21%
investments accounted for under the equity method. Conwed Plastics 14% 12% 9% 9%
Telecommunications 0% 0% 31% 37%
Property management 0% 0% 7% 13%
SELECTED STRATEGIC INVESTMENTS Gaming entertainment 0% 0% 3% 10%
Company – Business Overview Comments Other 13% 15% 6% 6%
STi Prepaid – Acquired for $122 million Corporate 39% 33% 18% 4%
International prepaid phone cards in March 2007 Pre-tax margin, before equity in income of associated firms:
ResortQuest – Acquired for $12 million Idaho Timber 3% 3% 3% 2%
vacation property management in June 2007 Conwed Plastics 15% 17% 17% 15%
Idaho Timber – Telecommunications n/m n/m 5% 3%
Acquired in May 2005
lumber manufacturing Property management n/m n/m -8% 7%
Conwed Plastics –
n/a Gaming entertainment n/m n/m -24% 5%
plastic netting production Other 11% 7% -82% -124%
Premier Entertainment Biloxi – Damaged by Katrina; Corporate 15% 11% -3% -17%
Hard Rock Hotel & Casino Biloxi opened in June 2007 Total 19% 16% -5% -19%
Sangart – medical product R&D Acquired in 2005 Selected items as % of total assets (period end):
Pine Ridge – winery in Napa n/a Long-term investments 18% 27% 32% 25%
Archery Summit – Investment in associated firms 7% 14% 15% 31%
n/a
winery in Willamette Valley Deferred tax asset (gross) 23% 21% 21% 19%
Jefferies High Yield Holdings Other long-term assets 10% 13% 13% 15%
Acquired in April 2007
– brokerage JV with Jefferies Debt 22% 21% 24% 26%
Goober Drilling (50%, debt) – Investment includes Other liabilities 10% 7% 12% 4%
land-based contract drilling $171 million loan Shareholders' equity 68% 71% 63% 69%
Cobre Las Cruces (30% stake) – Sold 70% for 12%
copper mining in Spain of Inmet in 2005. INVESTMENT RISKS & CONCERNS
Fortescue (Australia: FMG) – $452 million total
iron ore mining (equity & debt) cash investment / 2006-07 • 4Q08 market price declines in associated firms to
flow through income statement. We expect
INVESTMENT HIGHLIGHTS Leucadia to record large mark-to-market losses in
• Chairman Ian Cumming and president Joe income related to associated companies, including
Steinberg have one of the best track records in the large unrealized losses on AmeriCredit and Jefferies
investment business, compounding Leucadia’s investments.
equity and share price at 22% and 26% per year • 4Q08 tax asset writedown? In 2007, the company
from 1979-2007. recognized a $543 million benefit from a valuation
• Equity has grown from a deficit of $8 million in allowance reversal, apparently due to strong market
1978 (prior to current management), to equity of $6 value gains in Fortescue etc. Leucadia may have to
billion at yearend 2007. This increase occurred write off a portion of nearly $1.6 billion in deferred
despite an $812 million dividend in 1999. tax assets due to large unrealized recent losses.
• NOL of $5.4 billion at yearend 2007. • Concentrated investment portfolio, with
• Shares trade at .6x tangible book (ex. tax assets). significant mark-to-market volatility and illiquidity.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 128 of 241
…additional insight into LUK:
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 129 of 241
Leucadia National—Disaggregated Balance Sheet
The following table presents Leucadia’s balance sheet in a way that we find economically useful. The following disaggregated balance sheet
contains detail on the company’s major investments and presents tax assets and liabilities separately rather than as a net amount.
YTD
FYE December 31 2005 2006 2007 9/30/08
Assets
Short-term assets:
Cash and equivalents 287 457 162
Short-term investments 904 983 335
Receivables 70 134 182
Other current assets 105 146 222
Total current assets 1,366 1,720 901
Long-term assets:
Long-term investments:
Fortescue – cost (1) 246 246
Fortescue – unrealized gain (1) 1,578 780
Inmet – cost (2) 78 78
Inmet – unrealized gain (2) (3) 0 183
AmeriCredit – cost (4) 70 0
AmeriCredit – unrealized gain (4) (5) 1 0
Other long-term investments 802 823
Total long-term investments 1,466 2,777 2,110
Reconciliation to GAAP:
Reduction in total deferred tax asset (161) (694)
Tax asset adjustment offset 13 24
Total adjustments (148) (669)
Total GAAP assets 5,304 8,127
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 130 of 241
Lorillard (NYSE: LO) Greensboro, NC, 877-703-0386
Consumer Non-Cyclical: Tobacco, Member of S&P 500 http://www.lorillard.com
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© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 131 of 241
BUSINESS OVERVIEW INVESTMENT RISKS & CONCERNS
Lorillard is the third-largest cigarette maker and the oldest • Significant and uncertain legal liabilities.
continuously operating tobacco firm in the U.S. Lorillard’s Lorillard is a defendant in thousands of lawsuits.
flagship brand, Newport, is a menthol-flavored premium Provisions have been recorded in cases with
cigarette brand and the top selling menthol and second estimable liability only, with large contingent
largest selling cigarette in the U.S. Lorillard manufactures all exposures. Lorillard already pays $1+ billion per
of its products at its Greensboro, NC facility. Lorillard was year in settlement costs that reduce gross profit.
founded in 1760 and separated from Loews in June 2008. • Stated long-term goals may prove unrealistic.
Management aims for long-term revenue growth of
SELECTED OPERATING METRICS 3-4%, EPS growth of 5-7%, and a dividend yield of
FYE December 31 2005 2006 2007 2008 ~5%, resulting in a targeted annual equity return of
Unit volume (bn) 35.2 36.1 35.8 37.0
10-12%. This assumes continuing market share
Market share…
…of total U.S. market 9.2% 9.6% 10.0% 11.0% gains and accretive stock repurchases.
…of premium segment 12.3% 12.7% 13.0% n/a • No international exposure. Lorillard sold the
…of menthol segment 31.5% 32.2% 32.9% 34.3% international rights to its brands in 1977.
• Possibility of regulatory action on menthol. Some
INVESTMENT HIGHLIGHTS public health agencies have expressed concerns that
• Strong U.S. market position. Newport (94% of mentholated cigarettes may pose greater health risks
Lorillard’s volume and sales) is the #1 menthol and than other cigarettes, as smokers tend to inhale more
#2 overall brand cigarette in the $50 billion U.S. deeply. A menthol ban appears unlikely, however.
market (behind Philip Morris and RAI). The • Move to greater taxation may curtail demand.
“Newport pleasure” theme has existed for 35 years. Federal and state excise taxes have trended higher
• Gaining share in mature, competitive industry. over the years. In April 2008, New York State
Newport has grown to 33% of menthol cigarettes in almost doubled the excise tax per pack to $2.75.
the U.S., while menthol’s share of cigarettes • Lack of reinvestment opportunities. The U.S.
shipped has grown from 26% to 28% over five tobacco industry faces a declining long-term trend,
years. In addition, the premium segment has grown and Lorillard is unlikely to find ways to reinvest
from 68% to 73% of cigarettes, while Lorillard has capital at high rates. The company is returning most
captured a larger portion of the premium segment. free cash flow via share repurchases and dividends.
• Modest growth despite declining industry trend.
Lorillard projects annual revenue growth of 3-4% in COMPARABLE PUBLIC COMPANY ANALYSIS
2009-12, despite 3-4% industry unit declines. Market Enterprise Price This Next
EV /
• Industry-leading profitability. Lorillard generates Value Value
Rev.
to T. FY FY
($mn) ($mn) Book P/E P/E
more than $36 of operating income per 1,000 units
PM 72,810 83,240 1.3x n/m 11x 10x
shipped, better than any of its U.S. competitors.
BTI 52,030 62,550 3.8x n/m 14x 11x
• Still under-represented in Western U.S. Newport
ITYBY 25,910 32,710 1.8x n/m n/a n/a
has 17% share of the menthol segment in 23
RAI 11,010 12,900 1.5x n/m 8x 8x
Western states, trailing Marlboro Menthol (23%),
LO 10,740 9,550 2.3x 16.9x 12x 11x
Kool/ Salem (21%) and Discount Menthol (24%).
• High-margin business; strong FCF generation,
MAJOR HOLDERS
with LTM FCF of $850 million. The company
Insiders <1% │ Franklin 3% │ NWQ 2% │ Lone Pine 2%
expects to maintain operating margins in the 32-
33% range over the next few years.
RATINGS
• Repurchased 5.9 million shares for $400 million
VALUE Intrinsic value materially higher than market value?
($68 per share) from July through October.
MANAGEMENT Capable and properly incentivized?
• Seasoned management team. Lorillard executives FINANCIAL STRENGTH Solid balance sheet?
have been with the company for a long time and MOAT Able to sustain high returns on invested capital?
appear focused on long-term shareholder value. EARNINGS MOMENTUM Fundamentals improving?
• Shares trade at 12x trailing and 12x forward P/E. MACRO Poised to benefit from economic and secular trends?
EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 132 of 241
MasterCard (NYSE: MA) Purchase, NY, 914-249-2000
Services: Business Services, Member of S&P 500 http://www.mastercard.com
$350
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© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 133 of 241
BUSINESS OVERVIEW • Generates revenue from transaction processing and
MasterCard is a global electronic payments leader with other payment-related services (operations fees) and
25,000 issuer clients. Brands: MasterCard, Maestro, Cirrus. based on the dollar volume of activity on the cards
that carry the company’s brands (assessments).
SELECTED OPERATING DATA • Does not issue cards or extend credit, thereby
FYE December 31 2006 2007 2008 avoiding the specter of large credit-related losses.
% of revenue by type:
Net operations fees 73% 74% n/a
• Strategy: further penetrate customer base; expand
Net assessments 27% 26% n/a in select geographies and higher-growth segments,
Revenue growth by type: such as premium/affluent and contactless cards,
Net operations fees 25% 24% n/a commercial payments, and debit; enhance merchant
Net assessments -10% 19% n/a
relationships; pursue payment processing business.
∆ revenue 13% 22% 23%
∆ processed transactions 18% 16% 12% • Shares trade at 16x forward P/E (trailing GAAP
∆ gross dollar volume (GDV) 16% 18% 11% EPS loss reported).
∆ GDV (local currency) 15% 14% 11%
Impact of currency exchange rates on growth of… INVESTMENT RISKS & CONCERNS
…revenue 1% 3% 3%
…opex 1% 2% 2% • Weak consumer spending to impact fees due to
% of net operations fees by type: slowdown in transactions and lower dollar volumes.
Authorization, settlement, switch 48% 46% n/a According to management on February 5, “The
Currency conversion, cross border 26% 29% n/a economic environment remains challenging, with
Acceptance development fees 9% 9% n/a
Warning bulletin fees 3% 2% n/a
businesses, governments and consumers around the
Connectivity 3% 3% n/a world rethinking how finances are managed.”
Consulting and research fees 3% 3% n/a • Open-loop model depends on third-party merchant
Other operations fees 18% 18% n/a acquirers and card issuers. While Visa has a similar
Rebates -11% -11% n/a
Net assessments by type: model, American Express operates a closed-loop
Gross assessments 200% 193% n/a network that gives it additional revenue streams and
Rebates and incentives -100% -93% n/a more control over the functioning of the network.
Selected items as % of revenue: • Heightened regulatory scrutiny of interchange
G&A 45% 43% 38%
Advertising and marketing 32% 27% 20% fees. While MasterCard does not directly generate
Litigation settlement charges 13% 1% 50% revenue from interchange, if card issuers’ fees are
EBIT 7% 27% -11% reduced over time, they may put pressure on the
D&A 3% 2% 2% company to reduce operations fees and assessments.
Capex 2% 2% 2%
Capitalized software 1% 2% 2%
% of GDV by geography: COMPARABLE PUBLIC COMPANY ANALYSIS
U.S. and Canada 52% 49% 46% Market Price to This Next
Price FY End
Latin America 7% 7% 7% Value Tangible FY FY
($) Date
Europe 27% 29% 31% ($mn) Book P/E P/E
Asia/Pacific 13% 14% 14% V 56.00 47,330 87.0x 21x 18x Sep-30
South Asia, Middle East, Africa 2% 2% 2% AXP 15.70 18,260 1.5x 14x 10x Dec-31
% of GDV by card type:
DFS 7.00 3,370 .6x n/m 11x Nov-30
MasterCard credit and charge 73% 72% 71%
MasterCard debit 27% 28% 29% MA 161.90 20,923 16.9x 16x 13x Dec-31
Equity ownership / voting power (period end) (%/%):
Public investors (Class A) 49/83 57/85 66/86
Principal or affiliate members (Class B) 41/0 33/0 24/0
MAJOR HOLDERS
Foundation (Class A) 10/17 10/15 10/14 Insiders <1% │ MasterCard Foundation 10% │ Marsico 9%
│ Cap Re 3% │ Lone Pine 2% │ Farallon <1%
INVESTMENT HIGHLIGHTS
• #2 global payment card brand behind Visa, with RATINGS
$2.3 trillion in gross dollar volume and 19 billion VALUE Intrinsic value materially higher than market value?
transactions processed in 2007. MANAGEMENT Capable and properly incentivized?
• Three-tiered business model, with revenue from FINANCIAL STRENGTH Solid balance sheet?
developing and marketing payment solutions as MOAT Able to sustain high returns on invested capital?
franchisor, processing payment transactions and EARNINGS MOMENTUM Fundamentals improving?
providing consulting and information services. MACRO Poised to benefit from economic and secular trends?
EXPLOSIVENESS 5%+ probability of 5x upside in one year?
THE BOTTOM LINE
MasterCard is a high-ROIC business with a great brand and a sustainable competitive moat. The shares deserve closer
attention despite challenging near-term trends. However, any investment should be weighed against the opportunity cost of
investing in American Express. While MasterCard does not face serious credit quality risks as credit is extended by member
banks, we believe that longer-term the closed-loop model of American Express may actually be more attractive.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 134 of 241
…additional insight into MA: Share of Total Transactions by Operator, 2007 (industry-
wide card transactions: 85 billion)
2009 OUTLOOK, Discover,
PROVIDED BY COMPANY ON FEBRUARY 5, 2009 American JCB, Diners
• Thoughts for 2009: Express 3%
– Net revenue growth will likely be lower than 6%
longer-term objective range
– Operating expenses will be essentially flat over
2008 levels MasterCard
Visa
• Assumptions: 32%
59%
– Constant foreign exchange
– Effective Tax Rate = 35%
– Continue to monitor economic environment
Source: Company, The Manual of Ideas.
Visa
MasterCard 55% MasterCard Visa
33% 34% 59%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 135 of 241
MASTERCARD – SELECTED OPERATING MATERICS1
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 136 of 241
Sonae Capital (Lisbon: SONC)
Recent market price: € 0.46 per share
Shares outstanding: 250 million
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 137 of 241
BUSINESS OVERVIEW SELECTED OPERATING DATA
Sonae Capital operates in two segments: YTD
FYE December 31 2006 2007 2008 9/30/08
Sonae Turismo comprises (1) the development, management Turnover (€ mn) 266 267 302 164
and sale of high-quality resorts and residential properties; (2) Turnover growth n/a 0% 13% 19%
asset management services related to land and other real EBITDA margin 9% 3% 5% -3%
estate; and (3) tourism operations, including ownership and EBIT margin 7% 0% 3% -9%
Equity to total assets 57% 41% 48% 40%
management of hotels and health clubs. Net debt to equity 3% 62% 44% 78%
Spred comprises (1) new businesses; (2) joint ventures with
specialized partners; and (3) marketable investments. VALUATION SNAPSHOT
Sonae Capital was spun off from Sonae in December 2007 (€ in millions, Company MOI Estimate SONC.LS
except per share data) Estimate Low High Price
and went public on Euronext Lisbon in January 2008. Troia n/a 500 800 193
1
Resorts and residential 212 150 212 106
SONAE TURISMO—OVERVIEW OF OPERATIONS Other assets n/a 200 400 100
Enterprise fair value n/a 850 1,412 399
(1) Resort and residential development: Net debt (284) (284) (284) (284)
7,430 beds in €403mn 54% of Estimated equity value n/a 566 1,128 115
Troiaresort,
hotels, apt’s, project apartments per SONC.LS share n/a 2.30 4.50 0.46
peninsula near
villas; marina; (€230mn and 25% of 1
Based on appraisal disclosed in company presentation, September 2008.
Lisbon; opened
golf; meeting already villas were
in Sep. 2008
facilities invested) pre-sold • Shares trade at .3x book value.
Efanor, Greater Sales price:
700 "up-
Porto; €170mn €2,640 per
construction
market"
total sq. meter INVESTMENT RISKS & CONCERNS
apartments,
commenced in
school, etc.
investment (~$380 per • Asset-rich but cash-poor business with nearly
February 2008 sq. foot) €300 million of net debt. While the value of the
(2) Asset Management: operating assets and real estate exceeds net debt by
Existing assets
Boavista complex (next to an estimated 2x-4x, the debt weighs heavily on the
Hotel Porto Palacio)
company in the current credit environment.
Projects under development – 130,000 square-meter
construction phase business park in Maia • Controlled by CEO. While Belmiro de Azevedo
Residential projects in appears to treat shareholders fairly, his goals and
Projects under development –
design and licensing phase
Lisbon, Porto, Lagos, and timeframe may differ from those of investors.
Maia
Real estate rented out or for sale
Several plots of land, which may be developed or sold
COMPARABLE PUBLIC COMPANY ANALYSIS
Market Enterpr. Price This Next
EV /
(3) Tourism Operations: Value Value to T. FY FY
Rev.
Boavista Five-star, 251-room Hotel Porto Palacio, ($mn) ($mn) Book P/E P/E
complex, Porto member of “Leading Hotels of the World” JOE 2,170 2,110 6.9x 2.1x n/m 235x
Aqualuz, MTN 800 1,190 1.0x 1.7x 19x 33x
Four-star, 163-suite hotel (refurbished in 2007)
Lagos
IRS 200 480 1.5x 0.4x n/a n/a
Troiaresort 3 four-star hotels, 232 suites (refurb. in 2008)
Fitness 10 health clubs with 29,000 members MLP 80 190 2.2x 0.7x n/a n/a
1
Source: Company, The Manual of Ideas. SONC.LS €115 €399 1.3x 0.4x n/a n/a
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 138 of 241
St. Joe Company (NYSE: JOE) Jacksonville, FL, 904-301-4200
Services: Real Estate Operations http://www.joe.com
$90
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© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 139 of 241
BUSINESS OVERVIEW • Strategy: secure land-use entitlements to reposition
St. Joe develops residential, commercial and industrial real timberland for other uses, improve infrastructure,
estate and sells rural land in Florida. The company also has develop community amenities, and undertake
timber interests. It operates in four segments: strategic land planning (e.g., creative parceling).
Residential Real Estate sells developed home-sites and • Exited homebuilding in 2006-07 to focus on
parcels of entitled and undeveloped land. development. St. Joe is divesting non-core assets,
Commercial R.E. sells developed and undeveloped land. reducing capex and using strategic partners (e.g.,
new management agreements for golf courses, two
Rural Land sells parcels of the company’s timberlands. marinas, WaterColor, SummerCamp, WaterSound).
Forestry produces and sells pine pulpwood and timber. • Panama City Airport project broke ground in
2007. While it has run into resistance from various
SELECTED OPERATING DATA groups, the airport appears likely to open in 2010.
YTD • 46,200 residential units, 14 million commercial
FYE December 31 2006 2007 2008 9/30/08
% of revenue by type:
square feet in entitlements pipeline as of yearend
Real estate sales 90% 87% 82% 74% 2007, in addition to 633 acres zoned for commercial
Rental revenues 1% 1% 1% 0% uses. These entitlements are on 45,000 acres.
Timber sales 3% 5% 7% 9% • Wm. Britton Greene became CEO in May 2008
1
Other revenues 6% 7% 10% 16%
% of revenue by segment: after serving as COO. Former CEO Peter Rummell
Residential real estate 78% 68% 43% 28% retained his position as chairman.
Commercial real estate 9% 10% 8% 1% • Issued $580 million of equity at $35 per share in
Rural land sales 10% 17% 43% 61% 2008, paying off most debt. To meet liquidity needs,
Forestry 3% 5% 7% 9%
Revenue growth by segment: St. Joe had previously sold its office buildings for
Residential real estate -10% -36% -55% -46% $378 million and >100K acres of rural land to boost
Commercial real estate -41% -21% -44% -83% liquidity in 2007. Dividends were stopped in 4Q07.
Rural land sales 1% 31% 79% 1%
• Shares trade at 2.1x tangible book. St Joe reported
Forestry -38% 11% 6% 3%
Total revenue growth -14% -27% -28% -23% a trailing GAAP loss.
Pre-tax income margin by segment:
Residential real estate 26% 7% -27% -29% INVESTMENT RISKS & CONCERNS
Commercial real estate 33% 46% 52% 58%
Rural land sales 73% 81% 62% 57%
• Florida has experienced “dramatic slowdown” in
Forestry 18% 22% 1% 12% residential real estate since mid-2005, with market
Other -8% -14% -14% -35% conditions materially impacting St. Joe’s sales.
Total pre-tax income margin 23% 10% 5% -6% • Questions regarding land quality. David Einhorn
2
% of total assets by segment:
Residential real estate 42% 54% 71% 66%
pointed out in 2007 that after taxes and selling
Commercial real estate 32% 25% 6% 5% expenses, St. Joe might capture only one-half of the
Rural land sales 2% 2% 1% 1% gross sales price per acre. Einhorn also argued that
Forestry 9% 10% 7% 5% some of the land is swamp land and that tourists
Corporate 14% 10% 15% 23%
1
Primarily revenue from club operations and brokerage fees.
want to be “on the ocean” rather than “within ten
2
Excludes $8 million and $6 million of assets held for sale as of yearend 2007 miles” of it. Einhorn also argued that investors had
and September 30, 2008, respectively. failed to discount their assumptions to the present.
INVESTMENT HIGHLIGHTS MAJOR HOLDERS
• Largest private landowner in Florida and one of Insiders 3% │ Janus 17% │ Fairholme 15% │ Marsico 14%
few companies with ability to do large-scale real │ T Rowe 13% │ Third Avenue 11% │ Artisan 4%
estate development. St. Joe operates primarily in
Northwest Florida and owns 700,000 acres, 44% of RATINGS
which are within ten miles of the Gulf of Mexico. VALUE Intrinsic value materially higher than market value?
According St. Joe, the cost basis in most of the land MANAGEMENT Capable and properly incentivized?
is “very low.” The carrying value of operating and FINANCIAL STRENGTH Solid balance sheet?
development property is $250 million and $700 MOAT Able to sustain high returns on invested capital?
million, respectively, as of September 30.* EARNINGS MOMENTUM Fundamentals improving?
*
St. Joe also lists $8 million of investment property and $31 million of total MACRO Poised to benefit from economic and secular trends?
accumulated depreciation, resulting in net real estate of $930 million. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 140 of 241
UnitedHealth Group (NYSE: UNH) Minnetonka, MN, 952-936-1300
Financial: Insurance (Accident & Health), Member of S&P 500 http://www.unitedhealthgroup.com/ma…
$70
$60
$50
$40
$30
$20
$10
$0
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 141 of 241
BUSINESS OVERVIEW • Positioned as advocate of evidence-based care,
UnitedHealth provides managed health care, serving 70 transparent information exchange and a
million Americans. The company works with 560,000 health technologically-enhanced transaction infrastructure.
care professionals and 4,800 hospitals. UnitedHealth • Five-year outlook: Expects 6-9% organic revenue
manages $100 billion in aggregate health care spending and growth, supplemented by “occasional” M&A. Two-
derives revenue from risk-based products, service fees and thirds of EPS growth should come from operating
product sales. The company operates in four segments: earnings, with rest from “application of capital.”
Health Care Services provides health benefit plans and • Guiding for ‘09 EPS of $2.90-3.15 (+21-31% y-y).
services and includes UnitedHealthcare (including the former • Repurchased $2.7 billion of stock in 2008 and
Uniprise), Ovations and AmeriChoice. $11.5 billion from 2005-07.
OptumHealth provides health, financial and ancillary benefit • Shares trade at .5x EV to trailing revenue, 12x
services to help consumers navigate the health care system. trailing P/E and 10x forward P/E.
Ingenix provides database management, software and
INVESTMENT RISKS & CONCERNS
services to hospitals, physicians, payers, and other entities.
• Impact of push for universal health coverage
Prescription Solutions provides integrated pharmacy benefit unclear. It’s impossible to predict how future
management services through retail network pharmacies. legislation may affect HMOs’ enrollment numbers
and the profitability of their business models.
SELECTED OPERATING DATA • Recession may impact enrollment in employer
1
FYE December 31 2006 2007 2008 ‘09E
% of revenue by segment: group plans and non-employer individual plans and
Health care services 88% 79% 80% 79% cause more employees to opt out of employer group
OptumHealth 6% 5% 5% 5% plans. Employers may stop offering certain health
Ingenix 1% 1% 2% 2% benefits or offer employee-funded coverage options.
