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Jonathan Goldberg
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Jonathan Goldberg holds an MBA from the Richard Ivey School of Business at the University of Western Ontario. He has a passion for finance and value investing in particular. Other interests include motorcycles, photography, reading (non-fiction), staying fit, surfing and traveling.
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  • Buhler Industries, Inc. (TSE: BUI)
    Buhler Industries (BUI) is a manufacturer of high-quality tractors and other related equipment for use in the agricultural industry. They are the only manufacturer of such tractors in Canada and one of four in the world.
    The following screen brought this company to my attention:
    • Return on Invested Capital (NASDAQ:ROIC) greater than 10%
    • Price to Book value less than 2
    • 5-year earnings growth greater than 5%
    • Debt to Capital less than 50%
    What I was expecting to find was a company perhaps having a competitive advantage and that should be trading well above its book value but for some reason was able to be bought relatively cheap. BUI definitely wasn’t what I was screening for but I’m happy to have found it. The only reason it showed up on this screen was due to its turnaround performance in FY2008. After 5 straight years of declining sales and abysmal returns on capital, this company suddenly showed an ROIC of almost 17% in 2008 and reported its largest sales number since revenues started to decline in FY2003. This definitely warranted looking into further.
    BUI is currently trading at a price/earnings (P/E) of 6.25, a price/book of 1.13 and a price/book (tangible) of 1.29. The company traded at an approximate average P/E of 18 over the previous 5 fiscal years. This definitely looks cheap but the question remains, is it unusually cheap or is the low price warranted? With a market cap of $136 million and no analysts covering the stock to my knowledge, there is definitely a possibility that this company is flying under the market’s radar only to be noticed at a future date.
    Coming to BUI’s rescue in FY2007, the company’s worst reporting year since FY2000, was a Russian company by the name of Novoe Sodruzhestvo. This company’s reputation in Russia is, fittingly enough, that they acquire and transform factories. As is apparent from their track record, Novoe Sodruzhestvo lives up to their reputation. Even more fitting is that one of their previous acquisitions is the largest producer of combines in Russia. If you don’t know what a combine is, all that matters is that they are fixed onto tractors and used in agriculture. The Russians have already begun diligently working on their plans for BUI, which include introducing new products to the North American market as well as taking advantage of the Russian company’s distribution network in Eastern Europe. Over 160 official representatives of the combine manufacturer in Russia, Eastern Europe and Central Asia will support the distribution into new markets.
    The results of the new ownership have so far been promising. The new owners restructured sales and production activity to be more efficient and reinvigorated the work force with some changes at the management levels. In addition, the Russian’s network overseas enabled the company to ship double the amount of tractors as in the previous year. There is room for improvement, which we can expect to see, as suppliers couldn’t keep up with the production level. The company has already begun improving their supply chain and efforts have been successful to date. Next year’s plans are to further develop the product to cater to client tastes, develop the dealer network through an aggressive marketing budget and more finance options, and to further improve the supply chain by finding replacements for weak suppliers.
    Before even attempting to arrive at a value for a company it is important to understand the company and its assets as well as the strategic positioning and the current environment in which the company is situated. Only then can an estimate of fair value be arrived at with conviction. Prior to arriving at or relying on the following numbers it is helpful to read the company’s annual reports, most recent quarterly report and to visit the company’s website as well as those of its competitors. Obviously the more time and effort spent understanding the company and its industry, the better. The largest risk I see going forward is the strengthening Canadian dollar and the impact this may have on the amount of international sales and/or the conversion of those earnings into Canadian dollars. I believe this to be mitigated however by the company's continuing operational improvements as well as by the margin of safety employed in arriving at an entry price.
    Based on the current capital structure of 30.2% debt-to-capital and 69.8% equity-to-capital I found a weighted average cost of capital of 8.41%, using proprietary measures. With a ROIC (replacement value of balance sheet) of 4.02% in the last 12 months, earnings power value (NYSEARCA:EPV) would be expected to be below net asset value (NYSE:NAV). EPV was found to be $5.65 per share with the major driver being normalized zero-growth free cash flows of $12 million. NAV was found to be $8.75 per share with the major drivers being hidden balance sheet assets (product portfolio and customer relationships) of $33.71 million.
    If you would like to understand these numbers in greater detail please see my explanatory articles.
    Remember, as value investors we do not want to project future growth unless a company has a sustainable competitive advantage and as such I do not project growth for BUI in my valuation. Rather I see the new management as knowledgeable, capable and as motivated to bring the company’s EPV in line with the competitive state of NAV. It is for this reason that I give an 80% chance to this being accomplished, which implies an intrinsic value of $8.13 per share for the equity.
    Utilizing a 33% margin of safety, an entry price of $5.44 is recommended. At its current price of $5.44 this stock should be a valuable one to purchase and to hold onto for the long-term.
    Disclosure: None
    Sep 21 8:59 PM | Link | Comment!
  • Lecture Summary - Seth Klarman
     Seth Klarman is President of the Baupost Group, LLC. His firm, founded in 1982, manages $15 billion for institutional and high net worth clients. His now out of print book "Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor" sells for $1,200 on Amazon and $2,000 on eBay and has been stolen from most libraries.
