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Dano Siran
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I am a buy-and-hold investor who invests in high-quality temporarily undervalued companies.
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  • At $100 Per Share Airgas Makes Sense

    In the beginning of February, Airgas (NYSE:ARG) price per share declined to $100. At that level the ownership of this stock makes sense for various reasons. The Price to Sales multiple (see below) is below the lowest levels attained during entire 2013 as well as between the average and highest levels of several quarters between 2010 and 2012. Price to Earnings has eased off even more (also below) as did the Price to Self-financing (i.e. Cash Flow from Operations before changes to Working Capital). The only multiple that remains elevated is Price to Book (not shown here) but ARG bought back app. $600 mil. of its stock at 2012 end and 2013 beginning, which translates into a lower equity and a higher P/B. The financial performance remains strong (from margin and cash flow perspective) although the sales growth has slowed to a low single digit rate, which during the 3Q conference call the management attributed to sluggish economic conditions (as per the transcript provided by seekingalpha). Nevertheless to a long-term investor who is looking to pick up a reliable and growing business, the recent price decline presents a buy opportunity.

    (click to enlarge)

    ARG is in business of manufacturing industrial gases used in metal fabrication, construction, food and beverage retail and others.. The itemization of the wide variety of the gases that ARG produces is too prohibitive for this article but suffice it to say that its five main products (bulk, medical, specialty, CO2 and dry ice and safety gases) tend to grow faster than the economy and are counter-cyclical (as per the transcript of 2008 interview with the CEO provided by seekingalpha). Although the interview took place more than five years ago, a comparison of the business segments as detailed in 2008 and 2013 annual reports suggests that ARG's product portfolio has remained substantially the same and therefore one can assume that the CEO's observations are still relevant and enticing to an investor in 2014.

    Despite the counter-cyclical nature of its products, ARG's business is reliant on the welfare of the general industrial production. Thus the drop in ARG price in the beginning of February can be explained by the slowing industrial production resulting from the unusually cold Winter (on February 3rd the ISM Index dropped more than expected to 51.3). Similar declines in both price and multiples were recorded by ARG's peers, Air Products & Chemicals (NYSE:APD) and Praxair (NYSE:PX) (see below) but ARG's decline was most pronounced.

    The short-term outlook remains clouded, which was also confirmed by the management during the 3Q conference call but the ARG's financial performance remains stable. What is more encouraging is the fact that this was the case during the Great Recession of 2009 (see below for performance indicators). The Sales Growth was severely halted in 2009 but the margins remained strong testament to ARG's ability to rein in costs when business slows (this was also highlighted by the CEO during the 2008 interview). To be fair, APD and PX retained their strong margins during the crises as well, which prompts me to consider them investment-worthy but only after their multiples undergo the same adjustment that ARG just did.

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    Although the above P/E chart demonstrates that the business that during 2010 was selling on average at 25 times the earnings is now selling at slightly above 20 fetching a reasonable margin of safety, it is always prudent to compare the valuation to cash flows as well. I use the P/Self-financing, which contains all non-cash and one-off Income Statement items added back and tends to be more stable than P/E. At 10, ARG is clearly cheaper than during entire 2013 and hovering above the average levels of 2010 through 2012. The margin of safety is not as pronounced here as it is using the P/E, but in my opinion at $100 it is sufficient.

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    The one negative sign, aside from the slow down in Sales, is the increasing Debt to Equity Ratio. The 2013 annual report notes that $400 million in principal is due by 2014 end. In 2013 ARG generated $360 mil. in Free Cash Flow. If I assume that it will generate about as much in 2014 and use some of it to pay dividends, then it should be able to cover about half of the upcoming obligation. New debt then is inevitable. If it is any consolation, PX has similar indebtedness but APD relies on debt financing far less, which again prompt me to conclude that it too would be a good investment only if its valuations were a bit more reasonable. Returning to ARG's debt level, I am comfortable with it; ARG had even greater indebtedness in the past and was able to manage.

    For all the reasons stated above I recently went long on ARG and plan to add if the price will decline some more; the business is indispensable now and into the future and the financial performance reliable enough.

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    All financial data is sourced from and all stock prices from

    Disclosure: I am long ARG.

    Tags: ARG
    Feb 19 11:05 AM | Link | Comment!
  • Clean Harbors Unfairly Out Of Favor With The Market

    Article text goes here...

    Clean Harbors (NYSE:CLH) has recently been out of favor with the market. It appears to me that this is due to the lack of market's confidence in the viability of CLH's sizeable acquisition of Safety Kleen (SK) at end of 2012. The Price to Sales Multiple shown below is virtually at its lowest level in the past five years. Such valuation presents of course a wonderful opportunity for the value-oriented and long-term investor if the underlying financial performance of CLH remains strong. This article portends to show that this indeed is the case.