Prescription solutions 5% 15% 13% 13%
Revenue growth by segment: • Efficiency may decline, although management
Health care services 54% 5% 7% 4% claimed recently that it would “anticipate improving
OptumHealth 39% 13% 6% 0% our operating cost ratio by 20 to 40 basis points per
Ingenix 20% 36% 19% 16% year, which would include productivity gains as
Prescription solutions n/m 224% -5% 6%
Total revenue growth 54% 5% 8% 4% well as the leverage effect of increased scale.”
EBIT margin by segment:
2
• Long-term EPS growth goal of 13-16% appears
Health care services 9% 9% 7% 6% overly aggressive even in a normal economy.
OptumHealth 33% 35% 14% 13%
Ingenix 27% 31% 15% 16%
Prescription solutions 21% 32% 3% 3% COMPARABLE PUBLIC COMPANY ANALYSIS
Total EBIT margin 10% 11% 6% 7% Market Enterprise Price This Next
EV /
D&A as % of revenue 1% 1% 1% 1% Value Value to T. FY FY
Rev.
Capex as % of revenue 1% 1% 1% 1% ($mn) ($mn) Book P/E P/E
Net margin 6% 6% 4% 4% WLP 22,270 29,460 .5x n/m 8x 7x
3
Medical care ratio 81% 81% 82% 83% AET 14,810 18,070 n/a 4.2x 8x 7x
4
Operating cost ratio 14% 14% 16% 15% CI 5,790 7,120 n/a 3.2x 5x 5x
Return on tangible equity (avg) 507% 262% n/m n/m
WCG 660 -190 n/m 1.1x 14x 5x
Tangible equity to assets (avg) 3% 6% 0% n/m
1
Based on guidance provided during investor conference in December 2008. UNH 35,200 39,790 .5x n/m 10x 9x
2
Excludes Section 409A charge of $176 million, recorded in 1Q07. Calculated
as a percentage of revenue excluding investment income.
3
Represents UnitedHealth Group medical care costs as % of revenue. MAJOR HOLDERS
4
Represents operating costs as a percentage of total revenue. Insiders 2% │ Wellington 8% │ Clearbridge 3% │ Capital
World 3% │ Davis 2% │ GMO 2% │ Fairholme 1%
INVESTMENT HIGHLIGHTS
• $2 trillion U.S. health and well-being market, RATINGS
expected to grow to $4 trillion by 2015.* VALUE Intrinsic value materially higher than market value?
• Assuming health industry growth of 6-8%, the MANAGEMENT Capable and properly incentivized?
company expects “solid mid single-digit yields on FINANCIAL STRENGTH Solid balance sheet?
our risk-based businesses, which provide the largest MOAT Able to sustain high returns on invested capital?
portion of our total revenues.” EARNINGS MOMENTUM Fundamentals improving?
MACRO Poised to benefit from economic and secular trends?
* Source: Company presentation, December 2008.
EXPLOSIVENESS 5%+ probability of 5x upside in one year?
THE BOTTOM LINE
UnitedHealth enjoys large scale advantages in managed health care. The company generates strong free cash flow, trades at a
high FCF yield and has consistently repurchased stock. Nonetheless, we are a bit wary of non-capital intensive businesses
that generate large amounts of cash and are partly at the mercy of government regulation. We can’t find convincing reasons
why the company should continue to enjoy huge returns on capital in the long term, other than due to regulator inertia.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 142 of 241
…additional insight into UNH:
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 143 of 241
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 144 of 241
URS (NYSE: URS) San Francisco, CA, 415-774-2700
Capital Goods: Construction Services, Member of S&P MidCap 400 http://www.urscorp.com
$70
$60
$50
$40
$30 c
$20
$10
$0
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 145 of 241
BUSINESS OVERVIEW Revenue by Sector, 2008E
URS provides program management, planning, design, Infrastructure
engineering, construction, operations, and decommissioning 18%
services. It operates in three divisions: Federal
35%
The URS Division provides project-related services to
Pow er
governments and private clients. 19%
The EG&G Division provides project-related services to U.S.
government agencies, primarily the DOD and DHS. Industrial and
The Washington Division, formed via the acquisition of commercial
Washington Group in November 2007, provides project- 28%
related services to governments and private clients. Source: Company estimates, The Manual of Ideas.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 146 of 241
USG (NYSE: USG) Chicago, IL, 312-436-4000
Capital Goods: Construction - Raw Materials http://www.usg.com
$140
$120
$100
$80
$60
$40
$20
$0
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 147 of 241
BUSINESS OVERVIEW SELECTED OPERATING DATA
USG provides building materials for residential, new FYE December 31 2005 2006 2007 2008
nonresidential, and repair and remodel construction. USG % of revenue by segment:
North American Gypsum 63% 62% 55% 51%
products are also used in industrial processes. The company Building Products Distribution 40% 43% 44% 43%
operates in three segments: North American Gypsum, Worldwide Ceilings 14% 13% 16% 18%
Building Products Distribution and Worldwide Ceilings. Eliminations -16% -18% -14% -13%
Sales are highest from spring through the middle of fall. Revenue growth by segment:
North American Gypsum 17% 12% -22% -17%
USG emerged from a five-year Chapter 11 process in 2Q06. Building Products Distribution 18% 21% -8% -13%
The company raised $1.7 billion in a rights offering in 3Q06. Worldwide Ceilings 3% 7% 8% 4%
Berkshire backstopped the offering, buying seven million Total revenue growth 14% 13% -10% -11%
EBIT margin by segment:
shares at $40 per share. In March 2007, USG completed an North American Gypsum -77% 23% 3% -10%
offering of nine million shares at $48.60 per share. Building Products Distribution 7% 8% 5% -2%
Worldwide Ceilings 9% 10% 9% 9%
INVESTMENT HIGHLIGHTS Corporate and other 12% 13% 14% 16%
Total EBIT margin -46% 17% 3% -6%
• U.S Gypsum is #1 producer of gypsum wallboard DD&A as % of revenue
1
2% 2% 3% 4%
1
• Worldwide Ceilings is leader in interior ceiling ∆ Sheetrock ASP n/a 25% -25% -22%
1
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 148 of 241
…additional insight into USG: SELECTED SLIDES FROM COMPANY PRESENTATION,
SEPTEMBER 18, 2008
SELECTED SLIDES FROM COMPANY PRESENTATION,
JANUARY 28, 2009
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 149 of 241
USG / NORTH AMERICAN GYPSUM SEGMENT / U.S. GYPSUM – SELECTED METRICS
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 150 of 241
WellCare Health Plans (NYSE: WCG) Tampa, FL, 813-290-6200
Financial: Insurance (Accident & Health), Member of S&P MidCap 400 http://www.wellcare.com
$140
$120
$100
$80
$60
$40
$20
$0
Jan 00 Jan 00 Jan 00 Jan 00 Jan 00 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 151 of 241
BUSINESS OVERVIEW • Charles Berg joined as executive chairman in
WellCare provides managed care services exclusively for January 2008. He was previously CEO of Oxford,
government-sponsored healthcare programs, focusing on which he turned around and sold to UnitedHealth.
Medicaid and Medicare. The company offers health plans for • Heath Schiesser became CEO in January 2008.
families, children, the aged, blind and disabled, and He was previously SVP of marketing and sales. He
prescription drug plans, serving 2.5+ million members. has a large options package struck at $40 per share.
• Thomas Tran joined as CFO in July 2008. He
SELECTED OPERATING DATA—RESTATED1,2 was previously CFO of CareGuide and Uniprise.
FYE December 31 2005 2006 2007
• Rex Adams joined as COO in September 2008.
% of revenue by type:
Medicaid 72% 52% 50% He was previously CEO of AT&T East.
Medicare 27% 46% 48% • Shares trade at 5x forward earnings.
Premium revenue 99% 99% 98%
Investment and other income 1% 1% 2% INVESTMENT RISKS & CONCERNS
Revenue growth by type:
Medicaid 29% 42% 41% • Federal and state agencies searched WellCare
Medicare 51% 233% 56% headquarters in Tampa, Florida in October 2007.
Premium revenue growth 34% 94% 48% The DOJ and Florida AG appear focused on
Investment and other income 296% 193% 72%
Total revenue growth 35% 95% 48%
WellCare’s behavioral health refunds to the Florida
Medical benefit ratio (MBR) 82% 81% 82% Medicaid agency. The company is at risk of a fine
Gross margin by segment: that might range from $100-500 million.
Medicaid 19% 18% 21% • Executive turnover in January 2008, with
Medicare 18% 20% 21%
WellCare firing chairman and CEO Farha, CFO
Selected items as % of revenue:
SG&A 14% 14% 14% Behrens and general counsel Bereday.
Pre-tax income 4% 6% 7%
Net income 3% 3% 4% COMPARABLE PUBLIC COMPANY ANALYSIS
D&A 0% 0% 0% Market Enterprise Price This Next
Capex 2% 1% 0% EV /
Value Value to T. FY FY
% of Medicaid revenue by state: Rev.
($mn) ($mn) Book P/E P/E
Florida 65% 46% 34%
UNH 35,200 39,790 .5x n/m 10x 9x
Georgia <10% 26% 40%
Tangible equity to assets 22% 23% 32% WLP 22,270 29,460 .5x n/m 8x 7x
∆ shares out (period end) 2% 4% 2% CVH 2,410 2,850 .2x 12.7x 9x 7x
1
According to a WellCare 8-K dated July 21, 2008, the company needed to AGP 1,510 970 .2x 2.7x 11x 11x
restate financials for 2004, 2005, 2006 and 1H07. WellCare filed Form 10-K for CNC 940 720 .2x 2.9x 11x 10x
the year ended December 31, 2007 on January 28, 2009.
2
WellCare has not yet released financial statements for 2008. WCG 660 n/a n/m n/a 14x 5x
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 152 of 241
WellPoint (NYSE: WLP) Indianapolis, IN, 317-532-6000
Financial: Insurance (Accident & Health), Member of S&P 500 http://www.wellpoint.com
$100
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
Jan 00 Jan 00 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 153 of 241
BUSINESS OVERVIEW SELECTED OPERATING DATA
WellPoint offers network-based managed health care plans to FYE December 31 2006 2007 2008 ‘09E
employer, individual, Medicaid and senior markets. Plans % of revenue by type:
Premiums 91% 91% n/a n/a
include PPOs, HMOs and point-of-service plans; traditional Administrative fees and other 7% 7% n/a n/a
indemnity plans and consumer-driven health plans; hospital Total operating revenue 98% 98% n/a n/a
only and limited benefit products. The company also Net investment income, gains 2% 2% n/a n/a
provides services to self-funded customers as well as Revenue growth by type:
1
Premiums 28% 7% n/a n/a
specialty and other services, including life and disability Administrative fees and other 29% 2% n/a n/a
insurance benefits and pharmacy benefit management. Net investment income, gains 39% 15% n/a n/a
WellPoint is a licensee of the Blue Cross and Blue Shield ∆ revenue 28% 7% n/a n/a
2
∆ medical members 1% 2% n/a n/a
Association of independent health benefit plans. The Selected items as % of revenue:
company also serves customers under the UniCare brand. Benefit expense 74% 75% n/a n/a
Pre-tax income 9% 9% n/a n/a
INVESTMENT HIGHLIGHTS D&A 0% 0% n/a n/a
Stock-based comp, net 1% 1% n/a n/a
• Largest Medicare Parts A & B claims-processor Capex 0% 0% n/a n/a
in U.S., with 35 million total members and growing 2
Medical members (mn) 34 35 n/a n/a
specialty and health solutions businesses. 2
% of medical members by funding arrangement (mn):
• Participates in Blue Cross Blue Shield (includes Self-funded 49% 51% n/a n/a
Fully insured 51% 49% n/a n/a
80% of U.S. physicians and 95% of hospitals). 2
% of medical members by customer type (mn):
BCBS licensees benefit from network discounts. Local group 49% 48% n/a n/a
• Diverse membership base, with presence in more National accounts 18% 18% n/a n/a
than a dozen U.S. states, including California (25- BlueCard 13% 13% n/a n/a
3
Other 20% 21% n/a n/a
30% market share), Connecticut (45-50% share), Tangible equity to assets (avg) 6% 4% n/a n/a
Indiana (~45% share), and Virginia (40-45% share). ∆ diluted shares out (avg) 3% -6% n/a n/a
• Conservative reserving, with days in claims 1
Premiums increased 12% on an “organic” basis, driven by rate increases,
payable relatively consistent at 45-50 days.1 addition of New York state prescription drug contract and new enrollment in
Medicare Part D products. The remainder of the increase was due to the $6.5
• Aims to grow specialty products, including billion acquisition of WellChoice, which was completed on December 31, 2005.
2
behavioral health (24 million members), dental (9 3
Based on period-end data.
Includes individual, senior, state sponsored, and FEP accounts.
million, life (6 million), and vision (3 million).
• 46 million uninsured Americans—growth COMPARABLE PUBLIC COMPANY ANALYSIS
opportunity? WellPoint enrolled 350-400K Market Enterprise Price This Next
individuals with no previous coverage in 2008. EV /
Value Value to T. FY FY
Rev.
• Guiding for single-digit GAAP EPS growth in ($mn) ($mn) Book P/E P/E
2009. WellPoint expects to win 40 national accounts UNH 35,200 39,790 .5x n/m 10x 9x
and add 400K net new national members in 2009. CVH 2,410 2,850 .2x 12.7x 9x 7x
• Repurchased $3.0 billion of stock in the first nine AGP 1,510 970 .2x 2.7x 11x 11x
months of 2008 and $11 billion from 2005-07. CNC 940 720 .2x 2.9x 11x 10x
WCG 660 n/a n/m n/a 14x 5x
• Shares trade at 10% trailing FCF yield, 9x
WLP 22,270 29,460 .5x n/m 8x 7x
trailing P/E and 8x forward P/E.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 154 of 241
…additional insight into WLP: SELECTED SLIDES FROM COMPANY PRESENTATION,
FEBRUARY 9, 2009
BUSINESS MODEL—KEY LEVERS OF EPS GROWTH
• Revenue growth: price hikes in excess of cost
increases, organic membership gains, new products
• Operating cost improvement: “optimize” cost of
care, lower per-member administrative costs,
increase efficiency
• Capital management: high-return reinvestment,
efficient capital structure, share repurchases
20%
18%
16% 14.6%
14%
12%
00 01 02 03 04 05 06 07 08E
Source: Company, The Manual of Ideas.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 155 of 241
INDUSTRY-RELATED CHARTS Healthcare Expenses Paid Out of Pocket, 1975-2015E
Healthcare Spending as % of GDP, 1960-2005
27%
25%
0%
1995 2008
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 156 of 241
Winthrop Realty Trust (NYSE: FUR) Boston, MA, 617-570-4614
Services: Real Estate Operations http://www.winthropreit.com
$40
$35
$30
$25
$20
$15
$10
$5
$0
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 157 of 241
BUSINESS OVERVIEW • Announced repurchase plan in September 2008,
Winthrop Realty Trust operates in three segments: pursuant to which the company is permitted to buy
Operating Properties includes the trust’s wholly and up to five million shares.
partially owned operating properties. • Shares trade at .5x tangible book value (no EPS
Loan Assets and Loan Securities includes the trust’s estimates available).
activities related to senior and mezzanine real estate loans.
INVESTMENT RISKS & CONCERNS
REIT Equity Interests includes the trust’s activities related to • Management post-3Q08 (November 6): “In view
the ownership of securities in public real estate companies. of the worsening economic environment and the
The trust issued 5 million shares at $5.25 per share in a rights erosion of real estate equity values which transpired
offering and 20 million shares at $6 in a public sale in 2006. over the past 15 months, we continued to focus our
efforts primarily on increasing our corporate
SELECTED OPERATING DATA liquidity and delevering our balance sheet.”
YTD • $304 million of debt, offset by $219 million of
FYE December 31 2005 2006 2007 9/30/08
Selected operating data ($mn): cash. The company recently extended its credit line
Segment EBITDA
1
$45 $89 $51 $15 with KeyBank through December 2010, subject to
Segment EBIT 38 77 38 6 one, one-year extension right. The line provides for
Segment EBT 23 55 18 (6) a maximum initial borrowing of $35 million, subject
Corporate items 1 (9) (16) (10)
Net income to common 22 43 2 (15) to increase to $75 million. At December 16, the
% of EBITDA by segment (excl. corporate items): company had no amounts outstanding on the line.
Operating properties 54% 36% 60% 159%
Loan assets and securities 18% 24% 50% -66% COMPARABLE PUBLIC COMPANY ANALYSIS
REIT equity interests 28% 40% -10% 7%
Market Price to This Next
% of total assets by segment: Price FY End
2 Value Tangible FY FY
Operating properties 37% 32% 39% 40% ($) Date
($mn) Book P/E P/E
real estate – office (TX, FL) 13% n/a
KIM 10.40 2,820 .7x 18x 18x Dec-31
real estate – office (IL, IN) 9% n/a
real estate – office (PA, NY) 6% n/a REG 29.30 2,050 1.3x 22x 23x Dec-31
real estate – retail 3% n/a ARE 50.30 1,600 1.2x 19x 17x Dec-31
real estate – other 5% n/a CLI 19.60 1,300 .9x 20x 33x Dec-31
Loan assets and securities 41% 43% 43% 28%
OFC 25.10 1,290 1.5x 33x 27x Dec-31
REIT equity interests 16% 12% 10% 0%
Other assets
3
6% 13% 8% 32% WRI 13.60 1,180 .8x 8x 8x Dec-31
% of total assets by source of capital: BDN 5.90 520 .3x 31x n/m Dec-31
Liabilities 58% 60% 55% DDR 3.40 410 .2x 4x 5x Dec-31
Loans and mortgage loans 31% 32% 41% AKR 10.50 350 1.5x 11x 16x Dec-31
Repurchase agreements 13% 10% 0%
PEI 4.70 180 .3x n/m n/m Dec-31
convertible preferred stock 12% 13% 12%
other liabilities 3% 4% 3% RPT 5.10 90 .3x n/a n/a Dec-31
Minority interest 4% 1% 1% FUR 9.80 154 .5x n/a n/a Dec-31
Shareholders’ equity 38% 39% 43%
1
Referred to by the company as “net operating income”. Segment EBITDA
excludes corporate items and includes earnings from investments. MAJOR HOLDERS
2
3
Includes real estate and non-real estate assets. CEO Ashner 17% │ Other insiders 10% │ North Run 5% │
Includes cash and equivalents.
Fairholme 11% │ Wellington 3% │ Raffles 1%
INVESTMENT HIGHLIGHTS
RATINGS
• Fertile ground for new deals? According to VALUE Intrinsic value materially higher than market value?
management, the “adverse market conditions MANAGEMENT Capable and properly incentivized?
have… begun to provide the company with FINANCIAL STRENGTH Solid balance sheet?
investment opportunities which demonstrate risk MOAT Able to sustain high returns on invested capital?
adjusted returns at levels which we have not EARNINGS MOMENTUM Fundamentals improving?
observed since early 2000, and which we are MACRO Poised to benefit from economic and secular trends?
actively but selectively pursuing.” EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 158 of 241
Candidates—Deep Value: Japan
As we scouted for “deep value” opportunities to include in this report, we
quickly realized that a number of major Japanese corporations were quite cheap on
an earnings basis and even cheaper when underlying net asset values are considered.
We are presenting eight Japanese public companies in this special section.
We have chosen the following stocks based on low multiples of price to
tangible book value and some overlap in their businesses. We passed on a
number of rather cheap Japanese auto makers, as the latter are dealing with a unique
set of issues globally, and we felt that addressing such issues was beyond the scope
of this report. As a result, we analyze the following companies:
h Canon (CAJ)
h Fujifilm (FUJI)
h Hitachi (HIT)
h Kyocera (KYO)
h Panasonic (PC)
h Sharp (SHCAY)
h Sony (SNE)
h TDK (TDK)
Japanese stocks are widely viewed as low-ROE businesses with little
management focus on shareholder value, and we find this reputation to be largely
deserved. We do note, however, that some firms appear to be warming up to the idea
of share repurchases, albeit in limited magnitude. We also note that a few firms do
appear focused on improving returns on equity.
We choose Sony as our top pick among the eight contenders, with Canon
and Panasonic also deserving a closer look.
h Sony (NYSE: SNE) stands in a league of its own in terms of global brand
recognition and brand preference. Our analysis shows it trades
meaningfully below the sum of the value of its parts.
h Canon (NYSE: CAJ) is interesting due to best-in-class returns on equity
among large Japanese companies.
h Panasonic (NYSE: PC), formerly known as Matsushita Electric, derives
value both from a branded global consumer electronics business and
significant non-core assets.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 159 of 241
Major Japanese Public Companies – Overview
Basic Materials
Kubota KUB 27.21 7 11 7 13 25 5.0 Iron & Steel
Kobe Steel KBSTY 6.60 4 12 6 50 34 5.0 Iron & Steel
Furukawa Electric FUWAY 39.00 3 7 2 25 40 10.0 Metal Mining
Capital Goods
Mitsui & Co. MITSY 209.33 19 50 20 66 44 20.0 Misc. Capital Goods
Hitachi HIT 28.64 10 34 13 118 359 10.0 Misc. Capital Goods
Komatsu KMTUY 43.53 11 16 8 31 41 4.0 Construction & Agri Machinery
Consumer Cyclical
Toyota Motor TM 65.45 103 208 119 256 322 2.0 Auto & Truck Manufacturers
Honda Motor HMC 24.02 44 86 47 123 186 1.0 Auto & Truck Manufacturers
Panasonic PC 11.58 24 20 30 92 307 1.0 Audio & Video Equipment
Sony SNE 18.50 19 17 26 89 179 1.0 Audio & Video Equipment
Nissan Motor NSANY 5.95 12 60 30 217 158 2.0 Auto & Truck Manufacturers
Bridgestone BRDCY 26.80 10 18 14 75 137 2.0 Tires
Fujifilm FUJI 19.64 10 10 15 28 78 1.0 Photography
Sharp SHCAY 8.00 9 13 11 34 56 1.0 Audio & Video Equipment
Sanyo SANYY 7.30 3 5 3 20 93 5.0 Audio & Video Equipment
Kawasaki Heavy KWHIY 7.05 3 6 3 29 32 4.0 Recreational Products
Makita MKTAY 20.84 3 2 3 4 11 1.0 Appliances & Tools
Wacoal WACLY 59.91 2 1 2 2 14 5.0 Apparel/Accessories
Consumer Non-Cyclical
Kirin Holdings KNBWY 10.27 10 16 5 49 34 1.0 Beverages (Alcoholic)
Shiseido SSDOY 15.61 6 6 3 15 29 1.0 Personal & Household Products
Q.P. Corp. QPCPY 24.15 2 2 2 10 10 2.0 Food Processing
Financial
Mitsubishi UFJ MTU 5.06 59 n/m 64 47 78 1.0 Money Center Banks
Mizuho Financial MFG 4.43 25 n/m 0 0 49 2.0 Regional Banks
Tokio Marine TKOMY 22.85 18 n/m 14 70 27 1.0 Insurance (Property & Casualty)
Nomura NMR 5.10 10 n/m 15 7 26 1.0 Investment Services
Healthcare
Eisai ESALY 34.03 10 13 0 17 11 1.0 Biotechnology & Drugs
Services
NTT DoCoMo DCM 16.12 68 69 41 50 23 0.0 Communications Services
Nippon Telegraph NTT 22.64 60 105 63 115 208 0.0 Communications Services
ORIX IX 15.16 3 59 13 12 20 0.5 Rental & Leasing
Daiei DAIEY 8.70 2 2 2 25 10 n/a Retail (Department & Discount)
Technology
Canon CAJ 26.52 33 25 30 45 167 1.0 Computer Peripherals
Softbank SFTBF 15.00 16 39 (9) 59 21 n/a Computer Services
Kyocera KYO 64.00 12 7 14 17 65 1.0 Semiconductors
Fujitsu FJTSY 19.22 8 14 7 110 174 5.0 Computer Services
Ricoh RICOY 59.10 9 15 7 23 110 5.0 Office Equipment
Nidec NJ 11.33 6 7 3 7 95 0.3 Electronic Instruments & Controls
TDK TDK 40.30 5 6 7 9 74 1.0 Electronic Instruments & Controls
Trend Micro TMICY 29.40 4 3 1 2 4 1.0 Software & Programming
Konami KNM 15.96 2 2 1 3 6 1.0 Software & Programming
Advantest ATE 15.12 3 1 2 1 4 1.0 Semiconductors
[Japanese ADRs ● Deep Value Browser 1 ● dvbrowser1_data.xls, dvbrowser1.xls]
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 160 of 241
Major Japanese Public Companies – Overview
Basic Materials
Kubota KUB 7 11 1.0x .9x 506 18% 5% -1%
Kobe Steel KBSTY 4 12 .7x .2x 1,451 33% n/m -3%
Furukawa Electric FUWAY 3 7 1.5x .3x 632 14% n/m -1%
Capital Goods
Mitsui & Co. MITSY 19 50 1.0x .8x 1,491 15% n/m 4%
Hitachi HIT 10 34 .7x .3x 328 6% n/m -0%
Komatsu KMTUY 11 16 1.3x .5x 756 36% n/m 0%
Consumer Cyclical
Toyota Motor TM 103 208 .9x .8x 796 5% n/m -1%
Honda Motor HMC 44 86 .9x .7x 658 -60% n/m -1%
Panasonic PC 24 20 .8x .2x 298 20% n/m -3%
Sony SNE 19 17 .7x .2x 495 4% n/m 0%
Nissan Motor NSANY 12 60 .4x .3x 1,371 8% n/m -0%
Bridgestone BRDCY 10 18 .8x .2x 546 22% n/m 0%
Fujifilm FUJI 10 10 .6x .4x 363 8% 26% -0%
Sharp SHCAY 9 13 .8x .4x 614 0% n/m 0%
Sanyo SANYY 3 5 .9x .2x 213 8% n/m -0%
Kawasaki Heavy KWHIY 3 6 1.0x .2x 915 12% n/m 6%
Makita MKTAY 3 2 1.0x .6x 330 25% 71% 0%
Wacoal WACLY 2 1 1.0x .7x 135 8% 30% -1%
Consumer Non-Cyclical
Kirin Holdings KNBWY 10 16 1.9x .3x 1,418 27% n/m -0%
Shiseido SSDOY 6 6 1.8x .4x 531 40% 9% -1%
Q.P. Corp. QPCPY 2 2 1.2x .2x 1,087 18% n/m -0%
Financial
Mitsubishi UFJ MTU 59 n/m .9x n/m 606 n/m n/m 3%
Mizuho Financial MFG 25 n/m n/m n/m n/a n/m n/m -1%
Tokio Marine TKOMY 18 n/m 1.3x n/m 2,538 n/m n/m -2%
Nomura NMR 10 n/m .6x n/m 266 n/m n/m 0%
Healthcare
Eisai ESALY 10 13 25.2x .8x 1,565 28% n/m -0%
Services
NTT DoCoMo DCM 68 69 1.7x 1.4x 2,203 29% n/m -2%
Nippon Telegraph NTT 60 105 1.0x .9x 552 13% n/m -0%
ORIX IX 3 59 .2x 4.9x 601 10% n/m 1%
Daiei DAIEY 2 2 .8x .1x 2,407 3% n/m -0%
Technology
Canon CAJ 33 25 1.1x .6x 267 27% 26% -3%
Softbank SFTBF 16 39 n/m .7x 2,811 48% n/m 1%
Kyocera KYO 12 7 .8x .4x 263 18% 48% 1%
Fujitsu FJTSY 8 14 1.2x .1x 635 12% n/m -0%
Ricoh RICOY 9 15 1.3x .6x 213 18% n/m -0%
Nidec NJ 6 7 2.5x .9x 79 22% n/m 0%
TDK TDK 5 6 .8x .7x 117 4% 3% -2%
Trend Micro TMICY 4 3 3.7x 1.2x 606 >100% 18% -1%
Konami KNM 2 2 1.6x .7x 574 39% 6% 0%
Advantest ATE 3 1 1.1x 1.1x 289 -18% 62% -3%
[Japanese ADRs ● Deep Value Browser 1 ● dvbrowser1_data.xls, dvbrowser1.xls]
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 161 of 241
Why “Japan Inc.” Has Long Way To Go — Corporate Governance at Sharp Corporation
Sharp presents the following “system” as evidence of its commitment to “improving the speed and
quality of managerial decisions.” Note that the company even has a “One-of-a-kind Product Strategy
Committee.” We are not quite sure that “one-of-a-kind” products are best conceived by committee.