    The following is a summary of Seth Klarman's lecture, given to the Richard Ivey School of Business on March 17th, 2009.
    Klarman opened his speech by pointing out that people's investing temperament seems to be influenced by the state of the market when they graduated from school. As he said, "If you remember how cheap things can get, you don't easily forget that lesson." I attended this lecture in person while completing my MBA, and this statement had a direct impact on me as I would be graduating in one of the worst market climates in history.
    In defining value investing, Klarman describes it as a risk averse approach. He says that it's a series of principles and a way of thinking about investing that forces you to first focus on risk, and only then on returns. As the downside is where the pain is for most people, value investing protects against that first.
    Klarman's understanding based on research he has seen is that value investing via a mechanical approach (purely quantitative according to P/E, P/B, etc.) adds about 1% to 2% a year. He wonders, however, why anyone would trust a dumb formula when they can do even better through proprietary analysis and investigation. In doing so he can tell when some situations that look cheap (according to a mechanical method) aren't in fact that cheap. As such, his firm's approach to value investing is to follow the philosophy's principles while relying on their own fundamental and detailed research.
    Klarman's approach to investing is based on three underlying pillars:
    • Focus on risk before focusing on return. This is not risk in the form of beta or volatility but risk in the sense of how much you can lose if you do in fact lose. He mentions that beta or volatility risk is not really risk unless you must sell on the day the price happens to be low. This approach he describes is very different from wall street where reports tend to be written using single point estimates focusing on the upside, with rarely a mention of the various possibilities of potential downside risk.
    • Adopt a view toward absolute returns. The world seems to focus on relative performance instead of absolute performance. This sticks most investment firms to the group of "ensured mediocrity" as many just try to lose less than their peers. In focusing on absolute performance, the thought to Klarman of losing any of his clients' capital is unacceptable.
    • Employ a bottom-up investment approach. Most of the world employs a top-down investment approach by analyzing the economy, interest rates, etc and then applying these findings to decisions to invest in certain sectors that should perform well in the relevant environment. Klarman does not know anyone with a long-term success rate in doing this. Macro forecasting is very difficult to do, and another issue is that even if you are right you must also be early or prices would have already moved to reflect your viewpoint. While Klarman will still think about the macro environment, he analyzes all his investments using a bottom-up approach.
    Klarman started his firm in a similar fashion to Benjamin Graham's beginnings. He had a small amount of capital and would rummage around for mis-priced situations where there was a reason for mispricing and a catalyst present that would enable him to make money. Over the years his firm developed the following core principles:
    • Picking clients to ensure the firm will be able to maintain a flexible investment approach. This flexibility also allows the firm to capitalize on opportunities in different markets and asset classes.
    • Large amount of employee capital invested in the firm. He wants his firm to be the best place for employees to invest their capital. This ensures a vested interest in the work the employees are performing and would also be a great selling point.
    • Having an edge, a reason to think they can outperform. The biggest edge any investor can have, and his own firm's biggest advantage, is in having a long term investment horizon. Lot's of funds feel pressure to hold cash or to buy short-term situations but are unable to seek out 3-5 year holds as the capital may only be available for 6 months.
    • Foster strong relationships. The firm works hard to ensure they have the best brokers and that they are these brokers' best clients. If they are somebody's first or second largest client then they know they will be made aware of opportunities when large blocks of shares come on the market, etc.
    • Having a niche. The firm's particular focus is in complicated situations, one of their favourite areas being in distressed debt. As many firms have mandates to sell when debt hits this distressed level, Klarman's firm is able to take advantage of the ensuing mispricing and is able to make a profit. This is a much more ideal situation then buying from a seller who knows more than you and who has done the analysis and has decided to sell as a result. Klarman's firm really likes situations where there is a supply/demand imbalance. Other examples are situations where a stock is getting kicked out of an index or where a stock is being spun-off from its parent company. In both these situations there are many institutions and indices that would need to sell indiscriminately. As Klarman says, "Time is scarce so you want to look at these situations where there is a good chance of mispricings."
    More information about Seth Klarman as well as insights into the Baupost Group's holdings can be found at
    Sep 02 7:05 PM | Link | Comment!
  • Less Room to Fall for Value
    Today was not a good day for the markets, to say the least. These daily market fluctuations don't faze value investors though, due to the conviction we have in our investments' true worth.
    Recently I recommended an investment in Lockheed Martin Corporation (NYSE: LMT). Since it's a high conviction investment of mine I tend not to follow the daily ups and downs in the share price. Rather I keep an eye out for any new press releases or industry news that may cause a significant change in the model. Today, however, I couldn't help but notice that while the S&P was down by more than 2%, my investment in LMT was actually up 0.83%! Granted, this is a daily fluctuation that I already stated no interest in, but barring significant news one would expect a large-cap security like this to move along with the market.
    I would like to believe that LMT didn't suffer along with the rest of the market because it is one of the truly undervalued stocks in today's speculative and possibly overvalued market. While we value investors don't give notice to daily fluctuations in share price, it comforts me to know that we probably do have the upper hand when the market decides to go south.
    Tags: LMT, commentary
    Sep 02 12:04 AM | Link | Comment!
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