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    CLH is in the business of collecting hazardous waste produced by refineries, factories and such and also cleans up after oil spills and similar environmental catastrophes. In 2012 CLH acquired SK and got with it a large customer base that compliments its existing customer base by means of services cross-selling. The fact that CLH does not need to rely on one significant customer makes its business attractive (to be precise, SK derives about 7% of its revenue from one large customer, but so far there has been no indication suggesting a loss of that customer).

    CLH conducts over 50% of its business in Western Canada where the oil and gas production has slowed in the recent years contributing perhaps to the depressed CLH valuations. However, the Winter issue of the Alberta Oil Sands Industry Quarterly Update describes that the exploration and drilling activity in the region may be changing towards the better mainly due to the introduction of the more efficient horizontal drilling technology and the recent commitment of the Canadian government to increase trade with China. In the long-term the increase in activity will play into CLH's hands. As far as U.S. business is concerned, a perfunctory and common sense remark is that reliance on carbon sourced energy and all associated activities are to continue in the foreseeable future.

    Since the acquisition of SK, CLH reports its business in five segments and prior to that in three segments. The below chart shows on the quarterly basis the segmental Revenue split, EBITDA Margin and Asset Turnover (EBITDA by segment is provided by CLH and Asset Turnover is calculated as Revenue from each segment divided by Fixed and Intangible Assets combined). The EBITDA Margin and Asset Turnover remain strong for three segments: Technical Services, SK Environmental Service and Oil and Gas Field. Two segments have shown deterioration in the exhibited indicators: Oil and Re-refining, which the management during the Investor Day attributed to the decline in Group II Base Oil Price, in other words an occurrence beyond management's control and Industrial and Field, which the management during the 3Q conference call attributed to a loss of a contract in the Alberta Oil Sands region representing about 0.8% of annual revenue and a delay in opening of its newly constructed lodge. Management feels confident about being able to replace the lost contract and the lodge is now up and running, prompting me to conclude that the setbacks are (almost) history.

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    The below chart shows the P/E valuations and the financial indicators (annual basis) for the last five years. It allows the reader to compare the current financial situation and the valuation placed upon it by the market vis-à-vis the historical record. Return on Equity is decreasing in the last three quarters mostly due to the integration of SK, which in and of itself is a negative sign. However, management expects to increase the EBITDA margin from the current 12.3% to high teens, which will subsequently increase the ROE (as per the 3Q conference call). The ballooning debt to equity ratio resulted from debt issuance for the purchase of SK. The first principal payment on this debt is not unlit 2020 and the Free Cash Flow should until then cover all contractual obligations with a substantial margin.

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    The current P/E of 25 appears to fairly value CLH; it is not below nor over the lowest and highest valuations achieved in the past five tears but somewhere in the average range. The multiple does however fluctuate considerably and it is good therefore to gauge another multiple, the Price to Self-Financing, which compares the Market Cap to Net Income and all non cash and one-off items added back (it is sourced from the Cash Flow From Operations before changes to Working Capital). The Self-Financing Cash Flow tends to be more stable and thus allows a better comparison of the data. The graph below shows that CLH once again is valued at its lowest level in the shown period even though the Self-Financing Margin (Self-Financing to Revenue) remains at 13%.

    (click to enlarge)

    If my hypothesis from the beginning of the article regarding market's incredulity regarding the viability of SK addition to CLH business is true, then it behooves to review the SK financial performance as well. What I was able to retrieve are the SK financial statements provided in the acquisitions prospectus for the past three years and I show them below. By no means is the SK financial performance strong as far as Income Statement margins go, but the Company was able to grow Revenue, it has a higher Asset Turnover than CLH, rather strong cash flow margins and (not shown here) is able to cover all investment-related cash flows from by Cash Flows From Operations.

    I cannot find a single support for the lowest valuation of CLH currently placed on it by the market. I am not saying the business deserves high valuations, but the undervaluation does not make sense and I think there is an opportunity here for acquiring an undervalued business with continuing sound financial performance and long-term prospects.

    All financial information is sourced from, stock price information from and conference call information from transcripts provided by

    Disclosure: I am long CLH.

    Tags: CLH
    Feb 09 4:42 PM | Link | 3 Comments
  • CACC Fairly Valued At $111

    On May 24th the Credit Acceptance Corporation (NASDAQ:CACC) price per share rose 5% intraday after the financial services firm Stephens initiated coverage of the company with an Overweight rating. The stock closed at $111 for a 9% YTD gain. I wanted to invest in this company since 2010 after I found out how well it weathered the roughest patches of the credit crisis, but its valuation was never low enough to provide me with a comfortable margin of safety. Although the price of $111 increased the P/E ratio to 11.7, it still remains within the levels of past two years (see Chart 1), which is encouraging as it shows that the optimistic rating from Stephens did not immediately result in an overvaluation of the company. In this article I will try to analyze whether $111 is fair given the current state of CACC business.