Source: Sharp Corporation, Corporate Governance System (as of June 24, 2008), Annual Report for FY07, p. 31.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 162 of 241
Canon (NYSE: CAJ) Ohta-ku, TK, Japan, 81-3-375-2111
Technology: Computer Peripherals http://www.canon.com
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BUSINESS OVERVIEW • Market for digital SLR cameras continues to
Canon provides branded digital multifunction devices, grow. The market for compact digital cameras is
copying machines, printers, cameras, steppers, and aligners. also growing amid intense price competition.
The company sells through subsidiaries, each of which has • Strategy: develop high-value products based on
localized marketing and distribution responsibility. advanced technology. Even so, Canon could curtail
Canon entered the business machines field in the late 1950s basic research in favor of product-oriented R&D.
utilizing photographic and optical products technology. The • Repurchased 14 million shares for ¥50 billion
company introduced electronic calculators in 1964 and has (~$520 million) in November 2008. The company
since expanded into other technology-driven office products. had spent $4 billion on buybacks during 2007.
Seasonality is strongest during the Q4 holiday season. • Shares trade at 1.1x tangible book value, 10x
Corporate demand in Japan peaks in Q1. trailing P/E and 18x forward P/E.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 164 of 241
Fujifilm (Nasdaq: FUJI) Minato-ku, TK, Japan, 877-248-4237
Consumer Cyclical: Photography http://www.fujifilmholdings.com
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BUSINESS OVERVIEW • Shares trade at .6x tangible book value, 16x
Fujifilm operates in three segments: forward P/E and .6x tangible book value.
Imaging Solutions includes color films, digital cameras,
photofinishing equipment and services, and color paper. INVESTMENT RISKS & CONCERNS
Information Solutions includes medical systems, graphic arts • Guiding for revenue decline of 15% and EBIT
equipment and materials, flat panel display materials, decline of 86% in current fiscal year.
recording media, optical devices, and inkjet materials. • Imaging solutions business in decline, primarily
due to near-obsolesce of color films and “harsh”
Document Solutions includes office copy machines, printers, price competition in color paper market. Fujifilm is
production systems, paper, consumables, and office services. consolidating facilities and reducing personnel to try
to transform imaging business into cash cow.
SELECTED OPERATING DATA
YTD
• Recent Document Solutions margin expansion at
FYE March 31 2006 2007 2008 12/31/08 risk? Segment margin expanded in FY08 and so far
% of revenue by segment: in FY09, but a downtrend in domestic demand and
Imaging solutions 26% 22% 19% 18% slowdown in export sales may erode margin again.
Information solutions 33% 37% 39% 39%
Document solutions 41% 41% 42% 44%
• Panel makers’ manufacturing adjustments
Revenue growth by segment: impacting FPD materials business (part of info
Imaging solutions -7% -12% -10% -24% solutions segment). Fujifilm views this as a core
Information solutions 14% 17% 8% -10% business and is increasing supply of WV film for
Document solutions 8% 5% 4% -5%
which demand is expected to rise. The company is
Total revenue growth 6% 4% 2% -11%
EBIT margin by segment: also expanding its share of film for laptops.
Imaging solutions -11% -7% 0% -2% • Competition, slowdown in endoscope business
Information solutions 9% 9% 11% 5% (part of info solutions). In response, Fujifilm has
Document solutions 6% 5% 7% 7%
Total EBIT margin 3% 4% 7% 4%
taken control of the business from Fujinon.
D&A as % of revenue 8% 8% 8% 8% • Lower demand for medical use films affecting
Capex as % of revenue 7% 6% 6% 6% medical systems business (part of info solutions).
R&D as % of revenue 7% 6% 7% 8% The company is shifting from a film-centered
Net margin 1% 1% 4% 2%
portfolio to equipment and network products.
% of revenue by type:
Sales 86% 86% 86% 85%
Rentals 14% 14% 14% 15% COMPARABLE PUBLIC COMPANY ANALYSIS
Gross margin by type: Market Enterprise Price This Next
EV /
Sales 38% 38% 37% 36% Value Value to T. FY FY
Rev.
Rentals 57% 58% 60% 58% ($mn) ($mn) Book P/E P/E
Total gross margin 40% 41% 41% 39% CAJ 32,750 25,260 .6x 1.1x 18x n/a
% of revenue by geography: RICOY 8,580 14,970 .6x 1.3x 13x 20x
Japan 62% 60% 58% 45%
Asia Pacific 9% 10% 12% 21% EK 1,090 250 .0x 17.9x n/m n/m
Americas 17% 18% 18% 19% FUJI 9,600 10,360 .4x .6x 16x 16x
Europe 12% 12% 12% 15%
ROE 2% 2% 5% 2% MAJOR HOLDERS
Equity to total assets (avg) 63% 62% 59% 60%
∆ shares out (period end) 0% 0% -1% 0% Insiders <1% │ Japan Trustee Services 6% │ Master Trust
Bank of Japan 5% │ State Street 4% │ Nippon Life 4%
INVESTMENT HIGHLIGHTS
• Downsized photosensitive materials businesses
RATINGS
from 19,000 to 8,800 people in four years, while VALUE Intrinsic value materially higher than market value?
focusing on growth segments: medical equipment, MANAGEMENT Capable and properly incentivized?
graphic systems, document solutions, optical FINANCIAL STRENGTH Solid balance sheet?
MOAT Able to sustain high returns on invested capital?
devices, and flat panel display (FPD) materials.
EARNINGS MOMENTUM Fundamentals improving?
• Expects to repurchase ¥35 billion ($370 million)
MACRO Poised to benefit from economic and secular trends?
of stock in the year ending March 31st, following a
EXPLOSIVENESS 5%+ probability of 5x upside in one year?
¥34 billion buyback in the previous fiscal year.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 166 of 241
Hitachi (NYSE: HIT) Chiyoda-ku, TK, Japan, 650-244-7900
Capital Goods: Misc. Capital Goods http://www.hitachi.co.jp
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BUSINESS OVERVIEW SELECTED OPERATING DATA
Hitachi is a conglomerate that operates in seven segments: YTD
FYE March 31 2006 2007 2008 12/31/08
Information and Telecommunication Systems includes hard % of revenue by segment:
disk drives, servers, software, ATMs, and IT services. Info and telecom systems 25% 24% 25% 25%
Electronic Devices includes LCDs, semi cap equipment, test Electronic devices 13% 13% 12% 12%
Power and industrial 30% 29% 32% 32%
and measurement equipment, and medical equipment. Digital media, consumer 14% 15% 13% 13%
Power & Industrial includes nuclear, thermal and hydro- High functional materials 17% 18% 17% 17%
electric power plants, industrial machinery, and auto parts. Logistics and services 13% 12% 11% 11%
Financial services 5% 5% 4% 4%
Digital Media & Consumer includes optical disk drives, Eliminations, corporate -16% -15% -13% -13%
plasma and LCD TVs, mobile phones, and refrigerators. Revenue growth by segment:
High Functional Materials & Components includes wires Info and telecom systems 4% 5% 12% 0%
Electronic devices -9% 7% 0% -4%
and cables, copper products, chemical products, and resins. Power and industrial 12% 8% 18% -1%
Logistics, Services & Others includes general trading, Digital media, consumer 2% 15% 0% -12%
logistics and property management. High functional materials 6% 12% 4% -8%
Logistics and services -3% 0% 5% -14%
Financial includes leasing, loan guarantees and insurance. Financial services -2% -3% -11% -17%
Total revenue growth 5% 8% 10% -5%
INVESTMENT HIGHLIGHTS EBIT margin by segment:
Info and telecom systems 3.6% 2.4% 4.2% 5.9%
• One of world’s largest providers of electronic Electronic devices 1.7% 3.6% 4.2% 3.6%
and electrical products, ranging from electricity Power and industrial 3.3% 1.2% 3.9% 1.6%
generation systems to HDDs and medical systems. Digital media, consumer -2.7% -3.9% -7.3% -4.2%
High functional materials 6.9% 7.4% 7.5% 5.3%
• Intends to grow nuclear power systems business Logistics and services 1.6% 1.7% 2.2% 2.0%
globally via a strategic partnership with GE. Financial services 6.8% 4.7% 5.7% 3.5%
• Large real estate holdings (difficult to value). Eliminations, corporate -0.7% -0.8% -0.4% -0.7%
• Shares trade at .7x tangible book value and .3x Total EBIT margin 2.7% 1.8% 3.1% 2.4%
Selected items as % of revenue:
EV to trailing revenue. Special items
1
-0.4% -0.4% -1.0% 0.0%
D&A 4.8% 4.6% 4.8% 4.8%
INVESTMENT RISKS & CONCERNS Capex 10.1% 10.2% 8.6% 6.8%
R&D 4.3% 4.0% 3.8% 4.1%
• Guiding for revenue decline of 11% to ¥10,020 Net income (reported) 0.4% -0.3% -0.5% -4.7%
billion, EBIT decline of 88% to ¥40 billion and net EBIT to average assets by segment:
loss of ¥700 billion in current fiscal year. Info and telecom systems 5% 3% 6% n/a
• Unwieldy conglomerate, with businesses ranging Electronic devices 2% 5% 7% n/a
Power and industrial 4% 1% 5% n/a
from disk arrays that compete with EMC to Digital media, consumer -5% -6% -12% n/a
industrial machinery that competes with Caterpillar. High functional materials 8% 9% 9% n/a
• Low-margin, low-ROIC business, with EBIT Logistics and services 2% 2% 3% n/a
margins is the low to mid single digits. None of the Financial services 2% 1% 1% n/a
Total EBIT to avg assets 3% 2% 3% n/a
company’s segments posts high returns on capital. % of revenue by geography:
• Realignment to include “exiting certain businesses Japan 71% 68% 66% 57%
that share fewer synergies with targeted businesses Asia 12% 14% 16% 20%
or have poor prospects for higher efficiency.” North America 10% 10% 9% 9%
Europe and other 7% 8% 9% 14%
ROE (reported) 2% -1% -3% -18%
COMPARABLE PUBLIC COMPANY ANALYSIS Equity to total assets (avg) 24% 24% 22% 19%
Market Enterprise Price This Next ∆ diluted share out (avg) 2% -3% 0% 0%
EV /
Value Value to T. FY FY 1
Includes restructuring charges, impairment losses and losses on disposals.
Rev.
($mn) ($mn) Book P/E P/E
IBM 126,070 147,090 1.4x 9.4x 10x 10x
RATINGS
PC 23,990 19,680 .2x .8x 10x 11x
VALUE Intrinsic value materially higher than market value?
FJTSY 7,950 13,820 .1x 1.2x n/a n/a
MANAGEMENT Capable and properly incentivized?
HIT 9,520 34,350 .3x .7x n/a n/a
FINANCIAL STRENGTH Solid balance sheet?
MOAT Able to sustain high returns on invested capital?
MAJOR HOLDERS EARNINGS MOMENTUM Fundamentals improving?
Insiders <1% │ NATS CUMCO 9% │ State Street 8% │ MACRO Poised to benefit from economic and secular trends?
Master Trust Bank of Japan 6% │ Dodge & Cox 4% EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 168 of 241
Kyocera (NYSE: KYO) Kyoto-shi, KY, Japan, 858-576-2600
Technology: Semiconductors http://www.kyocera.co.jp
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BUSINESS OVERVIEW SELECTED OPERATING DATA
Kyocera operates in seven technology-driven segments: YTD
FYE March 31 2006 2007 2008 12/31/08
Fine Ceramic Parts provides communications components, % of revenue by segment:
sapphire substrates, and automotive and other components. Semiconductor parts 11% 12% 12% 13%
Applied ceramic products 10% 10% 12% 14%
Semiconductor Parts provides various types of ceramic Electronic device 22% 22% 23% 21%
packages and wireless communication device packages, Fine ceramic parts and other 6% 6% 6% 6%
Applied Ceramic Products provides solar power generating Total components 49% 51% 53% 53%
Telecom equipment 19% 20% 17% 19%
systems, solar cells and modules, and cutting tools. Information equipment 21% 21% 21% 19%
Electronic Devices provides ceramic/tantalum capacitors, Total equipment 42% 41% 39% 38%
Eliminations and other 9% 8% 9% 9%
timing devices, RF modules, connectors, and printheads.
Revenue growth by selected segment:
Telecommunications Equipment provides CDMA mobile Semiconductor parts 6% 13% 1% 0%
phone handsets and personal handy phone (PHS) products. Applied ceramic products 25% 12% 14% 13%
Electronic device -1% 10% 3% -16%
Information Equipment provides Ecosys printers, copying Total components growth 4% 12% 4% -6%
machines and multifunctional peripherals. Telecom equipment -9% 10% -12% 1%
Information equipment 3% 8% 3% -15%
Other includes telecom engineering, management consulting, Total equipment growth -7% 8% -6% -8%
chemical materials, electrical insulators, optical components, Total revenue growth 0% 9% 1% -7%
and hotel, real estate and insurance agent businesses. EBIT margin by selected segment:
Semiconductor parts 13% 15% 13% 10%
Applied ceramic products 19% 17% 22% 23%
INVESTMENT HIGHLIGHTS Electronic device 10% 16% 12% 3%
• Growing solar market benefits solar cells and Total components margin 13% 16% 15% 10%
modules business. Kyocera is investing heavily in Telecom equipment -1% 0% 3% -6%
Information equipment 11% 13% 14% 8%
this business, as it represents the only major growth
Total equipment margin 4% 6% 9% 1%
driver at this time. The company has ~300 MW of Total EBIT margin 9% 11% 12% 9%
production capacity and expects to boost capacity D&A as % of revenue 6% 6% 7% 6%
by roughly 100 MW per year through 2012. Capex as % of revenue 8% 5% 7% 6%
Kyocera aims to improve conversion efficiency R&D as % of revenue 5% 5% 5% 7%
Net income margin 6% 8% 8% 6%
from 16.5% to 18.5% over the same period. ROE 6% 8% 7% 4%
• Shares trade at .8x tangible book value, 10x Equity to total assets (avg) 67% 69% 72% 75%
trailing P/E and .8x tangible book value. % of revenue by geography:
Japan 40% 39% 39% 41%
Rest of world 60% 61% 61% 59%
INVESTMENT RISKS & CONCERNS
• Guidance revised down to a revenue decline of COMPARABLE PUBLIC COMPANY ANALYSIS
13% and net income of ¥20 billion in current FY. Market Enterprise Price This Next
Yen appreciation, price competition (e.g., ceramic EV /
Value Value to T. FY FY
Rev.
capacitor prices are down >20% in FY09) and ($mn) ($mn) Book P/E P/E
elevated input costs have pressured margins. IBM 126,070 147,090 1.4x 9.4x 10x 10x
• Recent profit decline due to demand slowdown, TDK 5,200 6,080 .7x .8x 576x n/m
pricing pressure in electronic components and lower KYO 11,750 6,910 .4x .8x 36x 108x
sales of digital multifunctional peripherals (MFPs).
The company reduced guidance in late October. MAJOR HOLDERS
• “Severe” business environment for components Insiders <1% │ State Street 9% │ Master Trust Bank of
used in high-end mobile phones due to weakening Japan 6% │ Japan Trustee Services 5% │ Dodge & Cox 3%
global handset demand. The company has also been
hurt by a “protracted upgrade cycle” for handsets RATINGS
resulting from an ineffective go-to-market strategy. VALUE Intrinsic value materially higher than market value?
• Telecom equipment business has struggled with MANAGEMENT Capable and properly incentivized?
declining sales and low margins. Management FINANCIAL STRENGTH Solid balance sheet?
hopes that the April 2008 acquisition of Sanyo’s MOAT Able to sustain high returns on invested capital?
mobile phone business and restructuring initiatives EARNINGS MOMENTUM Fundamentals improving?
will improve the outlook for this segment. MACRO Poised to benefit from economic and secular trends?
EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 170 of 241
Panasonic (NYSE: PC) Kadoma, Japan, 81-6-690-1121
Consumer Cyclical: Audio & Video Equipment http://www.panasonic.net
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BUSINESS OVERVIEW SELECTED OPERATING DATA
Panasonic, formerly known as Matsushita Electric, makes YTD
FYE March 31 2006 2007 2008 12/31/08
electronic and electric products for consumer, business and
% of revenue by product category:
industrial uses. The company operates in five segments: AVC networks 41% 41% 44% 46%
AVC Networks comprises two businesses: Video and Audio Home appliances 13% 13% 14% 15%
Components and devices 12% 12% 13% 12%
Equipment includes plasma and LCD TVs, DVD recorders PEW and PanaHome 18% 19% 19% 20%
and players, camcorders, and digital cameras. Information Other and JVC 15% 14% 10% 8%
and Communications Equipment includes PCs, optical disc Revenue growth by product category:
drives, copiers, printers, telephones, and mobile phones. AVC networks 4% 2% 6% -7%
Home appliances 2% 2% 6% -4%
Home Appliances includes refrigerators, air conditioners, Components and devices -2% 4% 2% -14%
washing machines, clothes dryers, and vacuum cleaners. PEW and PanaHome 1% 8% 2% -4%
1
Total revenue growth 20% 2% 3% -9%
Components and Devices includes semiconductors, general EBIT margin by segment:
components, electric motors, and batteries. AVC networks 5.2% 5.8% 6.3% 3.4%
MEW and PanaHome includes lighting fixtures, wiring Home appliances 6.3% 6.9% 6.7% 7.0%
Components and devices 7.5% 8.9% 9.1% 7.1%
devices, personal-care and health enhancing products. PEW and PanaHome 4.6% 4.6% 5.6% 3.8%
Other includes electronic-components-mounting machines, Total EBIT margin 4.7% 5.0% 5.7% 4.1%
industrial robots, welding equipment, and bicycles. Selected items as % of revenue:
R&D 6.3% 6.3% 6.1% 6.4%
Net income 1.7% 2.4% 3.1% 1.1%
INVESTMENT HIGHLIGHTS D&A 3.1% 3.1% 3.1% 4.0%
• Renamed company Panasonic (from Matsushita Capex 3.9% 4.6% 5.0% 5.7%
FCF 11.0% -0.4% 4.5% -0.6%
Electric) in order to focus strategic efforts around
ROE 4% 6% 7% 2%
the flagship brand. Panasonic is a global consumer Equity to total assets 48% 50% 50% 50%
electronics leader, spanning TVs, DVDs and PCs. ∆ diluted shares out (avg) -3% -2% -3% -2%
• Improvement initiatives: (1) dispose of non-core % of revenue by geography:
businesses (sold JVC to Kenwood and Sparx, Japan 52% 51% 50% 50%
Rest of world 48% 49% 50% 50%
distribution centers to Prologis); (2) speed structural 1
Excludes JVC. Panasonic’s stake in JVC decreased from 52% to 37% in
reforms (review manufacturing sites, cut fixed August 2007, with JVC now accounted for under the equity method.
costs); (3) reduce inventories; and (4) curb capex.
• Valuable real estate. Panasonic’s real estate COMPARABLE PUBLIC COMPANY ANALYSIS
holdings are difficult to value precisely but are Market Enterprise
EV /
Price This Next
likely worth a large percentage of enterprise value. Value Value to T. FY FY
Rev.
($mn) ($mn) Book P/E P/E
• To pay at ¥400+ billion ($4 billion) for majority SNE 18,570 17,270 .2x .7x n/m n/m
of Sanyo and spend ¥100 billion in capex to create PHG 17,590 18,280 .5x 3.0x 12x n/a
energy business, including rechargeable batteries SHCAY 8,810 13,220 .4x .8x n/m n/m
and solar products (deal announced in December; to FJTSY 7,950 13,820 .1x 1.2x n/a n/a
be financed by cash and debt). Various synergies PC 23,990 19,680 .2x .8x 10x 11x
should boost EBIT by ¥80 billion in 2013.
• Shares trade at 18x trailing P/E, 11x forward P/E MAJOR HOLDERS
and .8x tangible book value. Insiders <1% │ Moxley 8% │ Master Trust Bank of Japan
5% │ Japan Trustee Services 4% │ State Street 3%
INVESTMENT RISKS & CONCERNS
• Lowered guidance in November and again in RATINGS
February. Management now expects revenue of VALUE Intrinsic value materially higher than market value?
¥7,750 billion, EBIT of ¥60 billion and a net loss of MANAGEMENT Capable and properly incentivized?
¥380 billion for the current fiscal year. FINANCIAL STRENGTH Solid balance sheet? 1
• Price declines in flat-panel TV “very severe.” The MOAT Able to sustain high returns on invested capital?
company expected 20% decline for FY09 at the EARNINGS MOMENTUM Fundamentals improving?
beginning of the FY, but now estimates it at 30%. MACRO Poised to benefit from economic and secular trends?
• Exposed to yen appreciation, raw materials prices. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
1
Proposed Sanyo deal would weaken balance sheet by adding debt.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 172 of 241
Sharp (OTC: SHCAY) Abeno-ku, OS, Japan, 81-6-662-1221
Consumer Cyclical: Audio & Video Equipment http://sharp-world.com
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BUSINESS OVERVIEW − Electronic Components business (one-third of
Sharp is an electronics manufacturer focused on consumer revenue) — focused on growing LCD business.
and information products, including LCD TVs and mobile The company is also installing a new production
phones, and on electronic components, including LCDs and line for thin-film solar cells at the Katsuragi Plant
solar cells. The company was founded in 1912. and pursuing energy alliances in Japan and Italy.
− Strong recent sales of large-size LCD panels for
SELECTED OPERATING DATA TVs and solar cells. Sales of other electronic
YTD devices, including CCD/CMOS imagers, are down.
FYE March 31 2006 2007 2008 12/31/08
% of revenue by segment:
• Strong intellectual property portfolio, with
AV and comms equipment 39% 44% 47% 46% 17,500 patents in Japan and 21,500 overseas.
Home appliances 8% 8% 7% 7% • Shares trade at .4x enterprise value to trailing
Information equipment 15% 14% 13% 12% revenue and .8x tangible book value.
