Getting something for free: The Sanborn Map Model of Investing
One of the most famous exploits during the early years of Warren Buffett was his purchase of the Sanborn Map Company, an obscure business that produced highly detailed maps for use by insurance companies with a large investment portfolio on the side.
In a letter to his partnership to explain why Sanborn accounted for 35% of their assets, Buffett makes it very clear:
In 1958 with the Average in the 550 area, Sanborn sold at $45 per share. Yet during that same period the value of the Sanborn investment portfolio increased from about $20 per share to $65 per share...the same map business was evaluated at a minus $20 with the buyer of the stock unwilling to pay more than 70 cents on the dollar for the investment portfolio with the map business thrown in for nothing. --Warren Buffett's letter to partners, 1960
If you wish to read Buffett's commentary on this situation, which has thankfully been posted here by the Nasdaq.
NL Industries is, in my view, a likewise obscure company. First called National Lead Industries, NL was one of the first 12 components on the Dow Jones Industrial Average when it was created in 1896.
A Corporate Babushka Doll
Over time, NL was acquired by Harold Simmons through his holding company, Valhi (VHI), which currently owns a large stake in NL industries. VHI is at the top of the pyramid but I don't believe the value lies there. VHI also offers a considerably lower dividend yield, which for my personal investment goals, is unacceptable.
NL is also a holding company and its three primary assets are what is most intriguing to my mind. Disclosure of these assets can be found in NL's most recent 10-K.
- A 30% stake in one of the world's largest titanium dioxide producers, Kronos Worldwide (KRO). Kronos is a publicly traded corporation with mines located in Norway. Titanium dioxide is one of the most important industrial pigments and its literally everywhere. White paint, white paper, white appliances, self-cleaning glass, the list goes on.
- An 87% stake in a Texas furniture manufacturer called CompX International (CIX). CompX produces furniture, office supplies and engineered components.
- A private insurance brokerage and risk management company, EWI Re.
NL also offers a dividend yield of 4.1% currently, ensuring payment in excess of risk-free treasuries as we wait for the market to reappraise NL.
NL's current market capitalization is $594 million, and though it has increased in price, from approximately $510 million when I first initiated my position, I believe there is still an adequate margin of safety available at current prices and have elected to add more for these reasons:
As of 1/4/2013, the market capitalization of KRO is $2.3 Billion.
If NL's 30% ownership in KRO were liquidated and sold on the market, the proceeds would be $690 Million. Of course this is extremely unlikely, but already we can see that NL's stake in KRO means that the market is valuing its parent, NL, at almost -100 Million.
Under this line of reasoning, CompX furniture, with a market capitalization of $190M, at this price, is thrown in for free. NL's 87% ownership stake in CIX is equivalent to $165M.
Add together NL's ownership in its two publicly traded companies and you get $855M at the current prices. EWI Re. is also involved, but I have elected to write it down to a value of zero as it is a private company and, in my opinion, icing on the cake.
Let's divide 855M by 49M (the amount of NL shares outstanding)
You get $17.4 per share of assets plus a free share of an insurance business and a 4% dividend...all for the current price (at the time of writing (1/4/2013) of $12.24. A 42% difference.
Application of the Grahm number, the square root of (Book Value x EPS x 22.5), gives us $16.2 as fair value. In the interest of safety, I would establish a stop when the price reaches 10% below the Grahm number.
I like buying at a discount. I also like getting free stuff.