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    CACC provides financing for the purchase of used cars by people with sub-prime credit. It works with 4,355 dealers (as of the Q1 2013 filing) from the market of some 50,000 dealers (as per D. Busk, the Senior Vice President, during the Q4 2012 earnings conference call). CACC ranks among the nation's top five sub-prime car financing companies but operates in a market that is fragmented and new entrants continue to surface due to easy access to capital and low interest rates. The competition has increased in the last couple of years and CACC responded with the same strategy as during the last period of tightened competition in 2006 and 2007 and that's by increasing the number of dealers that it does business with (as per D. Busk during the Q4 2012 earnings conference call).

    Chart 2 displays the growth rates of $-amounts of new loans in each quarter versus the same period in the previous year (green bar graph). In Q1 2013, the $-amount of new loans declined 7.5% compared with the same period last year. Comparing the current growth rate to the rates from the last period of increased competition we see that there was no such decline between 2006 and 2007. In Q3 2007 the growth rates slowed to1.5%, but a two-digit growth resumed in the following quarter. We do not have such robust growth now; in fact Q1 2012 was the last quarter of two-digit growth. So judging from these growth rates alone, CACC's ability to take on new business has deteriorated more now than during the last period of increased competition in 2006 and 2007.

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    The blue graph in Chart 2 represents the quarterly $-amount of new loans indexed to Q1 2005. It gives a perspective on how much business CACC currently takes on compared with Q1 2005. Even though CACC generated less business in Q1 2013 than during the same period last year, it still had a strong quarter and if the history is any guide than we could assume that CACC will write at least as much new business in the rest of the year as it did during 2011. Of course, it's just as well possible that the declines of 2009 will recur and fetch reduced valuations. Applying 2009 P/E to the current TTM earnings yields a price of $90, but such severe decline is unlikely given the general bullishness in the market.

    CACC discloses the forecast of what % of the purchased loans it expects to collect (blue bar graph in Chart 3). Although the forecasts have come down in last few quarters, they still remain about two percentage points above the forecasts from the crisis years of 2008 and 2009 and above the last period of increased competition in 2006 and 2007. The red bar graph in Chart 3 represents the advances that CACC pays to dealers when it purchases the loan contracts. The 47.2% paid during the last quarter is the highest % since 2006, which shows that due to heightened competition CACC has to commit more capital to purchase new loans.

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    Another way to gauge CACC's the ability to grow business is to look at the new unit volume per dealer (Table 1). Lately, the ratio has been in low teens and increased to 13.1 in the last quarter. History shows us that since 2006 Q1 was always the strongest and somewhat indicative of the rest of the year. Hence the current 13.1, which is the lowest Q1 ratio in past eight years, does not bode well for the forthcoming quarters. Obviously, we cannot read too much into these numbers but the decline is a bit disconcerting. On the other hand the growth in the number of active dealers has been in excess of 20% in the past two years just as in 2007. If CACC is able to continue reaching new dealers at these clips, then the lower unit volume per dealer would be somewhat compensated for.

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    In addition to looking at the new business, it is also important to evaluate the performance of the existing contracts (Table 2). This set of data reveals how much of the existing contracts has been collected already and compares it to the historical collection rates. For example, in Q1 2013 CACC has collected 58.5% of the contracts originated in 2011 whereas in Q1 2010 it collected 61.3% on similarly aged contracts (red cells). However, the contracts purchased in 2012 had a longer average initial term than those from 2008, so the collection will be lower since it is spread out over a longer period of time. For the contracts with equal initial terms, e.g. those purchased in 2007 and 2010, the last reported collection rate is in excess of a comparable rate in 2007 (blue cells). The reader is encouraged to make his own interpretation of the data but to me it appears that there is no deterioration in the performance of the existing contracts.

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    Another way of looking at the strength of the existing contracts is by comparing the quantity of the contracts that is required to support the current securitization versus those from previous years. As part of its business, CACC securitizes the purchased contracts in order to free up capital. If CACC is now depositing a higher $-amount of loans into the securitizations than before then it can be argued that the current loans are of lower quality and vice versa. Table 3 shows six securitizations that CACC effected since 2008. For each balance outstanding, i.e. the capital it raises from investors, CACC is required to deposit loans into the securitizations trusts, i.e. loans pledged as collateral. The ratio of the two shows that the required gearing of the trusts has decreased since 2008, which suggests that the deposited loans are performing as expected.

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    So coming back to the purpose of this analysis, paying $111 per share of CACC, in my opinion is fair. The ability to grow business is undoubtedly affected as demonstrated by the above, however the underlying business remains strong. The interest rates are at all times low, which allows CACC to borrow cheaply and the pervasive bullishness in the general stock market may continue driving the stock up. On May 1st the stock dropped to $98, which would naturally be a more lucrative entry point than $111, but I will nonetheless pick up some share now in order to avoid foregoing further gains.

    Disclosure: I am long CACC.

    Tags: CACC
    May 28 3:27 AM | Link | Comment!
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