Consumer / info products 62% 66% 67% 65%
LSIs 5% 5% 5% 6%
LCDs 23% 20% 20% 21% INVESTMENT RISKS & CONCERNS
Other electronic components 10% 9% 8% 8% • Guiding for revenue decline of 15% and net loss
Electronic components 38% 34% 33% 35%
of ¥100 billion in current fiscal year, sharply
Revenue growth by segment:
AV and comms equipment 12% 27% 16% -15% lower than prior company guidance. Management
Home appliances 6% 6% 5% -10% expects margin compression due primarily to
Information equipment 1% 4% 0% -13% “intense” price competition and yen appreciation.
Consumer / info products 8% 19% 11% -14%
LSIs 3% 8% 12% 31%
• Recent results pressured by sluggish sales of
LCDs 16% -1% 9% 2% mobile phones and related components, yen
Other electronic components 11% 1% -3% -22% appreciation and price declines in LCD panels.
Electronic components 13% 1% 6% -2% • Expects global electronics competition to “get
Total revenue growth 10% 12% 9% -10%
EBIT margin by major segment:
more aggressive in the growth areas.” Sharp is
Consumer / info products 4% 4% 3% 0% responding by introducing new models, such as
Electronic components 10% 10% 9% 4% LCD TVs with built-in Blu-ray Disc recorders. The
Total EBIT margin 6% 6% 5% 2% company is also increasing solar cell production.
D&A as % of revenue 7% 7% 8% 10%
Capex as % of revenue 8% 9% 9% 9%
Cost reduction seems to be a secondary objective.
R&D as % of revenue 6% 6% 6% n/a
Net margin 3% 3% 3% -2% COMPARABLE PUBLIC COMPANY ANALYSIS
ROE 8% 9% 8% -3% Market Enterprise Price This Next
Equity to total assets (avg) 43% 41% 40% 39% EV /
Value Value to T. FY FY
Rev.
% of revenue by geography: ($mn) ($mn) Book P/E P/E
Japan 50% 49% 47% n/a PC 23,990 19,680 .2x .8x 10x 11x
Americas 16% 19% 18% n/a SNE 18,570 17,270 .2x .7x n/m n/m
Europe 17% 17% 17% n/a
China 8% 10% 12% n/a PHG 17,590 18,280 .5x 3.0x 12x n/a
Other 9% 6% 6% n/a SHCAY 8,810 13,220 .4x .8x n/m n/m
∆ shares out (period end) 0% 0% 1% 0%
MAJOR HOLDERS
INVESTMENT HIGHLIGHTS Insiders <1% │ Nippon Life 5% │ Meiji Yasuda Life 4% │
• Consumer/Information Products business (two- Mizuho 4% │ Bank of Tokyo 4% │ State Street 3%
thirds of revenue) — focused on growing LCD
color TV sales. Sharp recently introduced premium RATINGS
TV models, streamlined overseas production and VALUE Intrinsic value materially higher than market value?
launched mobile phones in China. MANAGEMENT Capable and properly incentivized?
− Strong recent sales of Blu-ray Disc recorders; weak FINANCIAL STRENGTH Solid balance sheet?
sales of mobile phones. LCD TVs units are up but MOAT Able to sustain high returns on invested capital?
sales have declined due to pricing pressure. EARNINGS MOMENTUM Fundamentals improving?
MACRO Poised to benefit from economic and secular trends?
EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 174 of 241
TDK (NYSE: TDK) Chuo-ku, TK, Japan, 516-535-2600
Technology: Electronic Instruments & Controls http://www.tdk.co.jp
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BUSINESS OVERVIEW • Improvement initiatives: (1) consolidate locations,
TDK provides recording media and devices, ferrite products, (2) dispose of unprofitable businesses, (3) reduce
and various components. It operates in two major segments: headcount, (4) pursue synergies from acquisitions of
Electronic Materials and Components comprises four Densei-Lambda, HDD head assets of Alps, and Thai
product sectors: (i) electronic materials (capacitors and suspension manufacturer Magnecomp.
ferrite cores and magnets), (ii) electronic devices (inductive • Reducing capex by 17% in current FY to ¥70
devices and high-frequency components), (iii) recording billion, to be used for upgrading and expansion of
devices (HDD heads), and (iv) other electronic components. production facilities aimed at growing revenue.
Recording Media has three product categories: audiotapes • Has 36 factories in Japan and 28 overseas, 73%
and videotapes, optical media, and other products. of which (based on floor space) are owned by TDK.
• Repurchased ¥39 billion of stock in FY ended
SELECTED OPERATING DATA March 2008 (no material buybacks since then).
YTD • Shares trade at 36x trailing P/E, .7x EV to trailing
FYE March 31 2006 2007 2008 12/31/08 revenue and .8x tangible book value.
% of revenue by segment:
Electronic materials 23% 23% 23% 21%
Electronic devices 19% 23% 24% 23%
INVESTMENT RISKS & CONCERNS
Recording devices 40% 35% 39% 35% • Guiding for revenue decline of 15% and negative
Other electronic products 5% 7% 9% n/a EBIT of ¥38 billion in FY09.
Electronic products 86% 88% 94% n/a
Recording media 14% 12% 6% n/a
• Weak recent results due to yen appreciation and
Revenue growth by segment: lower sales driven by price declines in HDD heads
Electronic materials 3% 10% 0% -19% and capacitors, offset partly by cost reductions and a
Electronic devices 33% 28% 5% -13% more favorable product mix (energy device sales).
Recording devices 35% -4% 10% -16%
Other electronic products 87% 55% 31% n/a
• Exposed to raw materials price increases. A key
Electronic products 26% 10% 8% n/a production input is magnetic powder of iron oxide.
Recording media -5% -4% -53% n/a • Global supply chain, with manufacturing and
Total revenue growth 21% 8% 0% -11% assembly in various countries, including China. This
EBIT margin by segment:
Electronic products 11% 11% 9% n/a
exposes TDK to potential force majeure disruptions.
Recording media -13% -2% 23% n/a • Competes in technology industries experiencing
EBIT margin (reported)
1
8% 9% 10% 2% rapid change. Many competitors are Asian firms,
Special items as % of rev. -1% 0% 2% -1% with currency exchange affecting competitiveness.
D&A as % of revenue 7% 8% 8% 10%
Capex as % of revenue 9% 8% 10% 15%
R&D as % of revenue 6% 6% 7% 7% COMPARABLE PUBLIC COMPANY ANALYSIS
Gross margin 26% 28% 27% 21% Market Enterprise Price This Next
EV /
% of revenue by geography: Value Value to T. FY FY
Rev.
Japan 34% 34% 33% 29% ($mn) ($mn) Book P/E P/E
Asia Pacific 50% 49% 54% 54% PC 23,990 19,680 .2x .8x 10x 11x
Americas 10% 10% 9% 8% SNE 18,570 17,270 .2x .7x n/m n/m
Europe 7% 7% 5% 8%
PHG 17,590 18,280 .5x 3.0x 12x n/a
ROE 7% 10% 10% -0%
Equity to total assets 76% 77% 77% 56% EPCYY 1,720 1,790 1.0x 2.2x n/a n/a
∆ shares outstanding (avg) 0% 0% -2% n/a TDK 5,200 6,080 .7x .8x 576x n/m
1
Includes restructuring costs of ¥7 billion and ¥500 million in FY06 and FY07,
respectively; and ¥15 billion gain on sale of Imation in FY08.
MAJOR HOLDERS
Insiders <1% │ Master Trust Bank of Japan 9% │ Japan
INVESTMENT HIGHLIGHTS
Trustee Services 9% │ Panasonic 5% │ Tradewinds 4%
• Founded in 1935 to commercialize ferrite, a
magnetic material. TDK’s growth has centered on RATINGS
ferrite, which is used in electronic equipment. VALUE Intrinsic value materially higher than market value?
• Sold recording media assets to Imation in 2007, MANAGEMENT Capable and properly incentivized?
while retaining related R&D, production and OEM FINANCIAL STRENGTH Solid balance sheet?
business. Recording media sales had been declining MOAT Able to sustain high returns on invested capital?
steadily to a shift toward electronic products. EARNINGS MOMENTUM Fundamentals improving?
• 50%+ of sales from Asian countries ex. Japan, MACRO Poised to benefit from economic and secular trends?
giving TDK a stake in Asian economic growth. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 176 of 241
Candidates—Deep Value: Other
We present the following companies:
h Capital Southwest (Nasdaq: CSWC)
h Cresud (Nasdaq: CRESY)
h Lear (NYSE: LEA)
h Syneron (Nasdaq: ELOS)
h UTStarcom (Nasdaq: UTSI)
h Yanzhou Coal Mining (NYSE: YZC)
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 177 of 241
Capital Southwest (Nasdaq: CSWC) Dallas, TX, 972-233-8242
Financial: Misc. Financial Services http://www.capitalsouthwest.com
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© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 178 of 241
BUSINESS OVERVIEW • Former chairman Bill Thomas built the company
Capital Southwest is a business development company. It over four decades, amassing an impressive track
invests long-term capital in expansion financings, MBOs, record of annual returns estimated to be in the mid
recaps, industry consolidations, and early-stage financings in teens. Thomas passed away in September 2008.
a broad range of industries. • Shares trade at .7x tangible book value.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 179 of 241
Capital Southwest — Overview of Investments and Fair Value per Share 1
(sorted by dollar value of portfolio holdings)
Key Data as of
Company Business
February 6, 2009
The Rectorseal Specialty chemicals for plumbing, HVAC, electrical, Ownership: 100%
Corporation construction, industrial, oil field and automotive applications; Cost: $0 million
Houston, Texas smoke containment systems for building fires; also owns 20% Value: $127 million
of The Whitmore Manufacturing Company
Encore Wire Corporation Electric wire and cable for residential, commercial Ownership: 17%
(Nasdaq: WIRE) and industrial use Cost: $6 million
McKinney, Texas Value: $77 million
Lifemark Group Cemeteries, mausoleums and mortuaries located in northern Ownership: 100%
Hayward, California California Cost: $5 million
Value: $71 million
Alamo Group Tractor-mounted mowing and mobile excavation equipment Ownership: 26%
(NYSE: ALG) for governmental, industrial and agricultural markets; street- Cost: $2 million
Seguin, Texas sweeping equipment for municipalities Value: $43 million
The Whitmore Specialized mining, railroad and industrial lubricants; coatings Ownership: 80%
Manufacturing Company for automobiles and primary metals; fluid contamination Cost: $2 million
Rockwall, Texas control devices Value: $37 million
Palm Harbor Homes Integrated manufacturing, retailing, financing and insuring of Ownership: 31%
(Nasdaq: PHHM) manufactured housing and modular homes Cost: $11 million
Dallas, Texas Value: $33 million
Media Recovery Computer datacenter and office automation supplies and Ownership: 97%
Dallas, Texas accessories; impact, tilt monitoring and temperature sensing Cost: $5 million
devices to detect mishandling shipments; dunnage for Value: $28 million
protecting shipments
Heelys Heelys stealth skate shoes, equipment and apparel sold Ownership: 32%
(Nasdaq: HLYS) through sporting goods chains, department stores and Cost: $0 million
Carrollton, Texas footwear retailers Value: $18 million
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 180 of 241
Capital Southwest — Discount to Net Asset Value per Share, 1998-2009
45%
36% NAV
35% discount
as of Feb. 6
25% (stock price:
$87.69)
15%
5%
3/31/98
3/31/99
3/31/00
3/31/01
3/31/02
3/31/03
3/31/04
3/31/05
3/31/06
3/31/07
3/31/08
2/6/09
Source: Company, The Manual of Ideas analysis.
Source: Company.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 181 of 241
Cresud (Nasdaq: CRESY) Ciudad Autonoma de Buenos Aire, Argentina, 541-328-7808
Consumer Non-Cyclical: Crops
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BUSINESS OVERVIEW INVESTMENT RISKS & CONCERNS
Cresud is an agricultural company and a large land owner in • Controlled by chairman Eduardo Elsztain who
Argentina. It engages in crop and milk production and cattle owns one-third of Cresud, and indirectly owns one-
raising. Cresud buys, develops and sells properties with third of IRSA and two-thirds of Alto Palermo.
agricultural prospects and/or value appreciation potential. • CEO Alejandro Elsztain is Eduardo Elsztain’s
brother. Alejandro is also CEO of Alto Palermo.
SELECTED OPERATING DATA • Other governance issues include payment of
FYE June 30 2006 2007 2008 “management fee” of 10% of net income to
% of gross income from production by type (non-GAAP):
Crops 39% 75% 80%
Consultores, which is 85%-owned by Eduardo
Beef cattle 27% 16% 10% Elsztain and 15%-owned by director Saúl Zang.
Milk 34% 9% 9% • 50+% ownership of IRSA exposes Cresud to
Growth of gross income from production by type (non-GAAP): Argentinian commercial and residential property
Crops -75% 781% 69%
Beef cattle -44% 164% 5%
market. The IRSA investment represented 35% of
Milk 50% 19% 70% Cresud’s balance sheet assets at the end of FY08.
Total growth -56% 355% 59% • Expropriation—highly unlikely, but a perceived
Growth of production volume by product line: risk nonetheless. While expropriation cannot be
Crops -29% 64% 13%
Beef cattle -8% 1% -11%
ruled out, such a measure appears unrealistic.
Milk 100% 14% 25% During the financial crisis of 2002, Argentina had
Corn as % of crop production 30% 46% 47% limited the payment of dividends to non-residents,
Corn production growth -52% 156% 16% but it never moved toward expropriation.
Use of owned and leased lands (period end):
• Taxes lower export revenue. In 2007, Argentina
Total lands ('000 hectares) 606 668 676
Crops 7% 8% 9% raised the tax on soybean exports from 27.5% to
Beef cattle 21% 17% 18% 35%, the tax on wheat exports from 20% to 28%,
Milk 0% 0% 1% and the tax on corn exports from 20% to 25%.
Sheep 0% 13% 13%
Land reserves 69% 59% 57%
• Dependent on weather and prices of agricultural
Owned lands leased to others 2% 2% 1% commodities, such as the price of cereals, oilseeds
∆ shareholders' equity
1
44% 51% 64% and by-products. Commodity prices are affected
1
Equity to total assets 73% 80% 77% both by global and regional factors and are outside
∆ diluted ADSs out (avg) -4% 13% 27% the company’s control. Weather and disease affect
1
As of period end.
Cresud’s production of crops and beef cattle.
• 61% of FY08 revenue from top ten customers,
INVESTMENT HIGHLIGHTS
with 46% from Cargill, Mastellone and Arre Beef
• One of the largest land owners in Argentina, with (Mastellone buys Cresud’s entire milk production).
18 owned farms covering 1.1 million acres (444K
• Leucadia-style investment not available to all
hectares) as of June 30. See land use in table above.
investors. While Leucadia’s stake in Cresud adds
• Owns 50.2% of IRSA (NYSE: IRS), one of credibility to the company, we note that Leucadia
Argentina’s top real estate firms, with activities in not only holds ADSs but also has an interest in
residential properties, office buildings, shopping Eduardo Elsztain’s personal investment vehicle.
malls, and hotels. IRSA owns 12% of Banco
Hipotecario, 63% of Alto Palermo (Nasdaq: APSA). MAJOR HOLDERS
• Opportunistic land seller. Proceeds from land Insiders __% │
sales from FY04-FY08 amounted to 103 million
pesos versus book value of 29 million pesos.
• Expanded into Brazilian agriculture in 2005; RATINGS
owns 8% of BrasilAgro following an equity raise. VALUE Intrinsic value materially higher than market value?
• Built up large net cash position via $____ million MANAGEMENT Capable and properly incentivized?
rights offering in March 2008. Leucadia purchase FINANCIAL STRENGTH Solid balance sheet?
stock in the rights offering at $16 per ADS. MOAT Able to sustain high returns on invested capital?
• Aggressive repurchases under program covering EARNINGS MOMENTUM Fundamentals improving?
30 million shares or 6% of shares outstanding. MACRO Poised to benefit from economic and secular trends?
• Shares trade at .8 tangible book value and 68x EXPLOSIVENESS 5%+ probability of 5x upside in one year?
forward earnings.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 183 of 241
Lear (NYSE: LEA) Southfield, MI, 248-447-1500
Consumer Cyclical: Auto & Truck Parts http://www.lear.com
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BUSINESS OVERVIEW INVESTMENT RISKS & CONCERNS
Lear supplies automotive parts in two segments: Seating • Year-end net debt of $2 billion, putting Lear on
includes seat systems and components. Electrical and verge of bankruptcy in current environment.
electronic includes electrical distribution systems and • Conditions “extremely challenging,” with 2008
electronic products, primarily wire harnesses; junction boxes industry production at the lowest level in more than
terminals and connectors, electronic control modules, and in- a decade. In North America, production was down
vehicle audio and entertainment systems. Lear has 91,000 26% in Q4, with Lear’s top fifteen platforms down
employees at 215 facilities in 35 countries. 26%. European industry production was down 29%,
In 2006/07, Lear divested its interior segment. Lear also with Lear’s top five customers down 31%. Buying
contributed its European and North American interior patterns are shifting away from SUVs. Financial
businesses to joint ventures with WL Ross and Franklin distress is rising within the supply chain.
Mutual in exchange for minority equity stakes. • 49% of revenue from GM and Ford, with
“classic” Ford and GM accounting for 42% of
SELECTED OPERATING DATA revenue, and Saab, Volvo, Jaguar and Land Rover
generating 7% of revenue. In addition to the usual
FYE December 31 2005 2006 2007 2008 risks of customer concentration, Lear also faces
% of revenue by segment:
Seating 65% 65% 76% n/a
risks relating to GM and Ford’s financial distress.
Electrical and electronic 17% 17% 19% n/a • Weak electrical and electronic business (~20% of
1
Interior 18% 18% 4% n/a revenue). Non-GAAP segment margin declined
Revenue growth by selected segment: from 7.4% in 2005 to 3.6% in 2007, driven by
Seating -2% 5% 5% n/a
Electrical and electronic 10% 1% 3% n/a
“fierce” global competition. Lear is restructuring
Total revenue growth 1% 4% -10% -15% this segment, with the goal of achieving a low-cost
EBIT margin by segment: global footprint, capitalizing on new technologies,
Seating 3% 5% 6% n/a and developing system integration capabilities.
Electrical and electronic 6% 3% 1% n/a
Interior
1
-6% -6% 1% n/a
• Prices of key raw materials, including hot-rolled
Total EBIT margin
2
1% 2% 4% 2% steel, copper, crude oil, and foam chemicals, are still
% of revenue by geography: elevated. (Lear lowered exposure to resins and
U.S. 37% 37% 28% supplier issues with divestiture of interior business.)
Canada 8% 8% 7% } 36%
Germany 12% 11% 15% n/a
Mexico 9% 10% 10% n/a COMPARABLE PUBLIC COMPANY ANALYSIS
Other countries 34% 34% 40% n/a Market Enterprise Price This Next
EV /
1
Divested European and North American interior businesses in October 2006 Value Value to T. FY FY
Rev.
and March 2007, respectively, in transactions involving WL Ross and Franklin. ($mn) ($mn) Book P/E P/E
2
Includes unallocated corporate expenses. JCI 8,120 12,530 .3x 7.0x 30x 9x
MGA 3,440 1,730 .1x 0.5x n/a n/a
INVESTMENT HIGHLIGHTS DAN 70 1,220 .1x 0.1x n/m n/m
• #2 globally in seating systems, generating sales of VC 20 1,450 .1x n/m n/m n/m
more than $12 billion (~80% of revenue) in a $50 LEA 60 1,880 .1x n/m n/m n/m
billion market. Lear is #2 in North America and #3
in Europe, and is a leader in China and India. MAJOR HOLDERS
• Electrical distribution systems revenue of more CEO Rossiter <1% │ Other insiders 1% │ Pzena 7% │
than $2 billion. The company is #3 in North Franklin 5% │ Elm Ridge 4% │ D.E. Shaw 4%
America and #4 in Europe in wire harnesses.
• Electronic products revenue of $900 million. Lear RATINGS
is a leader in junction box technology and a niche VALUE Intrinsic value materially higher than market value?
player in electronic modules, wireless products, MANAGEMENT Capable and properly incentivized?
premium audio/video and tire pressure monitoring. FINANCIAL STRENGTH Solid balance sheet?
• New operating structure aligns Lear with global MOAT Able to sustain high returns on invested capital?
strategies of major customers and allows it to access EARNINGS MOMENTUM Fundamentals improving?
lowest-cost manufacturing and sourcing options. MACRO Poised to benefit from economic and secular trends?
• Shares trade at .1x EV to trailing revenue. Lear is EXPLOSIVENESS 5%+ probability of 5x upside in one year?
expected to lose money this year.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 185 of 241
Syneron Medical (Nasdaq: ELOS) Yokneam Illit, Israel, 972-4-909-6200
Health Care: Medical Equipment & Supplies http://www.syneron.com
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BUSINESS OVERVIEW • Signed development and supply deal with P&G
Syneron provides aesthetic medical products based on in 2007, with goal of commercializing home-use
proprietary Electro-Optical Synergy (Elos) technology, devices and topical skin compositions.
which uses electrical and optical energy. The products are • Repurchased $9 million of stock in 2007-08.
sold to physicians and target non-invasive procedures, • $217 million of net cash and liquid investments.
including hair removal, wrinkle reduction, treatment of • Shares trade at 19x forward P/E and .7x tangible
superficial vascular and pigmented lesions, and treatment of book value.
leg veins. Syneron has an installed base of 10,000 products.
INVESTMENT RISKS & CONCERNS
SELECTED OPERATING DATA • Revenue down 63% in 4Q08. The aesthetic sector
YTD
FYE December 31 2005 2006 2007 9/30/08
3 was “impacted by an acute drop in both doctors’
% of revenue by geography:
2 confidence and credit availability.”
North America 62% 57% 57% 52% • Cut 20% of workforce in 4Q08 and closed offices
Other 38% 43% 43% 48% in Canada, Europe and Chicago. Syneron expects to
Revenue growth by geography:
North America 67% 22% 21% -7%
save 20% on opex in 2009 compared to 2008.
Europe 30% 53% 20% 4% • Gross margin in high 70s, roughly 20 points
Total revenue growth 51% 34% 21% -2% above industry average, may not be sustained.
% of revenue by type: Competitors include public companies Candela,
Product 93% 94% 91% n/a
Service
1
7% 6% 9% n/a
Cutera, Cynosure, Thermage, and Palomar Medical,
1
Service revenue should increase over time as the installed base grows. and private companies Lumenis Sciton, Reliant
2
In 2007, 57% of revenue came from North America, 23% from Europe, 16% Technologies, UltraShape, and Alma Lasers.
from Asia Pacific, and 4% from Israel and other countries.
3
While the company reported 4Q08 results on February 12, it has not yet • Subject to regulation. Before a new device can be
provided geographical and segment data. marketed in U.S., it must receive 510(k) clearance,
which lasts 3-12 months. Syneron must also comply
INVESTMENT HIGHLIGHTS with the FDA’s Quality System Regulation, which
• 20% global share in aesthetic medical products, a covers aspects of bringing products to market.
market with favorable long-term trends. Syneron • CEO Gerstel, CFO Tenenbaum own <1% of
focuses on the growth segments of aesthetic Syneron, while chairman Eckhouse owns 9%.
medicine of body shaping and skin rejuvenation.
• Innovative Elos technology. Approaches that rely COMPARABLE PUBLIC COMPANY ANALYSIS
solely on optical energy limit the safety and efficacy Market Enterprise
EV /
Price This Next
of many procedures due to limited skin penetration Value Value to T. FY FY
Rev.
($mn) ($mn) Book P/E P/E
and unwanted epidermal absorption. Elos makes it
PMTI 160 40 .5x 1.1x 90x 23x
easier to target the tissue to be treated, and boosts
CYNO 100 30 .2x .7x 15x 10x
safety through tracking of skin temperature. CUTR 90 -10 n/m .8x n/m 43x
• Positive acceptance of minimally invasive CLZR 10 -20 n/m .1x n/m n/m
LipoLite laser-assisted lipolysis product, which ELOS 170 -30 n/m .7x 8x 19x
was launched in February. Syneron delivered the
first units in Q2, with volume shipments in Q3. MAJOR HOLDERS
• Adding recurring revenue stream to equipment Chairman Eckhouse 9% │ CEO, CFO and other insiders
sales business model. The LipoLite Energy Access <1% │ Baupost 11% │ Brandywine 6% │ RenTech 5%
Program (LEAP) charges physicians a subscription
fee for laser-assisted lipolysis treatment. RATINGS
• Doron Gerstel (48) and Fabian Tenenbaum (34) VALUE Intrinsic value materially higher than market value?
became CEO and CFO, respectively, in 2007. MANAGEMENT Capable and properly incentivized?
Gerstel was previously president of Syneron N.A. FINANCIAL STRENGTH Solid balance sheet?
and Operations VP at Lumenis (formerly ESC MOAT Able to sustain high returns on invested capital?
Medical, founded by Syneron chairman Eckhouse). EARNINGS MOMENTUM Fundamentals improving?
MACRO Poised to benefit from economic and secular trends?
EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 187 of 241
…additional insight into ELOS: REVENUE AND MARGIN ANALYSIS
ELOS – Revenue, Gross Profit and EBIT, 2001-08
WHAT ARE THE SHARES WORTH?
Syneron posted explosive growth until recently, with revenue
• We value Syneron at $11-13 per share, based on increasing from virtually zero in 2001 to more than $140 million in
the sum-of-the-parts analysis presented below. 2007, driven by rapid adoption of proprietary Elos aesthetic medical
• Upside may come from share repurchases and products. The company showed strong operating leverage in the first
half of the decade, but EBIT has evaporated since 2006.
higher earning power than estimated. Earnings
upside could come from the LipoLite Energy $150mn
Access Program and the partnership with P&G.
• Downside appears protected due to $8 per share $100mn
in net cash and liquid investments. While markets
can be irrational, a profitable, high-ROIC business
$50mn
should not trade at a negative enterprise value.
-20%
WHY THE SHARES MAY BE MISPRICED
02
03
04
05
06
07
08
• Near-term business momentum has been
Source: Company, The Manual of Ideas.
negative, giving investors little to get excited about.
While most investors may agree that Syneron is
ELOS – Gross and EBIT Margin, 2001-08
undervalued at a market value roughly equal to net
The value of Syneron’s proprietary technology is evident in the high
cash and investments, few investors consider a gross margins the company has posted since ramping up sales in
strong balance sheet sufficient reason to invest. 2001. Gross margin declined to 74% in 2008 and 55% in 4Q08.
Syneron shares may remain undervalued until the
100%
company gives investors reason to like the business
again. Catalyst could include adoption of the 80%
LipoLite Energy Access Program or positive news
60%
related to the partnership with P&G.
• Low-conviction selling? Some value funds may 40%
have followed highly respected Baupost Group into 20%
Syneron without developing a level of conviction
that would help them stick with the company 0%
01
02
03
04
05
06
07
08
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 188 of 241
SYNERON – PRODUCT LINEUP
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 189 of 241
UTStarcom (Nasdaq: UTSI) Alameda, CA, 510-864-8800
Services: Communications Services http://www.utstar.com
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BUSINESS OVERVIEW SELECTED OPERATING DATA
UTStarcom restructured in 4Q07; it operates in six segments: YTD
FYE December 31 2005 2006 2007 9/30/08
Broadband Infrastructure provides broadband products. % of revenue by segment:
Multimedia Communications develops and markets IPTV Broadband infrastructure 16% 8% 6% 7%
solutions and wireless infrastructure technologies. Multimedia communications
2
16% 17% 12% 14%
PCD 48% 54% 67% 63%
The Personal Communications Division (PCD) distributes Handsets 16% 16% 10% 12%
mobile handsets outside of China. Services 2% 2% 2% 3%
Handsets focuses on the PAS handset market in China. Other 2% 1% 2% 2%
Services supports the Broadband Infrastructure and Revenue growth by selected segment:
Broadband infrastructure n/a -55% -22% -12%
Multimedia Communications product lines. Multimedia communications n/a -10% -28% 3%
Other includes mobile solutions focused on the IPCDMA Handsets n/a -16% -41% -13%
market, and custom solutions. Services n/a -1% 3% 7%
Total revenue growth 11% -14% 0% -16%
Gross margin by selected segment:
INVESTMENT HIGHLIGHTS Broadband infrastructure 31% -1% 4% 7%
• Focused on IPTV equipment business in countries Multimedia communications 26% 45% 33% 47%
such as India and China. The company’s customers Handsets 12% 30% 33% 23%
Services 44% 19% 28% 29%
have one million subscribers deployed on Total gross margin 15% 16% 13% 17%
UTStarcom’s IPTV solution (contracted business EBIT margin by segment:
covers another three million subscribers). Broadband infrastructure n/a -18% -15% -13%
• Divested low-margin PCD business in July 2008 Multimedia communications n/a 31% 12% 25%
2
PCD n/a 0% 4% 6%
while preserving book value and bolstering the Handsets n/a 17% 11% -2%
balance sheet with a $207 million cash infusion. Services n/a 11% 22% 20%
• Repaid $375 million of convertible and other Corporate and other n/a -13% -13% -14%
debt in past nine months. The company had no debt Total EBIT margin -16% -6% -9% -7%
Selected items as % of revenue:
and $330 million of cash as of September 30. D&A 3% 3% 2% 2%
• Peter Blackmore became CEO in July 2008, Capex 2% 1% 1% 1%
while scandal-tainted Hong Lu became executive Stock-based compensation
1
0% 1% 1% 1%
Special income (expense) -7% 0% 2% 3%
chairman. Blackmore joined as COO in July 2007.
% of revenue by geography:
He was previously EVP of sales at Unisys. U.S. 46% 55% 67% 65%
• Targeting revenue growth, margin improvement China 30% 32% 23% 23%
and monetization of non-core assets in 2009. Japan and other 23% 13% 10% 12%
% of revenue by customer:
• $400+ million NOL, expiring from 2010-2027. Verizon Wireless 12% 14% 22% 24%
• Shares trade at .3x tangible book value. The T-Mobile USA <10% 11% 15% <10%
company is expected to lose money this year. Sprint Spectrum <10% <10% 13% 13%
Government of China 22% 23% 17% <10%
Equity to total assets (avg) 35% 32% 32% 34%
INVESTMENT RISKS & CONCERNS ∆ diluted shares out (avg) -8% 3% 0% 2%
• Checkered recent history, including accounting 1
Includes non-cash items only (asset sale gains, special charges, in-process
restatements, a major decline in business in China R&D). Does not include inventory reserves and deferred tax asset changes.
2
The company sold the PCD operations in July 2008 to AIG Global Investment
and an investigation against former CEO Hong Lu. Group for $233 million, roughly equal to the segment’s net book value.
UTStarcom has lost investor credibility and while
new CEO Peter Blackmore is taking positive action, RATINGS
it may take some time for credibility to be restored. VALUE Intrinsic value materially higher than market value?
• Turnaround that has not yet “turned.” The MANAGEMENT Capable and properly incentivized? 1
company has yet to show that it can be profitable at FINANCIAL STRENGTH Solid balance sheet?
a significantly reduced scale of operations. MOAT Able to sustain high returns on invested capital?
• UTStarcom is at scale disadvantage versus most EARNINGS MOMENTUM Fundamentals improving?
other companies who compete for carrier customers. MACRO Poised to benefit from economic and secular trends?
EXPLOSIVENESS 5%+ probability of 5x upside in one year?
MAJOR HOLDERS 1
CEO Peter Blackmore is doing an admirable job in a difficult turnaround
CEO <1% │ Other insiders 6% │ Softbank 12% │ Barclays situation, but we do not welcome chairman Hong Lu’s involvement with the
6% │ Chou Associates 4% │ RenTech 3% company, as he has been tainted by a probe into improper trading.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 191 of 241
Yanzhou Coal Mining (NYSE: YZC) Zoucheng, SD, China, 86-537-538-231
Energy: Coal http://www.yanzhoucoal.com.cn
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BUSINESS OVERVIEW • Introduced equipment capable of comprehensive
Yanzhou Coal engages in coal mining and transportation. mechanized caving process designed to extract
The coal mining segment comprises the underground mining, coal from medium to thick coal seams.
preparation and sale of coal. • Location of mines enhances competitiveness due
The coal railway transportation segment comprises the the rapid economic growth of Eastern China, the
provision of railway transportation services. insufficient supply of coal produced in the Eastern
China region and the substantial costs involved in
The A shares are listed in Shanghai, the H shares in Hong transporting coal from other major coal-producing
Kong and the ADSs on the NYSE (1 ADS per 50 H shares). provinces such as Shaanxi Province, Shanxi
Province and Inner Mongolia Autonomous Region.
SELECTED OPERATING DATA • Shares trade at 1.0x tangible book value and 4x
YTD
FYE December 31 2005 2006 2007 9/30/08 trailing P/E (no EPS estimates available).
% of revenue by segment:
Coal mining 99% 99% 99% 90% Market Share of Raw Coal Production in China, 2007
Coal railway transportation 1% 1% 1% 1% (Chinese raw coal production: 3 billion tonnes)
Selected growth rates:
Revenue 4% 4% 17% 75% The Chinese coal industry is highly fragmented, with the top ten
Net sales of coal 10% 4% 21% n/a players accounting for only 28% of total production.
Coal volumes -15% 7% 1% 5% China Coal
Selected items as % of revenue: Shenhua 4% Shanxi Datong
EBIT 36% 29% 30% 46%
Net income 23% 18% 21% n/a 9% 3% 3% Heilongjiang
D&A 8% 8% 8% 11% 2%
Capex 11% 24% 18% n/a
Xiamei
Acquisition of mining rights 0% 0% 0% n/a
Other investments and M&A -1% 4% 6% n/a 2% Yanzhou
ROE 17% 13% 16% 26% 2%
Equity to total assets (avg) 84% 82% 81% 81% Yangquan
∆ shares out (period end) 60% 0% 0% 0% 1%
Others Huainan
% of coal sales by geography: Lu’an
Eastern China 70% 72% 84% n/a 72% 1%
1%
Southern and other China 4% 7% 7% n/a
Source: Company, The Manual of Ideas.
Outside of China 26% 21% 9% n/a
% of coal sales by industry:
Power plant 38% 37% 27% n/a INVESTMENT RISKS & CONCERNS
Metallurgical mills 16% 12% 12% n/a • Commodity producer exposed to slowdown in
Fuel trading companies 40% 34% 28% n/a
Construction and other 6% 17% 33% n/a
China. Demand for coal is primarily affected by the
% of coal sales by type: economic development and coal demand by power
“Clean” coal 64% 68% 67% n/a generation, chemical, metallurgy and construction
Screened raw coal 31% 27% 29% n/a materials industries. The average selling price of the
Mixed coal and others 6% 5% 4% n/a
company’s coal was RMB 350, RMB 342 and RMB
Coal mining data (mn tonnes, unless otherwise specified):
Reserves 1,968 1,999 2,084 n/a 409 per tonne in 2005, 2006 and 2007.
Raw coal production capacity 23 24 27 n/a • Dependent on major customers, including
Coal prep. input capacity 23 23 22 n/a Huadian Power, which accounts for 12% of sales.
Raw coal production 35 36 36 27
Coalfield area (sq. km) 447 467 610 n/a
RATINGS
INVESTMENT HIGHLIGHTS VALUE Intrinsic value materially higher than market value?
MANAGEMENT Capable and properly incentivized?
• Largest coal producer in Eastern China, with
FINANCIAL STRENGTH Solid balance sheet?
annual production of 36 million tonnes of raw coal.
MOAT Able to sustain high returns on invested capital?
• Operates six coal mines in Shandong Province, EARNINGS MOMENTUM Fundamentals improving?
which commenced production from 1973-2000. The MACRO Poised to benefit from economic and secular trends?
mines have in-place proven and probable reserves EXPLOSIVENESS 5%+ probability of 5x upside in one year?
of 1.9 billion tonnes. Not included in this estimate
are the reserves of Yancoal Australia (50 million
tonnes), Shanxi Nenghua (29 million tonnes) and
Zhaolou Coal Mine (106 million tones).
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 193 of 241
Candidates—“Magic Formula”
We present the following companies:
h Dell (Nasdaq: DELL)
h EarthLink (Nasdaq: ELNK)
h Garmin (Nasdaq: GRMN)
h KBR (NYSE: KBR)
h MEMC Electronic Materials (NYSE: WFR)
h Mesabi Trust (NYSE: MSB)
h Net 1 UEPS Technologies (Nasdaq: UEPS)
h Tempur-Pedic International (NYSE: TPX)
h Versant (Nasdaq: VSNT)
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 194 of 241
Dell (Nasdaq: DELL) Round Rock, TX, 512-338-4400
Technology: Computer Hardware, Member of S&P 500 http://www.dell.com
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BUSINESS OVERVIEW • Michael Dell returned as CEO in January 2007.
Dell is the #1 supplier of PCs in the U.S. and the #2 supplier • Strong balance sheet, with $7 billion of net cash.
globally, behind HP. Product categories include desktop PCs, • Bought $2.5 billion of stock in 1H09. Michael Dell
servers, networking, software, mobility, peripherals, and has purchased ~$200 million in recent months.
storage. The company was founded in 1984 by Michael Dell. • Shares trade at .2 EV to trailing revenue, 7x
trailing P/E and 8x forward P/E.
SELECTED OPERATING DATA
YTD INVESTMENT RISKS & CONCERNS
FYE February 1 2006 2007 2008 10/31/08
% of revenue by product group: • Weakness in most geographies. Enterprise, servers
Desktop PCs 39% 35% 32% 29% and storage remain resilient while “client” has
Mobility 26% 27% 29% 31% weakened. Dell is a year into a three-year, $3 billion
Software and peripherals 15% 16% 16% 17%
Servers and networking 10% 10% 11% 10%
cost reduction program, with most reductions tied to
Enhanced services 8% 9% 9% 9% new products (7 introduced so far, 17 remaining).
Storage 3% 4% 4% 4% • Consumer EBIT margin less than 1%, vs. 5-6%
Revenue growth by product group: at HP (might include some printing). Dell believes it
Desktop PCs 2% -8% -1% -7%
Mobility 20% 8% 13% 16%
can achieve “reasonable” profitability. Retail is not
Software and peripherals 26% 8% 10% 12% yet profitable, with Dell present in 15,000 stores.
Servers and networking 12% 7% 12% 1% The company likely needs more scale in retail.
Enhanced services 35% 20% 5% 11% • Direct model evolving as Dell enters stores and
Storage 38% 21% 8% 8%
Total revenue growth 14% 3% 6% 6% notebooks gain share (consumers like to “touch”
% of revenue by segment: before buying). Warranty is a high-margin business
Americas — Business 51% 51% 51% 47% in which Dell’s attach rate is below average.
Americas — Consumer 14% 12% 10% n/a • European margins have not met expectations, but
EMEA 23% 24% 25% n/a
Asia Pacific and Japan 12% 13% 14% n/a margins may bounce back in next two quarters.
EBIT margin by segment: • EMC partnership may be impacted by Dell’s
Americas — Business 10.4% 8.1% 8.2% 9.1% purchase of EqualLogic, though Dell management
Americas — Consumer 5.7% 1.9% -0.9% n/a remains “committed” to both offerings.
EMEA 6.8% 4.3% 6.6% n/a
Asia Pacific and Japan 8.0% 4.5% 5.5% n/a • CTO Kevin Kettler left in January after 13 years
Total EBIT margin 7.9% 5.3% 5.6% 6.3% with Dell; a marketing VP left in November.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 196 of 241
EarthLink (Nasdaq: ELNK) Atlanta, GA, 404-815-0770
Technology: Computer Services http://www.earthlink.net
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BUSINESS OVERVIEW • Founder Sky Dayton retired from Board in
EarthLink is a U.S. Internet service provider (ISP) operating October. Rolla Huff (51) joined EarthLink as CEO
in two segments: Consumer Services provides Internet access in June 2007. He was previously CEO of Mpower.
and value-added services to individuals. Business Services • Has “flexibility to pursue strategic alternatives,”
provides Internet access and value-added services to due to termination of convert hedge in September.
businesses and communications carriers. • Solid balance sheet, with $276 million of net cash.
• Large NOL, with $678 million of federal and $291
SELECTED OPERATING DATA million of state loss carryforwards at yearend 2007.
FYE December 31 2005 2006 2007 2008
• Repurchased 3.8 million shares for $32 million in
% of revenue by type of service:
Access 94% 91% 89% 89% the first nine months of 2008.
Value-added services 6% 9% 11% 11% • Shares trade at 3.8x tangible book value, 4x
% of revenue by segment: trailing P/E and 7x forward P/E.
Consumer services 95% 88% 84% 82%
Business services 5% 12% 16% 18%
Revenue growth by segment: INVESTMENT RISKS & CONCERNS
Consumer services n/a -7% -10% -24% • Business in runoff? Revenue has declined, and
Business services n/a 130% 18% -8% management appears focused on maximizing cash
Total revenue growth -7% 1% -7% -21%
EBIT margin by segment:
flow from existing subscribers while keeping
Consumer services 15% 14% 19% 40% reinvestment modest. The company has returned
Business services 68% 14% 7% 13% cash to shareholders through large buybacks.
Corporate and other -5% -6% -13% -18% • Internet access a commodity. While EarthLink
Total EBIT margin 13% 7% 4% 17%
Subscriber growth (period end):
provides value-added services, commoditized dial-
Dial-up consumers -8% -8% -20% -33% up and broadband Internet access account for close
Broadband consumers 17% 14% -42% -15% to 90% of revenue. Declining consumer access
Businesses 10% 39% -13% -16% pricing reflects the commodity nature of the service.
Total subscriber growth -1% 0% -27% -28%
Consumer subscribers (mn)
1
5.2 5.1 4.3 3.1
• Stopped investing in Helio in 2007, after investing
Consumer monthly ARPU ($) 20 19 20 21 $210 million. Helio, a JV with SK Telecom, is a
Consumer net churn
2
4.6% 4.6% 5.1% 4.4% U.S. MVNO. EarthLink owns 31% of Helio.
1
Business subscribers (mn) 0.2 0.2 0.2 0.2
Business monthly ARPU ($) 38 64 77 82
Business net churn
2
2.6% 2.8% 2.6% 2.8%
COMPARABLE PUBLIC COMPANY ANALYSIS
Market Enterprise Price This Next
∆ diluted shares out (avg) -11% -7% -7% -10% EV /
Value Value to T. FY FY
1
Represents period-average subscribers. Rev.
2 ($mn) ($mn) Book P/E P/E
Churn rate for 2007 excludes impact of loss of Embarq-related subscribers.
MSFT 169,720 151,010 2.4x 8.4x 11x 10x
INVESTMENT HIGHLIGHTS T 142,550 215,750 1.7x n/m 12x 11x
VZ 83,980 125,640 1.3x n/m 12x 11x
• Reduced back-office costs and new subscriber
YHOO 17,790 14,340 2.0x 2.4x 34x 29x
marketing due to declining sales and changes in the
S 8,060 26,580 .7x n/m 40x n/m
Internet access industry. EarthLink now focuses on
Q 6,130 19,210 1.4x n/m 11x 12x
maximizing income from more tenured subscribers. LVLT 1,450 7,260 1.7x n/m n/m n/m
• Aims to retain subscribers and grow business ELNK 730 540 .6x 3.9x 7x 10x
services through New Edge, a CLEC that provides
secure managed data networks and dedicated
MAJOR HOLDERS
Internet access. EarthLink acquired New Edge for
CEO Huff 1% │ Other insiders 2% │ Steel Partners 11% │
$109 million and 1.7 million shares in 2006.
Coghill 9% │ RenTech 7% │ Artisan 6% │ Sterling 5%
• Beat 2008 guidance after raising it last July and
October, driven by better-than-expected passive RATINGS
subscriber additions, lower churn and reduced opex.
VALUE Intrinsic value materially higher than market value?
Adjusted EBITDA was $309 million in 2008, up MANAGEMENT Capable and properly incentivized?
66% from 2007, even as revenue declined 21%. FINANCIAL STRENGTH Solid balance sheet?
• 2009 guidance calls for adjusted EBITDA of MOAT Able to sustain high returns on invested capital?
$210-225 million (down 27-32%), FCF of $190- EARNINGS MOMENTUM Fundamentals improving?
215 million, income from continuing operations of MACRO Poised to benefit from economic and secular trends?
$75-95 million, and capex of $10-20 million. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 198 of 241
Garmin (Nasdaq: GRMN) Camana Bay, Cayman Islands, 345-640-9050
Technology: Scientific & Technical Instruments http://www.garmin.com
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BUSINESS OVERVIEW INVESTMENT RISKS & CONCERNS
Garmin provides navigation devices and applications enabled • ASP declines have approximated 25% recently
by GPS technology. Products serve auto, mobile, wireless, and are expected to do so through yearend 2008.
outdoor recreation, marine, aviation, and OEM applications. Offsetting the declines are unit volume increases,
No customer accounts for 10% or more of revenue. component cost reductions, and greater efficiency.
Inflation could make lower costs tough to sustain.
SELECTED OPERATING DATA • Marine and aviation segments have slowed due to
YTD higher fuel prices and economic weakness.
FYE December 31 2005 2006 2007 9/30/08
Revenue by segment: • $8 billion Nokia acquisition of Navteq, which
Auto / mobile 39% 61% 74% 70% supplies digital map data for vehicle navigation and
Outdoor / fitness 23% 16% 11% 13% location-based services to Garmin under a deal that
Aviation 22% 13% 9% 10% runs through 2019. Garmin renewed the Navteq deal
Marine 15% 9% 6% 7%
Revenue by geography:
in late 2007 and abandoned a proposal to buy
North America 64% 62% 65% 64% Navteq competitor Tele Atlas. Nokia competes with
Europe 31% 33% 30% 31% Garmin, calling into question the long-term viability
Asia 5% 5% 5% 4% of Garmin’s Navteq partnership.
Units shipped (mn) 3.0 5.4 12.3 10.6
Change (y-y) 31% 78% 128% 55%
• €3 billion TomTom acquisition of Tele Atlas. Top
Revenue per unit ($) 339 329 259 231 Garmin competitor TomTom took control of Tele
Change (y-y) 3% -3% -21% -20% Atlas in June 2008. This deal puts both major
providers of digital map data—Navteq and Tele
INVESTMENT HIGHLIGHTS Atlas—into the hands of Garmin competitors.
• Leader in personal navigation devices (PNDs), • Dependence on Global Positioning System (GPS).
with 55% market share in North America and 20% GPS is a satellite-based navigation and positioning
share in Europe (#2 behind TomTom). Industry system consisting of a constellation of orbiting
shipments have slowed sharply after growing 100% satellites operated by the U.S. Department of
in the U.S. and 40% in Europe earlier this year. Defense. The DoD does not currently charge for
• Deals with auto makers and car rental firms have access to the satellite signals, but it is conceivable
boosted Garmin’s market presence. The company the government could decide to do so in the future.
has deals with Ford, Honda, and Volvo, as well as
National Car Rental and Alamo Car Rental. COMPARABLE PUBLIC COMPANY ANALYSIS1
• Acquisitions of European distributors have Market
EV EV /
Price This Next
Value to T. FY FY
doubled Garmin’s European share since early 2007. ($mn)
($mn) Rev.
Book P/E P/E
• Planned nüvifone launch in 2009. The nüvifone is NOK 45,840 42,790 .7x 9.4x 11x 9x
a mobile device that seeks to integrate the RIMM 27,460 25,790 2.7x 6.6x n/a n/a
navigation and communication experience. MOT 8,770 5,980 .2x 1.3x n/m 18x
• Leading-edge proprietary technology, protected TOM2.AS €472 €1,700 1.1x n/m n/a n/a
by more than 330 U.S. patents and 190 U.S. patent GRMN 3,480 2,940 .8x 1.8x 5x 6x
applications pending; and more than 40 foreign 1
TomTom and privately-held Magellan, Mio, Navigon are closest comps.
patents and 32 foreign patent applications pending.
• Units, revenue, and EBIT up 55%, 25% and 5%, MAJOR HOLDERS
respectively, YTD. Growth continues to be driven CEO Min Kao 20% │ Other insiders 26% │ Cap World 4%
primarily by the auto/mobile and outdoor/fitness
segments, while the marine segment has lagged. RATINGS
• Guiding for 2008 revenue of $3.6 billion (+13%), VALUE Intrinsic value materially higher than market value?
down from prior guidance of $3.9 billion (+23%), MANAGEMENT Capable and properly incentivized?
with EPS of $3.78 (excluding forex translation). FINANCIAL STRENGTH Solid balance sheet?
• Repurchased $625 million of stock YTD. MOAT Able to sustain high returns on invested capital?
• Shares trade at .8x EV to trailing revenue, 4x EARNINGS MOMENTUM Fundamentals improving?
trailing P/E and 6x forward P/E. MACRO Poised to benefit from economic and secular trends?
EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 200 of 241
…additional insight into GRMN: SHIPMENT VOLUME AND ASP TRENDS
• Unit shipments grew 128% in 2007 on a 21%
WHAT ARE THE SHARES WORTH? decline in ASPs. Unit growth slowed to 55% in the
• We value Garmin at $31-50 per share, based on first nine months of 2008, while ASPs eroded 20%.
the valuation analysis summarized below. The wide
range of fair value reflects (1) the difficulty of Garmin—Unit Shipments and ASPs, 2000-08 YTD
balancing the potential earnings impact of the 14mn units $400 per unit
current slowdown and the continued positive long- 12mn units
term growth outlook for personal navigation 10mn units $300 per unit
devices; and (2) the virtually impossible task of 8mn units
predicting the multiple of earnings Garmin will $200 per unit
6mn units
deserve in the future. We reflect this dual challenge 4mn units $100 per unit
in fairly conservative assumptions. 2mn units
0mn units $0 per unit
Garmin — Valuation Summary 00 01 02 03 04 05 06 07 ytd
($ in millions, except per share data) Low High
Value Value Unit Shipments Revenue per Unit
1
Value of excess marketable assets: Note: YTD data is for the nine months ended September 30, 2008.
Cash and equivalents $522 $522 Source: Company, The Manual of Ideas.
Marketable securities 18 18
Long-term marketable securities 309 309
Net cash and investments $849 $849
Garmin—Unit Growth and ASP Changes, 2001-08 YTD
2
Cash needed to run business (200) (100) 140% 30%
Total $649 $749 120% 20%
Value of core business: 100% 10%
2009 estimated EPS ex. interest income 2.80 80%
0%
Fair value multiple of 2009E adjusted EPS 10x 60%
Estimated EBIT power in 2-3 years 1,200 -10%
40%
Fair value multiple of EBIT power 8x
20% -20%
Total $5,824 $9,600
0% -30%
Estimated fair value of GRMN $6,473 $10,349 01 02 03 04 05 06 07 ytd
per share $31 $50
1 Unit Grow th (left axis) ASP Change (right axis)
Based on balance sheet values as of September 27, 2008.
2
Represents MOI estimate. Note: YTD data is for the nine months ended September 30, 2008.
Source: Company filings, The Manual of Ideas estimates and analysis. Source: Company, The Manual of Ideas.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 201 of 241
GARMIN-ASUS MOBILE PHONE ALLIANCE GARMIN VERSUS TOMTOM – PND UNIT SHIPMENTS
Notes from announcement and conference call, February 4: 2004 2005 2006 2007 2008
PND unit sales (mn):
• Garmin and ASUSTeK Computer (TAIEX: Garmin 2.3 3.0 5.4 12.3 n/a
2357) teamed up to design, manufacture and TomTom 0.2 1.7 4.7 9.6 ~12.0
distribute co-branded location-centric mobile Relative market shares:
phones. The form is a contractual alliance with Garmin 90% 64% 54% 56% n/a
profit sharing, not an independent corporate entity. TomTom 10% 36% 46% 44% n/a
Source: Garmin, TomTom, The Manual of Ideas.
• Garmin brings navigation expertise to the
alliance, while ASUS provides smartphone TOP COMPETITOR TOMTOM – SNAPSHOT
design and development. ASUS, which generated
• TomTom is #1 PND supplier in Europe (46%
$8 billion of revenue in 2008, provides PC
market share in 4Q08) and #2 globally. It derives
components as well as complete solutions, including
more than three-quarters of revenue from Europe,
notebooks, desktops, smart phones, and PDAs.
with the rest primarily from North America (24%
• The companies have already begun joint market share). TomTom was founded in 1991, went
development of mobile phones, to be branded public in 2005, and has ~3,500 employees today.
Garmin-Asus nüvifone. Garmin expects to bring to
• 2002-07: revenue up from €8 million to €1.7 billion,
market Garmin-Asus nüvifone models in 2009. The
net income up from €1 million to €317 million.
original Garmin nüvifone, announced in 2008, will
• Lowered 2008 revenue and EBITDA margin
be re-branded as the Garmin-Asus nüvifone G60.
guidance in January, from €1.80 billion to €1.67
This phone is expected to be delivered in 1H09.
billion and from 20-24% to 19-20%, respectively.
• Garmin-Asus nüvifones will be location-based
• Guiding for 2008 PND market size of 17 million
services (LBS)-centric devices. They are expected
to offer the same turn-by-turn, voice-prompted units in Europe and 17 million units in North
America, down from TomTom’s previous market
navigation of high-end Garmin portable navigation
guidance for 18 million units in each market (which
devices (PND). Whether this will cannibalize PND
had been reduced from 20 million in each market).
sales remains to be seen. It appears likely that each
TomTom expects to comprise 12 million of the
nüvifone will contribute less gross profit to Garmin
estimated 34 million units sold globally.
than does each PND unit.
• Acquired mapping firm Tele Atlas for €3 billion
Market Opportunity for “Smart” Phones in August 2008, creating a strategic challenge for
Garmin, which relies on mapping data provided by
• North America: An estimated 20 million integrated-
Navteq (acquired by Nokia for $8 billion).
GPS smart phones shipped in 2008. The number is
expected to rise to an annualized rate of 57 million • Cut 7% of non-Tele Atlas workforce, or 115
units within three years (amounting to 85% of all people, in January. Cost cutting measures at Tele
mobile phones expected to be shipped annually in Atlas are expected to save €35 million per year.
North America within three years).1 • Weak balance sheet, with negative tangible book.
• EMEA: An estimated 32 million integrated-GPS TomTom reduced net debt from €1.32 billion at the
smart phones shipped in 2008. The number is end of 3Q08 to €1.11 billion at the end of 4Q08.
expected to rise to 54 million in 2009.1 The company is in compliance with debt covenants.
• Global handset shipments are expected to drop
TomTom Stock Performance Since IPO
4-5% in 2009, but GPS-enabled phone shipments
(Amsterdam Stock Exchange: TOM2.AS)
are expected to rise 6% to 240 million units.2
€ 80
• Smart phone shipments in North America and
€ 70
Western Europe are projected to grow from 88
€ 60
million in 2009 to 125 million in 2011.3
€ 50
3 € 40
Smart Phone Shipments By Region, 2008-2011 € 30
CAGR € 20
(units in millions) 2008 2009 2010 2011 ’08-‘11 € 10
North America 37 46 56 66 21%
€0
Latin America 6 8 9 11 20%
May-05 Apr-06 Mar-07 Feb-08 Jan-09
Western Europe 36 42 50 59 18%
Eastern Europe 12 14 17 22 21% Source: TomTom, The Manual of Ideas.
Asia Pacific 59 64 78 93 17%
M.E., Africa 12 15 18 24 n/m
Total 162 188 228 274 19% CONFERENCE CALL ALERT:
Growth 32% 16% 21% 20% TomTom Q4 2008 Earnings
1
Canalys, “Mobile Navigation Analysis Worldwide,” December 2008. February 24, 2009
2
3
ABI Research, “GPS-enabled Handsets,” January 2009. Webcast: http://investors.tomtom.com
Oppenheimer & Co., “2009 Handset Forecast,” November 23 2008.
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 202 of 241
MANAGEMENT’S VIEW OF BUSINESS • Inventory: to fall $150 million in Q4; at Q3-end,
Notes from 3Q08 earnings call on October 29: inventory was “more lean as retailers look to reduce
• Business environment: “the reason we had to drop their… exposure and delay cash expenditures”
our numbers from our earlier guidance was October; • nüvifone: on track for 1H09 launch; signed deals
we definitely saw a slowdown;” in PND market, “with some key carriers” (including carrier
Europe has slowed “more dramatically” than U.S.; subsidies); breadth and depth of LBS capabilities
PND remains “hot category— it will still be one of are “superior to any other device on the market;”
the pushes for the holiday season when you look at expects to be competitive versus Apple and RIM in
shelf space and number of SKUs;” “very strong features and pricing; gross margin should be 30-
promotional emphasis for PNDs for the holidays” 35%; one million units shipped in first twelve
• Q3 review: 19% revenue growth on 43% shipment months after release would be “acceptable”
growth and 17% ASP decline; “solid” growth in • PND market size and growth: U.S. and Europe are
automotive and outdoor fitness; gross margin 20 million units each, with 60% growth in North
eroded 260 bps y-y, but “exceeded our earlier America and 20% in Europe; while growth is down,
expectations as ASP declines moderated and price “the PND market is still growing at a healthy pace
reductions were largely offset by lower product in comparison to other categories;” at Q3-end,
cost;” gross margin eroded 150 bps sequentially but North American penetration is in mid teens while
would have been “nearly flat” excluding currency; Europe is above 20%; mix of new to replacement
EPS down 2% assuming constant currency rates sales is 80%/20% (replacement sales expected to
• Q3 review—automotive and mobile: 21% revenue increase as market matures); average life of PND
growth, driven by “strong” unit growth and device is 3-5 years (likely to come down with price)
“moderating” price declines; Garmin has top three • Garmin PND market share: grew to 54% in North
PNDs and seven of top ten PNDs in the U.S. America and >20% in Europe in Q3
• Q3 review—outdoor fitness: 35% revenue growth, • Share repurchases: bought back 14.7 million
helped by market share gains shares for $624 million YTD; authorized additional
• Q3 review—aviation: +9%, “as shipments to OEM $300 million on October 29
offset weakness in portable and retrofit markets” • Miscellaneous: employs 1,700+ engineers globally
• Q3 review—marine: 8% revenue decline, as higher
fuel prices have weakened marine industry; gaining
share in OEM and dealer-installed markets
• Q3 review—by geography: 29% North American CONFERENCE CALL ALERT:
revenue growth, 9% European revenue growth, 21% Garmin Q4 2008 Earnings
Asian revenue decline; Asia down due to “timing of
several sales programs… we do continue to expect February 25, 2009, 11am ET
healthy double-digit growth in our APAC markets” Phone: 706-643-9558
Webcast: www.garmin.com
• 2008 guidance: revised down – “some markets are
slowing,” “weaker international currencies add
additional pressure on our revenues and margins;”
expect revenue of $3.6 billion (+13%), 24% EBIT
margin and EPS of $3.78 (flat y-y) including gain
on TeleAtlas shares (based on 19% tax rate)
• 2009 outlook: market will be “different, with higher
penetration rates as we go into the year, but still unit
growth and less ASP decline;” ASP may erode less
due to (1) already low prices and (2) already thin
margins realized by competitors, leaving limited
room for price cuts; U.S. PND unit growth: “not
prepared to give 2009 guidance, but… do not see
any reason why we shouldn’t see at least 20% unit
growth;” PND margin may see “slight reduction…
should still see [PND] margins of about 30%”
• ASP dynamics: -17% in Q3; ASP stable or up y-y
in outdoor fitness, aviation and marine; PND ASP
decline continues “in line with our earlier forecast”
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 203 of 241
MEMC Electronic Materials (NYSE: WFR) St. Peters, MO, 636-474-5000
Technology: Semiconductors, Member of S&P 500 http://www.memc.com
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BUSINESS OVERVIEW INVESTMENT RISKS & CONCERNS
MEMC provides silicon wafers for semiconductor and solar • 1Q09 outlook: “End market weakness and low
applications. It has global R&D and manufacturing facilities. order visibility across both semiconductor and solar
Customers include semi device and solar cell makers. applications continues… This environment is
MEMC sells wafers from 100-300mm and intermediate exacerbated by continued inventory reductions at
products such as polysilicon and silane gas. The company semiconductor customers, the combination of which
has 200+ U.S. and 450+ foreign patents. Samsung and Yingli is resulting in a significant sequential reduction in
Green Energy each accounted for 10%+ of revenue in 2007. semiconductor wafer demand which is, in turn,
Texas Pacific Group acquired the company from E.ON in leading to the diversion of some polysilicon output
2001 and sold its stake in several transactions through 2007. from semiconductor to solar markets. This is having
the effect of reducing pricing for polysilicon and
SELECTED OPERATING DATA wafers in the solar market.” 1Q09 revenue “could
FYE December 31 2005 2006 2007 2008 decline by as much as 50%” from 4Q08. “The
Change in wafer ASPs -3% 10% -41% n/a reduced pricing and significantly lower factory
% of revenue by product type: utilization assumed in this view, the latter of which
Wafers 90% 81% 78% n/a
Excess polysilicon raw material 10% 19% 22% n/a
would result in significant underutilization charges,
% of revenue by geography: could result in gross margins declining” to ~20%.
U.S. 31% 34% 24% n/a • Q4 revenue of $426 million (down 21% y-y)
China 3% 14% 21% n/a missed previously lowered guidance of $475-525
Korea 17% 12% 16% n/a
Taiwan 20% 18% 17% n/a million. Q4 gross margin was 45%, also below
Other 29% 22% 22% n/a guidance and down from 55% in 4Q07.
• Nabeel Gareeb resigned as CEO last October
INVESTMENT HIGHLIGHTS after six years with MEMC. Former Cypress EVP
• 18% CAGR in silicon wafer shipments from Ahmad Chatila is set to become CEO on March 2.
1990-2007, driven by growth in semiconductor • Unanticipated events can affect production. In
units and solar megawatts. The wafer market is 2Q08, a premature failure of a heat-exchanger at the
expected to grow from $10 billion (80/20 semi/solar Merano, Italy facility reduced polysilicon output by
split) in 2005 to $32 billion (45/55) in 2010. Semi 5%, causing 2Q08 results to miss guidance.
devices and solar cells are made from wafers. • Competitors include Shin-Etsu Handotai, SUMCO,
• Capital-intensive business. MEMC operates Siltronic, BP Solar, Evergreen Solar, Kyocera, REC
several production facilities with 8,000MT of Group, Sanyo, Sharp, and SolarWorld.
targeted annual polysilicon capacity. Net PP&E was
$976 million as of September 30. Capex was $276 COMPARABLE PUBLIC COMPANY ANALYSIS
million in 2007 and $303 million in 2008. Market Enterprise Price This Next
EV /
Value Value to T. FY FY
• Wafer volume drives revenue growth, with ($mn) ($mn)
Rev.
Book P/E P/E
volume increases driven by new wafers and higher FSLR 11,710 11,150 11.0x 8.7x 37x 21x
shipments of existing wafers. Prices declined 41% BRCM 8,850 6,950 1.5x 3.9x 60x 25x
in 2007 due to a mix shift, with new 156mm wafers MRVL 5,020 4,200 1.3x 3.4x 11x 46x
depressing the average price, while existing wafers SPWRA 3,000 3,220 2.2x 3.8x 14x 10x
and intermediate products realized higher prices. STP 1,460 2,710 1.4x 1.6x 11x 14x
• Strong balance sheet, with $1.3 billion of net cash WFR 3,620 2,520 1.3x 1.7x 20x 10x
and investments as of September 30.
• Repurchased four million shares for $270 million RATINGS
since May 2007 on total authorization of $1 billion. VALUE Intrinsic value materially higher than market value?
• Shares trade at 1.7x tangible book value, 9x MANAGEMENT Capable and properly incentivized?
trailing P/E and 20x forward P/E. FINANCIAL STRENGTH Solid balance sheet?
MOAT Able to sustain high returns on invested capital?
MAJOR HOLDERS EARNINGS MOMENTUM Fundamentals improving?
Insiders <1% │ Fidelity 12% │ Cap Re 4% │ Greenlight 3% MACRO Poised to benefit from economic and secular trends?
│ Gardner Lewis 2% │ Artisan 1% │ Principled 1% EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 205 of 241
KBR (NYSE: KBR) Houston, TX, 713-753-3011
Capital Goods: Construction Services, Member of S&P MidCap 400 http://www.kbr.com
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© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 206 of 241
BUSINESS OVERVIEW • $550 million BE&K acquisition grows Services.
KBR is an engineering, construction and services company The July deal re-establishes KBR as a domestic
supporting the energy, petrochemicals, government, and civil contractor and maintenance services provider. The
infrastructure sectors. It operates in four segments, with few integration is “going extremely well,” with “strong
projects typically accounting for a large portion of revenue. contributions” in new awards and financial results.
Government and Infrastructure (G&I) supports the military • Management has expressed optimism in KBR’s
mission cycle. In civil infrastructure, it operates in waste and ability to execute and deliver positive results.
water treatment, transportation, and facilities maintenance, • CEO Bill Utt (51) joined KBR in 2006 after six
providing program management and other services. years as CEO of SUEZ Energy N.A. CFO Kevin
Upstream constructs energy and petrochemical projects, DeNicola joined KBR in June 2008 from Lyondell
including technically complex projects in remote locations. Chemical, where spent six years as CFO.
Expertise includes LNG and GTL gas monetization facilities, • Shares trade at 2% trailing FCF yield, 9x trailing
refineries, oil and gas production facilities, and pipelines. P/E and 9x forward P/E.
Services provides construction and industrial services. INVESTMENT RISKS & CONCERNS
Other includes Downstream, Technology, and Ventures. • 50% of revenue from Iraq and Kuwait in 2007.
Halliburton (NYSE: HAL) sold stock in KBR for $17 per The rate of spending in those regions has decreased
share in an IPO in November 2006, and divested its entire already, partly due to a new competitively bid,
stake in April 2007. KBR sold its 51% interest in European multiple service provider LogCAP IV contract,
naval dockyard DML for $345 million in June 2007. which replaced the previous LogCAP III contract.
• U.S. government was 62% of revenue in 2007.
SELECTED OPERATING DATA U.S. agencies may alter their contract award criteria.
YTD KBR may be suspended or barred from contracting
FYE December 31 2005 2006 2007 9/30/08
with U.S. agencies due to potential consequences of
Revenue growth -17% -5% -1% 29%
% of revenue by segment: ongoing investigations into the company’s conduct.
G&I
1
79% 74% 70% 63% • Dependent on capex by oil and gas companies in
Upstream 12% 19% 22% 23% Upstream, Services, and Other business units.
Services 3% 4% 4% 9%
Other 6% 3% 5% 5%
• Formal SEC investigation and DOJ criminal
EBIT margin by segment: investigation into “improper payments” that may
G&I
1
4% 5% 5% 5% have been made to government officials in Nigeria.
Upstream 9% 2% 10% 11%
Services 14% 14% 17% 7%
Other 22% -12% 4% 12%
COMPARABLE PUBLIC COMPANY ANALYSIS
Unallocated -3% -3% -2% -2% Market Enterprise Price This Next
EV /
Total EBIT margin 3% 2% 4% 5% Value Value to T. FY FY
Rev.
% of revenue by geography: ($mn) ($mn) Book P/E P/E
U.S. 14% 15% 11% n/a FLR 7,630 5,560 .3x 2.8x 12x 11x
Iraq and Kuwait 59% 52% 50% n/a JEC 4,970 4,220 .4x 3.5x 11x 11x
Other 28% 33% 39% n/a SAI 4,050 4,360 .4x 6.6x 18x 16x
% of G&I revenue by sub-segment: URS 2,880 3,820 .4x n/m 13x 12x
U.S. Gov’t – Middle East 81% 81% 78% 79%
U.S. Gov’t – Americas 14% 13% 12% 9% KBR 2,420 1,310 .1x 1.6x 9x 9x
International operations 5% 6% 10% 12%
% of upstream revenue by sub-segment: MAJOR HOLDERS
Gas monetization 34% 60% 74% 78%
Offshore 47% 23% 18% 18%
CEO Utt <1% │ Other insiders <1% │ Capital World 12% │
Other 19% 18% 8% 4% Barclays 4% │ Neuberger 3% │ D.E. Shaw 3%
1
Government and infrastructure.
RATINGS
INVESTMENT HIGHLIGHTS VALUE Intrinsic value materially higher than market value?
• “Go to” contractor for U.S. government, other MANAGEMENT Capable and properly incentivized?
large buyers of engineering and construction FINANCIAL STRENGTH Solid balance sheet?
services. KBR has proven expertise in executing MOAT Able to sustain high returns on invested capital?
large-scale projects in far-flung places. EARNINGS MOMENTUM Fundamentals improving?
• Q3-end backlog of $15 billion, up 27% y-y, MACRO Poised to benefit from economic and secular trends?
provides several quarters of visibility. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 207 of 241
Mesabi Trust (NYSE: MSB) New York, NY, 615-835-2749
Financial: Misc. Financial Services
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© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 208 of 241
BUSINESS OVERVIEW • Mesabi is overseen by four trustees: an SVP of
Mesabi, formed in 1961, derives leasehold royalty income corporate trust services at U.S. Bank, a mining
from outsourced iron ore mining. The trust has interests in geologist, a lawyer, and a private investor.
leases and the Mesabi Land Trust. Trustee activities are • Distributes income to shareholders on quarterly
limited to collecting income, paying expenses, distributing basis, driven by iron ore royalties received.
income to unitholders, and protecting the assets held. The • Shares trade at 3x trailing earnings (no EPS
trust has no employees but engages consultants to monitor estimates available).
the amount and sale price of iron ore products shipped from
Silver Bay, Minnesota, based on information provided by INVESTMENT RISKS & CONCERNS
CCI/Northshore (NYSE: CLF), the lessee/ operator of the • “Significantly lower shipments of iron ore
Mesabi lands. Royalties payable to the trust by CCI are based pellets” in 4Q08. Prices realized were up 40% y-y
on the amount and price of iron ore shipped. The trust is in 4Q08. However, shipments of iron ore pellets fell
organized as a pass-through vehicle for income tax purposes. 82% to 238,240 gross tons in 4Q08.
The trust is likely to terminate in several decades based on a • Does not operate iron ore mines and has little
formula specified in the trust agreement. control over CCI’s activities. Northshore has
power to decide capex and production levels. The
SELECTED OPERATING DATA trust relies on data provided by CCI in order to
YTD
FYE January 31 2006 2007 2008 10/31/08
determine royalties in any given period.
Selected growth rates: • CCI decides portion of operations on Mesabi
Revenue 59% -17% 5% 151% lands versus government or other lands. If CCI
Net income per unit 60% -17% 6% 156% opted to produce more on lands other than Mesabi
Distributions per unit 99% 5% -16% 184%
% of revenue by type:
lands, royalties would likely decrease. In CY07,
Royalties – amended leases 98% 97% 97% 100% 88% of CCI’s Northshore production was on
Royalties – Peters Lease 2% 2% 3% 0% Mesabi lands, down from 91% in CY06.
Trust expenses / revenue 4% 4% 3% 2% • CCI derives 80%+ of North American iron ore
Net income / revenue 96% 96% 97% 98%
Distributions / net income 97% 122% 97% 73%
revenue from five customers. In some cases, CCI
is the sole supplier of iron ore pellets to its
INVESTMENT HIGHLIGHTS customers. As sales volume depends on customer
requirements, it can fluctuate wildly.
• Royalty income and distributions to unitholders
driven by (1) shipment volume of iron ore pellets,
COMPARABLE PUBLIC COMPANY ANALYSIS
(2) pricing of iron ore sales, and (3) the percentage Market Enterprise Price This Next
of iron ore pellet shipments from Mesabi Trust EV /
Value Value to T. FY FY
Rev.
lands rather than from other Northshore lands. ($mn) ($mn) Book P/E P/E
• Shipment volume of iron ore pellets varies based BHP 119,320 121,850 1.9x 3.1x 15x 15x
on customer delivery schedules, iron ore industry RIO 84,980 98,640 2.6x 2.2x 6x 9x
conditions, and weather on the Great Lakes. RTP 41,370 79,950 1.5x 725.8x 4x 6x
• Prices under contracts between CCI and its CLF 3,150 3,190 .9x 2.0x 5x 7x
customers are subject to adjustment based on MSB 100 80 2.1x n/m n/a n/a
multiple price and inflation index factors.
• Majority of income derived from base overriding MAJOR HOLDERS
royalties, which roughly range from 2.5% of gross Insiders <1% │ Hodges 4% │ Skylands 2% │ Tontine <1%
proceeds for the first one million tons of iron ore
shipped annually, to 6% of gross proceeds for RATINGS
shipments in excess of 4 million tons. VALUE Intrinsic value materially higher than market value?
• Other income sources are royalty bonuses, fee MANAGEMENT Capable and properly incentivized? n/a
royalties, and minimum advance royalties. FINANCIAL STRENGTH Solid balance sheet?
Bonuses are earned when iron ore is sold at prices MOAT Able to sustain high returns on invested capital?
above a threshold price. Fee royalties are relatively EARNINGS MOMENTUM Fundamentals improving?
minor and relate to the Peters Lease. Minimum MACRO Poised to benefit from economic and secular trends?
advance royalties are payable regardless of volume. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 209 of 241
Net 1 UEPS Technologies (Nasdaq: UEPS) Johannesburg, South Africa, 27-11-343-2000
Technology: Computer Services http://www.net1ueps.co.za
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© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 210 of 241
BUSINESS OVERVIEW • Selected by Central Bank of Ghana as country’s
Net 1 provides a proprietary universal electronic payment common electronic payment platform. Net 1 also
system (UEPS) to the underbanked in developing economies. provides a customized banking and payment system
It operates in four segments, primarily in South Africa: to a government-affiliated consortium in Iraq.
The transaction-based activities segment earns fee income • Expanding into Namibia and Botswana through
from a state welfare distribution service in South Africa, and JVs that operate smart card-based systems; and
transaction processing for retailers, utilities and banks. into Colombia and Vietnam to operate virtual top-
The smart card accounts segment derives revenue from a up solutions for mobile prepaid airtime vending.
fixed monthly fee for the provision of smart card accounts. • BGS acquisition accelerates entry into Russia.
Net 1 acquired 80% of BGS for €72 million and
The financial services segment provides short-term loans on 40K shares in August. BGS’ largest customer and
a principal basis and life insurance on an agency basis. It 20%-owner is Sberbank, the largest bank in Russia.
generates interest income and initiation and services fees.
• Guiding for 15% adjusted EPS growth in FY09.
The hardware, software and technology segment derives • Authorized $50 million buyback last November.
revenue from sales of hardware, SIM cards, cryptography, • Shares trade at 2.9x EV to trailing revenue, 9x
SIM card licenses, and hardware rentals to merchants. trailing P/E and 8x forward P/E.
SELECTED OPERATING DATA INVESTMENT RISKS & CONCERNS
FYE June 30 2006 2007 2008 1H09
% of revenue by segment: • Two-thirds of revenue affected by recent South
Transaction processing 60% 62% 60% 57% African tender. The South African Social Security
Smart card accounts 18% 15% 14% 12% Agency conducted a tender for the distribution of
Financial services 8% 5% 3% 2% welfare grants. Net 1 filed proposals in May 2007.
Technology sales 14% 17% 22% 29%
Revenue growth by segment:
In November 2008, SASSA terminated the tender
Transaction processing 13% 19% 10% -6% process without any awards. As a result, Net 1
Smart card accounts 4% -5% 4% -19% retained contracts with five provincial governments
Financial services -20% -30% -27% -26% through March 31, 2009 – and probably beyond.
Technology sales 52% 47% 44% 37%
Total revenue growth 11% 14% 13% 0%
However, the long-term outcome remains unclear.
EBIT margin by segment:
Transaction processing 52% 57% 55% 54% COMPARABLE PUBLIC COMPANY ANALYSIS
Smart card accounts 45% 45% 45% 45% Market Price to This Next
Financial services 43% 30% 23% -39% Price FY End
Value Tangible FY FY
Technology sales 63% 16% 21% 26% ($) Date
($mn) Book P/E P/E
Corporate -6% -3% -2% -4% V 56.00 47,330 87.0x 21x 18x Sep-30
Total EBIT margin 46% 43% 43% 39%
Total net income margin
1
30% 28% 34% 42% MA 161.90 20,920 16.9x 16x 13x Dec-31
1
Includes foreign exchange gains and losses and other transitory items. DFS 7.00 3,370 .6x n/m 11x Nov-30
GPN 35.30 2,830 23.9x 16x 15x May-31
INVESTMENT HIGHLIGHTS TSS 13.20 2,600 5.6x 10x 10x Dec-31
• UEPS could enable four billion people with UEPS 15.30 853 6.8x 8x 7x Jun-30
limited bank access to transact electronically.
Four million out of 18 million unbanked South MAJOR HOLDERS
Africans receive welfare on Net 1 smart cards. CEO Belamant 4% │ Other insiders 1% │ Brait S.A. 16% │
• UEPS uses smart cards that operate in real-time General Atlantic 11%
but offline, unlike prevalent systems that require
immediate network access. UEPS users can transact RATINGS
in remote areas when a portable smart card reader is VALUE Intrinsic value materially higher than market value?
available. UEPS can also be used for banking, MANAGEMENT Capable and properly incentivized?
health care, money transfers, voting, and ID. FINANCIAL STRENGTH Solid balance sheet?
• CEO Serge Belamant (54) and CFO Herman MOAT Able to sustain high returns on invested capital?
Kotze (38) have been with the company or EARNINGS MOMENTUM Fundamentals improving?
predecessors since 1989 and 2000, respectively. MACRO Poised to benefit from economic and secular trends?
EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 211 of 241
Tempur-Pedic International (NYSE: TPX) Lexington, KY, 800-878-8889
Consumer Cyclical: Furniture & Fixtures http://www.tempurpedic.com
$40
$35
$30
$25
$20
$15
$10
$5
$0
Jan 00 Jan 00 Jan 00 Jan 00 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 212 of 241
BUSINESS OVERVIEW • Thomas Bryant (60) became CEO in 2006 after
Tempur-Pedic provides premium branded mattresses and five years with Tempur-Pedic. He was previously
pillows in two segments: Domestic consists of two U.S. CEO of Stairmaster. Other senior executives joined
factories and a distribution subsidiary. International consists the company in the past two to five years.
of a factory in Denmark and distribution subs. • Commencing “most extensive new product
launch” in company history, with new and
SELECTED OPERATING DATA upgraded products slated for launch globally.
FYE December 31 2005 2006 2007 2008 • “Executed well” in 4Q08, cutting costs and
% of revenue by geography:
Domestic 64% 66% 66% 62%
improving the balance sheet by repatriating cash.
International 36% 34% 34% 38% • Shares trade at 1x EV to trailing revenue, 10x
Revenue growth by geography: trailing P/E and 10x forward P/E.
Domestic 25% 16% 17% -21%
International 18% 8% 18% -6%
Total revenue growth 22% 13% 17% -16%
INVESTMENT RISKS & CONCERNS
EBIT margin by geography: • Guiding for revenue decline of 15-17% and EPS
Domestic 18% 19% 19% n/a to range from down 11% to up 14% in 2009, with
International 32% 29% 29% n/a estimated revenue of $770-790 million and EPS of
Total EBIT margin 23% 22% 22% 14%
Revenue growth by channel:
1,2 $0.70-0.90, “assuming unit volumes will not
Retail 31% 19% 21% -15% improve from the Q4 rate coupled with a modest
Direct 4% -17% -7% -40% benefit from seasonality and price increases.”
Healthcare -2% -2% 12% -7% • Net debt of $404 million at yearend 2008. The
Third party -1% 12% 3% -7%
Revenue growth by product:
3 company has eliminated dividends and cut opex and
Mattresses 31% 15% 18% -18% working capital. It expects to “remain in compliance
Pillows -9% 0% 12% -17% with the covenants in our credit facility.”
Other 27% 16% 18% -9%
4 • Exposed to cost of chemicals and proprietary
U.S. door count n/a 6,050 6,350 n/a
International door count
5
n/a 4,450 4,990 n/a additives. While input prices have softened
1
Products are sold through four distribution channels in each geographic recently, a reversal would pressure margins.
segment: retail (furniture, specialty, and department stores), direct (direct
response and Internet), healthcare (chiropractors, medical retailers, hospitals),
and third-party distributors in countries with no owned subsidiaries. COMPARABLE PUBLIC COMPANY ANALYSIS
2
In 2007, the company derived 83% of revenue from the retail channel, 7% Market Enterprise Price This Next
EV /
from direct, 5% from healthcare, and 5% from third-party distribution. Value Value to T. FY FY
3
In 2007, the company derived 69% of revenue from mattresses, 13% from Rev.
($mn) ($mn) Book P/E P/E
pillows, and 18% from other products (foundations, adjustable beds, etc.).
4
The company plans to increase door count to 7,000-8,000 "over time"; the ETH 320 460 .5x 1.1x 17x 13x
total available market is estimated at 10,000 stores. ZZ 110 870 .6x n/m 15x 4x
5
The company has identified 7,000 international stores as appropriate targets. SCSS 10 60 .1x .7x n/m n/m
TPX 570 970 1.0x n/m 10x 9x
INVESTMENT HIGHLIGHTS
• $13 billion global mattress market, with 22 MAJOR HOLDERS
million mattress unit sold in the U.S., and a similar CEO Bryant 1% │ Other insiders 2% │ Invesco 20% │
number of mattresses sold outside the U.S., in Fidelity 7% │ Kayne Anderson 6% │ Karsch 6% │
2007.1 In addition, domestic pillow sales were $1.1 Friedman Fleischer 6% │ Munder 5% │ Franklin 5%
billion, with roughly equivalent international sales.
• Leader in growing specialty mattress category, RATINGS
which comprises non-innerspring mattresses, VALUE Intrinsic value materially higher than market value?
including foam mattresses, airbeds, and waterbeds. MANAGEMENT Capable and properly incentivized?
• Comfort and health advantages over standard FINANCIAL STRENGTH Solid balance sheet?
bedding products. The company uses temperature- MOAT Able to sustain high returns on invested capital?
sensitive material that has a high density and EARNINGS MOMENTUM Fundamentals improving?
conforms to the body to reduce neck and back pain. MACRO Poised to benefit from economic and secular trends?
The company holds 70 U.S. and foreign patents. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
1
Source: Tempur-Pedic, International Sleep Products Association (ISPA).
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 213 of 241
Versant (Nasdaq: VSNT) Fremont, CA, 510-789-1500
Technology: Software & Programming http://www.versant.com
$250
$200
$150
$100
$50
$0
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 214 of 241
BUSINESS OVERVIEW • Large recurring revenue stream, high switching
Versant, founded in 1988, provides object-oriented data costs. We estimate that two-thirds of revenue is of a
management software that companies use to solve complex recurring nature. Versant is deeply embedded into
data management and integration problems. The software is customer applications, making it difficult to switch.
used in strategic distributed applications, including network • Highly capable Jochen Witte (47) became CEO
modeling and management, fault diagnosis, fraud prevention, in 2005. Previously, he headed Versant’s European
service activation and assurance, and customer billing and operations and co-founded a firm that merged with
scheduling. Management is based in the U.S. and Germany, Versant in 2004. Since taking the helm, Witte has
while R&D activities are conducted in Germany and India. cut costs and focused on the database business.
The company targets the telecom, technology, defense, Financial results have improved dramatically.
financial, transportation, and health care industries. It sells • Strong balance sheet; large NOLs. Versant had
two types of perpetual licenses: Development licenses, sold $27 million of net cash as of July 31. It had federal,
on a per seat basis, authorize a customer to develop an state, and German NOLs of $80 million, $16
application that uses Versant software. Deployment licenses million, and $41 million as of October 31, 2007.
permit a customer to deploy an application it has developed • Shares trade at 14% trailing FCF yield and 7x
under a development license. End-users typically buy trailing P/E (no EPS estimates available).
deployment licenses based on the number of CPUs. VARs
and distributors purchase development licenses on a per seat INVESTMENT RISKS & CONCERNS
basis. In exchange for royalties, VARs are authorized to • Impact of weak economy, dollar appreciation.
sublicense deployment copies of Versant software. According to CEO Witte, “achieving our future
goals will become more challenging.”
SELECTED OPERATING DATA • Competition from relational database companies
YTD including Oracle, CA, Sybase, IBM, and Microsoft.
FYE October 31 2005 2006 2007 7/31/08
% of revenue by type:
Versant also competes against object database firms
License 56% 51% 60% 64% such as Progress Software and Objectivity.
Maintenance 40% 40% 39% 35% • Small but growing object-oriented database
Prof. services 4% 9% 1% 1% market. The $70 million market size limits the
Revenue growth by type:
License -9% -4% 50% 32%
explosiveness of Versant’s growth potential.
Maintenance -7% 7% 22% 12% • Low insider ownership—particularly noteworthy
Prof. services -50% 153% -84% 7% given Versant’s small market capitalization.
Total growth -11% 6% 26% 24%
1
Gross margin by type:
License 97% 96% 99% 98%
COMPARABLE PUBLIC COMPANY ANALYSIS
Maintenance 77% 79% 82% 84% Market Enterprise Price This Next
EV /
Prof. services -42% 34% 54% 65% Value Value to T. FY FY
Rev.
Total GM 83% 83% 92% 93% ($mn) ($mn) Book P/E P/E
% of revenue by geography: ORCL 89,420 90,010 3.8x n/m 12x 11x
North America 34% 37% 46% 32% CA 9,680 9,430 2.2x n/m 12x 11x
Europe 64% 61% 50% 54% BMC 5,480 4,830 2.6x n/m 13x 12x
Asia 2% 3% 4% 14%
2 SY 2,320 2,160 1.9x 24.8x 13x 12x
∆ in shares out 14% 1% 3% 2%
1 PRGS 690 570 1.1x 5.0x 9x 8x
Gross profit excludes intangibles amortization, which amounted to $237K in
each of the nine months ended July 31, 2007 and July 31, 2008. VSNT 60 30 1.2x 2.3x n/a n/a
2
Represents y-y change in average diluted shares outstanding.
MAJOR HOLDERS
INVESTMENT HIGHLIGHTS CEO Jochen Witte 2% │ Other insiders 2% │ RenTech 8%
• Object-oriented database management software
has advantages over relational databases in RATINGS
meeting the data requirements of companies who VALUE Intrinsic value materially higher than market value?
use very large, changing bodies of complex data. MANAGEMENT Capable and properly incentivized?
• Versant Object Database (VOD) cuts customers’ FINANCIAL STRENGTH Solid balance sheet?
hardware costs and speeds development. VOD MOAT Able to sustain high returns on invested capital?
sales account for almost all license revenue. Versant EARNINGS MOMENTUM Fundamentals improving?
also sells FastObjects software, added in 2004 via a MACRO Poised to benefit from economic and secular trends?
merger with CEO Witte’s former company. EXPLOSIVENESS 5%+ probability of 5x upside in one year?
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 215 of 241
Portfolios With “Signal Value”
Revealing the Top Ideas of Top Investors
“Signal value” as opposed to “noise.” We present the MOI Signal Rank answers the question, “What are this
holdings of some of the world’s top investors. We look for investor’s top ten ideas right now?” Rather than simply
investors who have amassed impressive track records over presenting each investor’s largest holdings as of the recently
long periods of time. We choose these investors carefully filed quarter end, the MOI’s proprietary methodology ranks
to avoid the noise inherent in most 13F-HR filings. the companies in each investor’s portfolio based on the
investor’s current level of conviction in each holding, as
Top investors included in this section: judged by the MOI.
• William Ackman, Pershing Square Our proprietary methodology takes into account
• Bruce Berkowitz, Fairholme a number of variables, including the size of a position in an
• Warren Buffett, Berkshire Hathaway investor’s portfolio, the size of a position relative to the
• Ian Cumming & Joe Steinberg, Leucadia market value of the corresponding company, the most recent
quarterly change in the number of shares owned, and the
• David Einhorn, Greenlight
change in the stock price of a position since the most recent
• Glenn Greenberg, Chieftain
quarterly filing date.
• Brian Gaines, Springhouse
For example, an investor might have the most
• Tom Gayner, Markel Gayner
conviction in a position that is only the tenth-largest
• Mason Hawkins, Southeastern
position in such investor’s portfolio. This might be the case
• Chris Hohn, Children’s Investment Fund
if an investor invests in a small company, resulting in a
• Carl Icahn, Icahn holding that is simply too small to rank highly based on size
• Seth Klarman, Baupost alone. On the other hand, such a holding might represent
• Eddie Lampert, RBS (ESL) 19.9% of the shares outstanding of the subject company,
• Dan Loeb, Third Point suggesting a high level of conviction. Our estimate of the
• Steve Mandel, Lone Pine conviction level would rise further if the subject company
• Mohnish Pabrai, Pabrai Funds has a 20% poison-pill threshold, thereby suggesting that the
investor has bought as much of the subject company as is
• Rich Pzena, Pzena Investment
practically feasible.
• Kenneth Shubin Stein, Spencer
• Prem Watsa, Fairfax
• Marty Whitman, Third Avenue
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 216 of 241
Bill Ackman, Pershing Square
MOI Market Price ($) Shares Owned Holdings
Signal Value Latest Filing ∆ Since Latest ∆ Since as % of
Rank Company Ticker ($mn) Date Date Filing Filing 9/30/08 Co. Fund
1 General Growth Properties GGP 171 0.55 1.29 -57% 22,901,194 new position 7% 1%
2 Visa V 25,114 55.95 52.45 7% 7,135,608 >+100% 2% 15%
3 Target TGT 22,644 30.08 34.53 -13% 26,754,804 +36% 4% 38%
4 Alexander’s ALX 889 174.97 254.90 -31% 8,205 new position 0% 0%
5 EMC EMC 24,611 12.06 10.47 15% 58,619,033 no change 3% 25%
6 Borders Group BGP 33 0.54 0.40 35% 10,597,880 no change 18% 0%
7 Greenlight Capital Re GLRE 392 13.05 12.99 0% 250,000 no change 1% 0%
8 Wendy's/Arby's Group WEN 2,490 5.30 4.94 7% 47,044,509 -15% 10% 10%
9 Sears Holdings SHLD 4,821 38.99 38.87 0% 302,936 -40% 0% 0%
10 Dr Pepper Snapple DPS 4,211 16.60 16.25 2% 10,824,220 -51% 4% 7%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 217 of 241
Ian Cumming & Joe Steinberg, Leucadia
MOI Market Price ($) Shares Owned Holdings
Signal Value Latest Filing ∆ Since Latest ∆ Since as % of
Rank Company Ticker ($mn) Date Date Filing Filing 9/30/08 Co. Fund
1 AmeriCredit ACF 689 5.23 7.64 -32% 32,715,440 no change 25% 26%
2 Capital Southwest CSWC 336 89.69 108.16 -17% 19,776 no change 1% 0%
3 Jefferies Group JEF 2,016 12.33 14.06 -12% 48,585,385 no change 30% 70%
4 Cresud CRESY 409 8.15 8.95 -9% 3,364,174 no change 7% 3%
5 International Assets IAAC 73 8.13 8.58 -5% 1,384,985 no change 15% 1%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 218 of 241
Glenn Greenberg, Chieftain
MOI Market Price ($) Shares Owned Holdings
Signal Value Latest Filing ∆ Since Latest ∆ Since as % of
Rank Company Ticker ($mn) Date Date Filing Filing 9/30/08 Co. Fund
1 American Express AXP 18,258 15.74 18.55 -15% 7,923,790 new position 1% 6%
2 Rockwell Collins COL 5,875 37.16 39.09 -5% 1,548,200 new position 1% 2%
3 Precision Castparts PCP 9,406 67.22 59.48 13% 1,985,050 new position 1% 5%
4 Crosstex Energy XTEX 197 4.38 4.37 0% 3,112,076 +7% 7% 1%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 219 of 241
Seth Klarman, Baupost
MOI Market Price ($) Shares Owned Holdings
Signal Value Latest Filing ∆ Since Latest ∆ Since as % of
Rank Company Ticker ($mn) Date Date Filing Filing 9/30/08 Co. Fund
1 Facet Biotech FACT 159 6.66 6.08 10% 3,985,567 new position 17% 2%
2 News NWS/A 11,799 6.50 9.09 -28% 16,942,972 +1% 1% 13%
3 Exterran Holdings EXH 1,467 22.67 21.30 6% 4,928,925 +70% 8% 9%
4 RHI Entertainment RHIE 53 3.94 4.59 -14% 4,463,534 +28% 33% 2%
5 Syneron Medical ELOS 172 5.98 8.34 -28% 3,086,619 no change 11% 2%
6 BreitBurn Energy BBEP 375 7.13 7.05 1% 8,157,439 +32% 15% 5%
7 PDL BioPharma PDLI 754 6.31 6.18 2% 14,363,749 +4% 12% 7%
8 Theravance THRX 873 16.65 12.39 34% 9,033,741 +44% 17% 9%
9 News Corp. NWS 5,773 7.23 9.58 -25% 5,390,600 >+100% 1% 4%
10 Domtar UFS 527 1.07 1.67 -36% 33,452,199 +50% 7% 5%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 220 of 241
Steve Mandel, Lone Pine
MOI Market Price ($) Shares Owned Holdings
Signal Value Latest Filing ∆ Since Latest ∆ Since as % of
Rank Company Ticker ($mn) Date Date Filing Filing 9/30/08 Co. Fund
1 JPMorgan Chase JPM 92,163 24.69 31.53 -22% 12,339,623 new position 0% 6%
2 MasterCard MA 15,929 161.90 142.93 13% 2,921,408 >+100% 3% 7%
3 Visa V 25,114 55.95 52.45 7% 8,435,552 +81% 2% 7%
4 America Movil AMX 31,090 29.53 30.99 -5% 24,007,275 +33% 2% 12%
5 Union Pacific UNP 21,894 43.51 47.80 -9% 6,885,633 new position 1% 5%
6 Qualcomm QCOM 58,852 35.68 35.83 0% 20,270,480 +13% 1% 12%
7 Monsanto MON 43,463 79.41 70.35 13% 4,230,159 new position 1% 5%
8 Google GOOG 85,677 357.68 307.65 16% 844,016 new position 0% 4%
9 Las Vegas Sands LVS 2,157 3.36 5.93 -43% 18,677,261 new position 3% 2%
10 Coach COH 4,485 13.97 20.77 -33% 6,172,333 new position 2% 2%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 221 of 241
Kenneth Shubin Stein, Spencer Capital
MOI Market Price ($) Shares Owned Holdings
Signal Value Latest Filing ∆ Since Latest ∆ Since as % of
Rank Company Ticker ($mn) Date Date Filing Filing 9/30/08 Co. Fund
1 Berkshire Hathaway BRK/A 93,517 88,140.00 96,600.00 -9% 48 new position 0% 9%
2 Wendy’s / Arby’s WEN 2,490 5.30 4.94 7% 1,198,502 new position 0% 11%
3 Crosstex Energy XTXI 147 3.18 3.90 -18% 1,025,893 >+100% 2% 7%
4 Leucadia National LUK 3,647 15.66 19.80 -21% 70,000 new position 0% 3%
5 Huntsman HUN 682 2.91 3.44 -15% 400,000 new position 0% 3%
6 Atlas America ATLS 553 14.08 14.85 -5% 74,634 new position 0% 2%
7 Mastech Holdings MHH 6 1.59 2.38 -33% 10,000 new position 0% 0%
8 Winthrop Realty Trust FUR 154 9.80 10.84 -10% 47,192 new position 0% 1%
9 AnnTaylor Stores ANN 371 6.50 5.77 13% 65,848 new position 0% 1%
10 dELiA*s DLIA 58 1.87 2.20 -15% 471,367 +14% 2% 2%
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 222 of 241
Screening For Asymmetrical Risk-Reward Profiles
CONTRARIAN
“Shunned by the market, but not by insiders” Companies close to 52-week lows, with consistent insider buying
“Biggest losers” Companies whose stock prices have declined most over 1+ years
“Biggest losers (deleveraged)” Companies with no net debt and large stock price decline over 1+ years
“Biggest losers (deleveraged, likely profitable)” Companies with no net debt, positive next FY EPS, and large price drop
DEEP VALUE
“Lots of revenue, but little enterprise value” Companies that trade at low multiples of net revenue
“Neglected gross profiteers” Companies that trade at low multiples of gross profit
“Companies with strong, liquid balance sheets” Companies with at least 50% of market value in net cash
ACTIVIST TARGETS
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 223 of 241
Contrarian: Shunned by the Market, But Not by Insiders
Screening criteria: ► Persistent insider buying in past six months ► No insider selling ► Price within 10% of 52-week low ► Market value
more than $100 million │ Sorted by: Number of insider purchases
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 224 of 241
Contrarian: Biggest Losers
Screening criteria: ► At least one analyst estimate of this year’s EPS and next year’s EPS ► Market value more than $100 million │ Sorted
1
by: Largest price decline since yearend 2007
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 225 of 241
Contrarian: Biggest Losers (Deleveraged)
Screening criteria: ► Positive net cash ► At least one analyst estimate of this year’s EPS and next year’s EPS ► Market value more than
1
$100 million │ Sorted by: Largest price decline since yearend 2007
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 226 of 241
Contrarian: Biggest Losers (Deleveraged & Profitable)
Screening criteria: ► Positive net cash ► Positive consensus EPS estimate for next FY ► At least one analyst estimate of this year’s EPS
1
and next year’s EPS ► Market value more than $100 million │ Sorted by: Largest price decline since yearend 2007
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 227 of 241
Deep Value: Lots of Revenue, Low Enterprise Value
Screening criteria: ► Enterprise value to trailing revenue less than 0.5x ► Market value does not exceed revenue ► Market value more
than $500 million │ Sorted by: Enterprise value to revenue
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 228 of 241
Deep Value: Neglected Gross Profiteers
Screening criteria: ► Enterprise value not more than trailing gross profit ► Market value not more than 2x gross profit ► Market value more
than $200 million │ Sorted by: Enterprise value to gross profit
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 229 of 241
Deep Value: Companies with Strong, Liquid Balance Sheets
Screening criteria: ► Net cash at least 50% of market value ► At least as much insider buying as selling in past six months ► Price to
tangible book less than 1.5x ► Market value more than $100 million │ Sorted by: Number of insider purchases; price to tangible book
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 230 of 241
Activist Targets: Underperformers
Screening criteria: ► Bottom-50% rank in EBIT margin, ROE and asset turnover; LTM rank lower than rank two years ago ► Stock price
lower than two and five years ago ► Insider ownership less than 20% ► Market value more than $100 million │ Sorted by: Market value
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 231 of 241
Activist Targets: Sale, Liquidation or Recap Opportunities
Screening criteria: ► Tangible book at least 50% of market value ► Current assets minus total liabilities at least 50% of market value ►
Positive net cash ► Insider ownership less than 20% ► Market value more than $100 million │ Sorted by: Market value
Net Net
Current Net
P/ Assets Cash EV/ P/E
Price MV EV Tang. as % as % LTM Next
Company Ticker ($) ($mn) ($mn) Book of MV of MV Rev. FY
1 Magna International Inc. (US MGA 30.56 3,441 1,729 .5x 62% 50% .1x na
2 Ingram Micro Inc. IM 12.67 2,089 1,739 .8x 113% 17% .0x 10x
3 Tellabs, Inc. TLAB 3.95 1,564 412 .9x 81% 74% .2x 21x
4 Foot Locker, Inc. FL 7.54 1,168 896 .6x 88% 23% .2x 15x
5 FormFactor, Inc. FORM 16.06 788 265 1.1x 72% 66% 1.3x nm
6 MKS Instruments, Inc. MKSI 15.89 781 521 1.5x 55% 33% .8x 99x
7 Benchmark Electronics, Inc. BHE 11.54 751 404 .7x 104% 46% .2x 11x
8 Cymer, Inc. CYMI 21.02 622 480 1.2x 55% 23% 1.0x nm
9 OM Group, Inc. OMG 20.04 611 492 .8x 81% 19% .3x 19x
10 Men's Wearhouse, Inc., The MW 10.99 569 556 .7x 51% 2% .3x 15x
11 Harmonic Inc. HLIT 5.88 559 232 1.7x 57% 59% .6x 13x
12 Verigy Ltd. VRGY 9.30 542 202 1.2x 54% 63% .3x nm
13 Electronics For Imaging, Inc EFII 9.68 499 310 1.2x 52% 38% .6x 15x
14 Emulex Corporation ELX 5.97 493 208 1.2x 66% 58% .5x 14x
15 ViroPharma Incorporated VPHM 6.23 490 72 1.1x 85% 85% .3x 8x
16 ScanSource, Inc. SCSC 18.53 489 458 1.3x 67% 6% .2x 11x
17 Plantronics, Inc. PLT 9.76 475 292 1.0x 76% 39% .4x 35x
18 JAKKS Pacific, Inc. JAKK 17.05 469 374 1.4x 59% 20% .4x 6x
19 Coherent, Inc. COHR 17.83 434 234 .9x 71% 46% .4x 15x
20 Analogic Corporation ALOG 30.72 407 245 1.1x 66% 40% .6x 15x
21 NetGear, Inc. NTGR 10.88 384 182 1.1x 84% 53% .2x 12x
22 TriQuint Semiconductor TQNT 2.57 375 289 .7x 54% 23% .5x na
23 Fred's, Inc. FRED 9.29 371 368 1.0x 63% 1% .2x 12x
24 Park Electrochemical Corp. PKE 17.95 367 153 1.3x 59% 58% .7x 16x
25 Sigma Designs, Inc. SIGM 13.80 364 232 1.3x 52% 36% 1.0x 17x
26 Ixia XXIA 5.68 360 157 1.5x 57% 56% .9x 33x
27 Sonus Networks, Inc. SONS 1.32 360 42 .7x 86% 88% .1x nm
28 OmniVision Technologies, Inc OVTI 7.08 354 110 .7x 79% 69% .1x nm
29 Imation Corp. IMN 9.21 347 251 .6x 115% 28% .1x 14x
30 Zoran Corporation ZRAN 6.71 343 -15 .7x 102% 104% nm nm
31 SonoSite, Inc. SONO 19.61 334 200 1.6x 57% 40% .8x 20x
32 RTI International Metals, In RTI 13.87 319 275 .6x 79% 14% .5x 9x
33 Adaptec, Inc. ADPT 2.51 306 -64 .8x 121% 121% nm nm
34 Brooks Automation, Inc.(USA) BRKS 4.67 298 186 .9x 58% 38% .4x nm
35 Exar Corporation EXAR 6.77 291 49 1.0x 83% 83% .4x nm
36 Applied Micro Circuits Corpo AMCC 4.38 287 98 1.1x 76% 66% .4x nm
37 Omnicell, Inc. OMCL 9.02 282 162 1.4x 53% 43% .6x 23x
38 Ultratech, Inc. UTEK 11.96 281 129 1.5x 63% 54% 1.0x 20x
39 Maxygen, Inc. MAXY 7.48 278 72 1.4x 69% 74% .7x nm
40 Actel Corporation ACTL 10.47 270 131 1.2x 58% 51% .6x 15x
41 L.B. Foster Company FSTR 26.24 269 181 1.2x 64% 33% .4x 12x
42 Superior Industries Internat SUP 10.04 268 157 .5x 66% 41% .2x nm
43 Mellanox Technologies, Ltd. MLNX 8.44 267 88 1.3x 72% 67% .8x 15x
44 Silicon Image, Inc. SIMG 3.49 259 74 1.1x 69% 72% .3x 58x
45 FARO Technologies, Inc. FARO 14.91 248 143 1.3x 63% 42% .7x 21x
46 Cirrus Logic, Inc. CRUS 3.70 241 130 1.6x 53% 46% .7x 37x
47 Finish Line, Inc., The FINL 4.40 241 186 .6x 75% 23% .1x 10x
48 Cohu, Inc. COHU 10.18 237 148 1.3x 59% 37% .7x na
49 InfoSpace, Inc. INSP 6.44 223 31 1.0x 81% 86% .2x 644x
50 Nabi Biopharmaceuticals NABI 4.28 222 104 1.8x 55% 53% nm nm
[MOI04 ● MOI – 1,2,4,5,6 ● MOID]
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 232 of 241
Greenblatt’s Magic Formula, based on Trailing Financials
Screening criteria: ► Market value more than $100 million ► ADRs and banks excluded │ Sorted by: Equal-weighted average of two
rankings: (1) LTM return on capital employed (“good business”), and (2) LTM EBIT-to-EV yield (“good price”)
LTM Insiders
to EBIT/
Price 52-Wk MV EV EBIT/ Capital Tax # #
Company Ticker ($) High ($mn) ($mn) EV Empl. Rate Buys Sells
1 Heidrick & Struggles Interna HSII 16.33 133% 267 84 82% 1559% 43% - -
2 Molina Healthcare, Inc. MOH 21.72 96% 581 203 55% 1333% 40% 3 11
3 KBR, Inc. KBR 14.97 157% 2,418 1,308 36% 5875% 38% - -
4 CTC Media, Inc. CTCM 3.65 770% 555 626 41% 290% 29% - -
5 Terra Industries Inc. TRA 24.62 134% 2,515 2,005 40% 229% 28% 1 10
6 EarthLink, Inc. ELNK 6.72 51% 728 540 30% 242% nm - 10
7 CF Industries Holdings, Inc. CF 54.68 216% 2,647 2,026 57% 147% 36% 6 15
8 Ituran Location and Control ITRN 8.17 69% 192 140 55% 148% 30% - -
9 Wright Express Corporation WXS 13.51 157% 517 514 38% 168% 35% 5 2
10 McDermott International MDR 13.06 414% 2,977 2,151 29% 241% 22% 8 -
11 Hackett Group, Inc., The HCKT 2.59 157% 102 76 25% 406% 2% - -
12 Capital One Financial Corp. COF 12.11 424% 4,713 8,627 24% 470% 85% 1 5
13 VAALCO Energy, Inc. EGY 8.11 11% 472 374 33% 164% 63% - -
14 HLTH Corporation HLTH 11.68 9% 2,167 1,152 43% 131% 3% - 5
15 Herbalife Ltd. HLF 20.69 147% 1,321 1,497 24% 342% 30% 10 1
16 Energen Corporation EGN 31.39 153% 2,251 2,824 20% 3470% 37% - 2
17 Korn/Ferry International KFY 10.37 98% 464 262 33% 125% 36% 1 -
18 Bare Escentuals, Inc. BARE 3.68 713% 337 558 32% 126% 39% 1 -
19 CNA Surety Corporation SUR 17.36 32% 767 789 20% 1362% 31% 1 -
20 SEI Investments Company SEIC 13.50 100% 2,573 2,181 23% 250% 38% 1 25
21 MetLife, Inc. MET 26.80 144% 21,268 37,353 21% 482% 31% 5 -
22 Coach, Inc. COH 13.97 169% 4,485 4,088 27% 151% 34% 5 1
23 Pre-Paid Legal Services, Inc PPD 32.79 61% 381 413 24% 188% 43% - 14
24 China-Biotics Inc. CHBT 8.00 63% 137 94 20% 613% 22% - 2
25 True Religion Apparel, Inc. TRLG 10.56 201% 258 203 32% 106% 38% - 3
26 Martha Stewart Living Omnime MSO 2.53 295% 139 89 30% 113% 3% - 7
27 Solutia Inc. SOA 4.25 324% 401 1,767 85% 81% 17% 19 -
28 AmSurg Corp. AMSG 19.55 48% 615 784 27% 130% 39% - 9
29 Innophos Holdings, Inc. IPHS 14.93 178% 314 571 52% 78% 23% - 23
30 Terra Nitrogen Company, L.P. TNH 125.26 37% 2,341 2,268 18% 1540% nm - -
31 Perini Corporation PCR 22.29 101% 1,122 783 21% 223% 38% 4 2
32 Georgia Power Company GPW 24.06 5% 223 7,801 21% 215% 33% - -
33 Maxygen, Inc. MAXY 7.48 27% 278 72 35% 83% nm - -
34 Garmin Ltd. GRMN 17.20 326% 3,484 2,944 32% 85% 17% 8 -
35 OpenTV Corp. OPTV 1.12 88% 156 60 24% 129% 1% - 2
36 World Acceptance Corp. WRLD 18.51 148% 299 582 18% 785% 38% 1 5
37 Darling International Inc. DAR 5.16 240% 422 419 33% 83% 38% 1 2
38 Chart Industries, Inc. GTLS 7.99 597% 227 321 39% 78% 29% 3 4
39 Herman Miller, Inc. MLHR 11.78 185% 632 835 29% 93% 34% - 1
40 San Juan Basin Royalty Trust SJT 17.96 163% 837 816 17% 4325% nm - -
41 MEMC Electronic Materials, I WFR 16.11 439% 3,616 2,511 34% 79% 33% 2 -
42 Take-Two Interactive Softwar TTWO 7.78 259% 604 394 29% 87% 13% - 4
43 Torchmark Corporation TMK 27.49 140% 2,338 3,318 20% 207% 32% 3 3
44 NutriSystem Inc. NTRI 13.78 78% 408 350 28% 87% 36% - 23
45 America's Car-Mart, Inc. CRMT 10.54 119% 124 162 20% 178% 36% 1 9
46 EMCOR Group, Inc. EME 21.02 72% 1,376 1,236 23% 111% 39% 1 4
47 American Oriental Bioenginee AOB 4.81 155% 376 283 25% 94% 20% - -
48 Global Cash Access Holdings, GCA 2.59 203% 215 452 16% 4103% 41% 6 1
49 Federal-Mogul Corporation FDML 7.00 203% 704 2,830 70% 61% 20% 2 -
50 Gentiva Health Services, Inc GTIV 27.16 10% 783 982 20% 147% 15% - -
[MOI07 ● Expanded Greenblatt View ● MOIG]
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 233 of 241
Greenblatt’s Magic Formula, based on This FY Estimates
Screening criteria: ► Market value more than $100 million ► ADRs and banks excluded │ Sorted by: Equal-weighted average of two
rankings: (1) This FY estimated return on tangible equity (“good business”), and (2) This FY estimated earnings yield (“good price”)
LTM Insiders
to EBIT/
Price 52-Wk MV EV EBIT/ Capital Tax # #
Company Ticker ($) High ($mn) ($mn) EV Empl. Rate Buys Sells
1 Heidrick & Struggles Interna HSII 16.33 133% 267 84 82% 1559% 43% - -
2 Molina Healthcare, Inc. MOH 21.72 96% 581 203 55% 1333% 40% 3 11
3 KBR, Inc. KBR 14.97 157% 2,418 1,308 36% 5875% 38% - -
4 Terra Industries Inc. TRA 24.62 134% 2,515 2,005 40% 229% 28% 1 10
5 CF Industries Holdings, Inc. CF 54.68 216% 2,647 2,026 57% 147% 36% 6 15
6 Ituran Location and Control ITRN 8.17 69% 192 140 55% 148% 30% - -
7 EarthLink, Inc. ELNK 6.72 51% 728 540 30% 242% nm - 10
8 HLTH Corporation HLTH 11.68 9% 2,167 1,152 43% 131% 3% - 5
9 VAALCO Energy, Inc. EGY 8.11 11% 472 374 33% 164% 63% - -
10 McDermott International MDR 13.06 414% 2,977 2,151 29% 241% 22% 8 -
11 Hackett Group, Inc., The HCKT 2.59 157% 102 76 25% 406% 2% - -
12 Korn/Ferry International KFY 10.37 98% 464 262 33% 125% 36% 1 -
13 Capital One Financial Corp. COF 12.11 424% 4,713 8,627 24% 470% 85% 1 5
14 Solutia Inc. SOA 4.25 324% 401 1,767 85% 81% 17% 19 -
15 True Religion Apparel, Inc. TRLG 10.56 201% 258 203 32% 106% 38% - 3
16 Martha Stewart Living Omnime MSO 2.53 295% 139 89 30% 113% 3% - 7
17 Coach, Inc. COH 13.97 169% 4,485 4,088 27% 151% 34% 5 1
18 SEI Investments Company SEIC 13.50 100% 2,573 2,181 23% 250% 38% 1 25
19 Innophos Holdings, Inc. IPHS 14.93 178% 314 571 52% 78% 23% - 23
20 Energen Corporation EGN 31.39 153% 2,251 2,824 20% 3470% 37% - 2
21 MetLife, Inc. MET 26.80 144% 21,268 37,353 21% 482% 31% 5 -
22 CNA Surety Corporation SUR 17.36 32% 767 789 20% 1362% 31% 1 -
23 Garmin Ltd. GRMN 17.20 326% 3,484 2,944 32% 85% 17% 8 -
24 Darling International Inc. DAR 5.16 240% 422 419 33% 83% 38% 1 2
25 Chart Industries, Inc. GTLS 7.99 597% 227 321 39% 78% 29% 3 4
26 Herman Miller, Inc. MLHR 11.78 185% 632 835 29% 93% 34% - 1
27 MEMC Electronic Materials, I WFR 16.11 439% 3,616 2,511 34% 79% 33% 2 -
28 China-Biotics Inc. CHBT 8.00 63% 137 94 20% 613% 22% - 2
29 Take-Two Interactive Softwar TTWO 7.78 259% 604 394 29% 87% 13% - 4
30 OpenTV Corp. OPTV 1.12 88% 156 60 24% 129% 1% - 2
31 NutriSystem Inc. NTRI 13.78 78% 408 350 28% 87% 36% - 23
32 Perini Corporation PCR 22.29 101% 1,122 783 21% 223% 38% 4 2
33 Federal-Mogul Corporation FDML 7.00 203% 704 2,830 70% 61% 20% 2 -
34 American Oriental Bioenginee AOB 4.81 155% 376 283 25% 94% 20% - -
35 EMCOR Group, Inc. EME 21.02 72% 1,376 1,236 23% 111% 39% 1 4
36 Torchmark Corporation TMK 27.49 140% 2,338 3,318 20% 207% 32% 3 3
37 Volcom, Inc. VLCM 8.71 232% 212 139 41% 61% 36% - 6
38 World Acceptance Corp. WRLD 18.51 148% 299 582 18% 785% 38% 1 5
39 America's Car-Mart, Inc. CRMT 10.54 119% 124 162 20% 178% 36% 1 9
40 Cal-Maine Foods, Inc. CALM 23.73 106% 565 656 30% 67% 35% - 13
41 National-Oilwell Varco, Inc. NOV 28.43 226% 11,865 11,196 26% 81% 34% 7 -
42 Graham Corporation GHM 9.97 451% 101 56 47% 55% 33% 1 2
43 San Juan Basin Royalty Trust SJT 17.96 163% 837 816 17% 4325% nm - -
44 Fuqi International, Inc. FUQI 4.77 151% 105 71 42% 54% 15% - -
45 Guess?, Inc. GES 16.66 171% 1,569 1,393 26% 71% 37% - 11
46 Genesco Inc. GCO 14.91 160% 287 412 61% 51% 43% - 2
47 Humana Inc. HUM 42.75 70% 7,217 3,205 33% 54% 35% 5 3
48 Chevron Corporation CVX 69.73 50% 141,677 137,655 31% 55% 44% - -
49 Obagi Medical Products, Inc. OMPI 6.63 174% 150 126 20% 108% 41% - 1
50 Dynamex, Inc. DDMX 11.89 173% 116 106 23% 75% 40% 12 -
[MOI08 ● Expanded Greenblatt View ● MOIG, MOIH, m. sort]
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 234 of 241
Greenblatt’s Magic Formula, based on Next FY Estimates
Screening criteria: ► Market value more than $100 million ► ADRs and banks excluded │ Sorted by: Equal-weighted average of two
rankings: (1) Next FY estimated return on tangible equity (“good business”), and (2) Next FY estimated earnings yield (“good price”)
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 235 of 241
Greenblatt’s Magic Formula, based on 2013 EPS Ests
Screening criteria: ► Market value more than $100 million ► ADRs and banks excluded │ Sorted by: Equal-weighted average of two
rankings: (1) Next FY estimated return on tangible equity (“good business”), and (2) Next FY estimated earnings yield (“good price”)
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 236 of 241
OPINION their managers’ shoes, their protests to the contrary
notwithstanding. How then to proceed?
How Can an Investor Explain Losing An alternative, perhaps the only alternative for the
Money In 2008 non-expert LP, is to revisit the character and investing
By Nadav Manham principles of the money manager. Sometimes character
flaws are easy to spot after a year of large losses—a
“People give themselves away… They make certain kinds manager prevents investors from withdrawing while
of comments… It’s the very things they talk about. There continuing to charge fees on that “hostage” capital, or he
are a lot of clues in the things they think are important.” abandons a losing fund only to start up another without
—Warren Buffett any compensation to the old investors—but often they are
more subtle, and reveal themselves only in how a
manager chooses to communicate with his investors. Ours
Most professional money managers, even the best is a quantitative field, so this kind of qualitative
known superinvestors of today, lost money in 2008. evaluation is not emphasized. But as the above quote from
Those who “invest in investors” find themselves having to Warren Buffett shows, people unwittingly reveal
choose whether to redeem their capital, remain invested, themselves in how they communicate. Qualities of
or even add to funds. The task is more difficult than it intellectual honesty, consistency of principles, and “truth
appears, especially for old-fashioned value investors who in advertising” shine through, and give the non-expert LP
seek long-term outperformance with little risk of a kind of scorecard to follow when judging investment
permanent capital loss. On the one hand, “If they lost a lot managers. Conversely, money managers themselves
of money last year, kick them out!” is not always the best should take great care in how they communicate, as they
course to follow, for investing is an unusual game in that can be judged by their words, by both expert and non-
today’s losses can often (but not always) set the stage for expert investors, especially during difficult periods like
tomorrow’s gains. Value investing legends like Charles the present one.
Munger and William Ruane suffered large losses in the
1973-1974 bear market, as did Benjamin Graham himself As an example: Hedge fund managers who espouse a
during the Great Depression. Those who stayed the course value philosophy often claim to adhere to the following
with these managers were more than rewarded, while three principles:
those who kicked them out ended up kicking themselves.
On the other hand, rushing to invest with those few 1) I invest to maximize long-term results.
managers who actually made money in 2008 can also be a 2) I don’t believe it’s possible to “time the market”
false guide. Most of the great Wall Street prophets of in the short-term.
earlier ages, those who “called” this crash or that, later 3) I should make money every year, therefore I
faded into obscurity. More cynically, some take should apologize when I don’t.
advantage of their new status as prophets to multiply their
assets under management to levels that must penalize Each principle in and of itself is admirable, and all are
future results (for their investors, not themselves). the kinds of things LPs like and probably demand to hear,
but a closer look reveals that, for value investors at least,
Ideally, the value hedge fund limited partner any two principles can be true only at the expense of
evaluates his investor simply by stepping into his shoes weakening the third one. A value investor who wants to
and evaluating his current portfolio for its expected return maximize long-term returns and doesn’t think he can time
and the all-important margin of safety. Just as a hedge the market must accept the probability of short-term
fund manager strives to understand the companies in losses as the unavoidable price of doing so. David
which he invests as well as their executives do, so too can Swensen of Yale has been almost alone among
the LP strive to understand his money manager’s endowment investors in making the obvious point that no
investments as well as the manager himself. The LP can portfolio with a multi-generational time horizon should
also perform a post-mortem on results achieved so far and concern itself with avoiding occasional losing years. An
try to figure out how that record was achieved, which is investor who eschews market timing and also wants to
more important as a guide to the future than the record make money every year can do so, but only at the expense
itself. However, the real world of the investor in investors, of avoiding equity-like assets like stocks in favor of safer
especially those in value-oriented and smaller funds, often bond-like instruments. And finally, there is nothing
falls short of this ideal. Many if not most of these shameful or even impossible about trying to invest for the
investors are not professional investors themselves and long-term while also trying to make money every year,
therefore lack the expertise to perform this evaluation. but those who do so should admit that they do try to see
Even those who invest in hedge funds for a living often around corners and “time the market.” Even the decision
lack access to the information required to fully step into to hold cash instead of equities is a kind of market timing
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 237 of 241
call, although it’s impolite to admit it. With the exception Here’s another one, a particular pet peeve of mine:
of those, like Buffett and Seth Klarman, whose pools of When a manager writes, “We feel awful about 2008, but
capital are large enough that when they say “I hold cash the good news is we’ve never seen better buying
because I can’t find anything else to buy” they really opportunities [so please stick around!].” This kind of
mean it, investors who hold a combination of cash and advertising should make an LP wary, even if strictly
equities could simply take the cash and use it to buy more speaking it’s true. If a money manager does not endorse
of what they already own. That they choose not to is not market timing (and most don’t), he shouldn’t ask his
necessarily wrong, nor is it something to hide, but it investors to engage in money manager timing either. The
should be called what it is: something very close to manager who can only promise a good spring after a
market timing, a bet that tomorrow’s universe of terrible winter sets himself too low a task—his job is to
opportunities will be better than today’s. Most great value outperform in all seasons. Either he can do that or he
investors avoid sitting too heavily on this three-legged can’t. Those who advertise their ability to achieve high
stool of logic (some still do, but they’ve probably earned highs only after low lows (the implication that you end up
the right), and instead openly acknowledge the tradeoffs where you started) should consider a career in roller
inherent in trying to achieve all three goals in an uncertain coaster design, not money management.
world.
Finally, perhaps the most popular recent example of
Another example of intellectual dishonesty and less- “principle drift” I’ve seen among professional value
than-truthful advertising: If you are a long-term investor investors. Most value investors swear by the notion of
in a hedge fund, and your manager boasts loudly of staying within their circle of competence. Most, until
having preserved your capital during the difficult last recently, have also disdained macroeconomic forecasting,
months of 2008, whatever comfort you take should be many with great pleasure. Therefore it’s ironic to see so
tempered by the knowledge that such heroics come at a many “going Soros” for the first time by filling their
price. Your manager either believes himself capable of investor letters with bold macro pronouncements on
calling the bottom, which is fine as long as he admits it currencies, metals, the next six months, what the Fed
(which he likely doesn’t, or in fact claims is impossible) should do, etc., like atheists who suddenly get religion
or perhaps he has chosen to forgo investing in when they find themselves in foxholes. Some say “I have
undervalued opportunities for fear of losing money in the to in today’s market,” and some will no doubt succeed at
short term, in which case he’s not serving your interests this new kind of investing, but experience suggests that
as a long-term investor. Contrast this with the candor of it’s both difficult and dangerous for value investors to
Jeremy Grantham in a recent Fortune interview, who with change their stripes, even if the environment seemingly
the wisdom of King Solomon admitted that the only way cries out for them to do so.
out of this problem is to somehow split the baby:
It’s also easy to forget in these dark times that today
“How bad will you feel if you put in your cash is not the first time the macro environment has looked
reserves and the market continues to go down? You’re bleak, and that such turmoil does not require an investor
going to feel awful. And how will you feel if you don’t to become an expert in macro predictions. Both Benjamin
buy in the cheapest market for 20 years and it runs away Graham and John Maynard Keynes thought long and hard
and leaves you? Horrible. You have to step your way and brilliantly about the economy during the Great
through so that the regret, which is going to be huge Depression, but as theorists only. As investors they
anyway, is about neutral.” avoided any attempts to profit from macro forecasting,
with good results. The 1973-1974 bear market kicked off
Another example: The common “apology” for poor an unprecedented period of political and macro
2008 performance, preceded by the inevitable “We’re instability: Post-Watergate malaise, post-gold standard
seeing great opportunities in XYZ” from previous years’ fears of paper money, oil shocks, stagflation, a 20%
communications. Any money manager who accepted federal funds rate, etc. If ever there was a time you
exposure to equities going into 2008 presumably believed “needed” to have a macro view it was then. But that
that at prices then prevailing such exposure promised period turned out to be the best time to forget all that and
long-term outperformance. In 2008, however, all forms of invest in the straight-ahead Graham and Dodd style. From
equity—that is, of ownership of enterprise—were 1975 through 1982, when the economic environment
punished, even those whose long-run intrinsic value has finally calmed down a little, Berkshire Hathaway’s worst
not changed much if at all. If you’re in the business of annual gain in book value was 19.3%. Tweedy, Browne
owning businesses, as most value investors are, you had averaged over 25% per year, Sequoia over 30%. And
nowhere to hide in 2008. That’s a risk inherent in Walter Schloss, who probably couldn’t even spell
ownership. If your money manager apologizes for it, does “macroeconomic,” returned 37.5% in that period of
he also apologize for what he wrote in 2007? Does he turmoil. The best modern value investors are aware of this
take it back? paradox of investing history, and don’t try to seduce their
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 238 of 241
LPs with their economic brilliance at the expense of value
investing principles. Seth Klarman said it best: “We
worry top-down, but we invest bottom-up.”
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 239 of 241
general or personal recommendation or take into account
No Investment Advice
This newsletter is not an offer to sell or the solicitation of
an offer to buy any security in any jurisdiction where such
an offer or solicitation would be illegal. This newsletter is
distributed for informational purposes only and should not
be construed as investment advice or a recommendation
to sell or buy any security or other investment, or
undertake any investment strategy. It does not constitute a
© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com Spring 2009 – Page 240 of 241
WE’VE BEEN
CALLED MANY THINGS.
BUT WE’RE NOT COMPLAINING.
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