Stalwarts During Trouble - Investor AB

Summary

• During times of turmoil, we learn to appreciate the stalwart, recession-resistant companies of our portfolios, as they typically just "shrug off" headwinds.
• Investor AB, a swedish Investment conglomerate, is one such stock/company.
• The company remains somewhat overvalued in terms of its NAV, the typical valuation indicator for the company, but nonetheless offers defensive returns.
• Investor is a "HOLD" at these valuations.

Investor AB (OTCPK:IVSXF) (OTCPK:IVSBF) is one of the more defensive, European stocks in my entire portfolio. It makes up almost 4% of my entire portfolio, and the purpose of this article is to report what exactly the company has done during the coronavirus, how it has been performing and what we can expect going forward.

Investor AB - How has the company been doing?

Investor went into the coronavirus pandemic with its valuation and sheet at a nearly all-time-high. Things were excellent for the nearly 500B SEK worth of assets that Investor manages. Like I mentioned in my previous article, over 95% of these assets are of a long-term ownership characteristic, and they fall into the following categories.

• Electronics Manufacturing
• Weapon Manufacturing
• Medicine/Bioscience & healthcare
• Appliances
• Machinery
• Fintech-companies
• Finance/Banks
• Commodities (such as timber)
• High-tech/niche technical companies
• Smaller investments, through its investment arms EQT and Patricia industries.

(Source: 1Q20 Presentation)

In my previous article, I go deeper into exactly what these investments are - but suffice to say they include both companies that you can invest in on your own, but also companies that Investor owns fully or that aren't publically listed - so the only way to own them is through Investor AB. Investor AB is best known for its massive stakes in Ericsson (ERIC), ABB (ABB), Atlas Copco (OTCPK:ATLKY) and AstraZeneca (AZN).

(Source: Investor AB 1Q20 Presentation)

The usual Swedish argument for investing in the stock is that it offers an almost ETF-like diversified exposure to the market at a mere 0.12% expense ratio, which has outperformed the SIXRX index by 18% growth as opposed to 12% for the latter in terms of annual rates of return.

So, what exactly happened to Investor during 1Q20? What happened to one of the most defensive Swedish companies, with an admittedly high industrial exposure, during one of the worst crashes in 10 years?

• NAV dropped by 10% during 1Q20, reaching 572 SEK/share. Total returns were negative 11% during 1Q20, compared to SIXRX which dropped 18%. By that measure alone, Investor AB held up well against index.
• Investors listed holdings generated quarterly returns of negative 14%.
• Investor used the panic to increase its assets, buying almost 1.6B SEK worth of stock in ABB, and 200M SEK worth of shares in Electrolux (OTCPK:ELUXF).
• The value of investments in the company's EQT-arm grew by 11%, driven by excellent results across the board in the EQT funds.
• The company reported a net debt in terms of total reported assets of 4.7% for 1Q20. The company had a little north of 19.1B SEK on the balance sheet, with an average debt maturity of almost 11 years as of 31st of March 2020.

So, in short, things for Investor went well in that they dropped substantially less than the market during the first quarter of 2020. The stock also recovered very quickly, and once again trades at a historical premium, if not premium to reported NAV.

(Source: 1Q20 Presentation)

We also know that a company didn't do as well as it could have when it starts to focus on goals such as "sustainability" and other soft metrics. While I'm in no way opposed to such targets, lifting such qualities to the forefront usually, in my experience, means that there's very little positive outside of it to showcase investors.

(Source: Nordnet)

I cut this from my broker to quickly show you the development since the 1st of January 2020 to today. While we're not touching premiums seen in March yet, we're also, when compared to the NAV-drop of 1Q20, back to about the relationship between share price and NAV we saw in late February of 2020.

We also need to mention that Investor actually expects 2Q20 to be worse than 1Q20, as many of the negative effects impacting company orders won't materialize until mid or later in 2020. As such, Investor guides for a rather rocky 2020.

A quick word on the dividend. Unfortunately, Investor's dividends flow from the dividends of its stakes - much like my portfolio. With Swedish (and international companies) cutting their dividends left and right, there's a logic in at least questioning the viability of the proposed dividend, even if company finances remain good. In Sweden, it's also a question of overall perception, especially with the majority owners of Investor AB being prominent figures in Sweden's national economy. The short of it is that the company has elected to postpone the AGM and will return with a revised dividend proposal when such an AGM has been held - on the 17th of June, as it happens.

Let's talk about quarterly results on a more granular level.

(Source: 1Q20 Presentation)

No surprise is that the company's healthcare supplier, Mölnlycke (not listed) performed truly excellent and saw organic growth of over 7% in constant currency, driven by demand for antiseptic, gloves, and general PPE as well as wound care supplies.

(Source: 1Q20 Presentation)

Other stakes in the healthcare segment, such as Laborie, didn't see the same growth and noted negative development of 4% for the quarter. While PPE and supplies were good, supplies for and procedures relating to elective surgeries were not.

(Source: 1Q20 Presentation)

Industrials, including ABB, Sobi, Permobil, and others noted mixed development - but overall, the company's results were positive with organic growth of 6% and an EBITDA growth of 12% YoY in what the company considers its "larger stakes".

Limited customer access is having serious implications for some of the company's stakes. Investor is heavily involved and invested in assistance/tools for the handicapped and those in need of wheelchairs - but there's little to be done here when the world is essentially in lockdown.

So, the question was, how has Investor AB been doing?

1Q20 was solid in context, no question there. The problem seems to lie in the coming quarter/s when some of the headwinds we saw here materialize. We should expect Investor to face some short-term pressure once these effects become known and once impacts on NAV are calculated.

Investor - What is the valuation?

There are a few ways of valuing companies like Investor AB. We can either use metrics like P/E ratios (though these are fairly useless here) or - since it's an investment company which publishes the value of its investments - we can use the publically available NAV.

At the time of 1Q20, NAV had sunk to around 570 SEK/share. At the time of writing this article, the company's NAV has once again risen to 644 SEK/share, meaning the company currently trades at a 21.20% discount to NAV.

To be clear, NAV in this context (although it may seem self-explanatory) is the theoretical value that would accrue to the shareholders if the company was liquidated. Thus, if all assets were sold and all loans were paid off, how much would it be left to distribute to shareholders - this is typical NAV, and it is here as well. With Investor it's somewhat complex, because its listed holdings can be measured on an intraday trading basis, while unlisted holdings must be valued on a quarterly basis when they are reported.

There is, as such, a bit of ambiguity in the NAV, which also is likely one of the reasons why Investor never trades at actual NAV.

(Source: IbIndex)

The chart above follows Investor's stock price (the blue line) in relation to the calculated NAV (the teal line). As we can see, the coronavirus hasn't introduced any sort of particular unprecedented disconnect between the previous trends here, and Investor isn't ridiculously under-, or indeed overvalued when compared to where it typically trades.

In terms of the company's yield and valuation, things are actually substantially worse off on a historical basis. Investing in the company yields barely 2.8%, when historically things have looked far better before.

(Source: Börsdata, Investor AB Yield in %)

As we can see, the company's yield is on the very bottom of its 10-year history. Earnings ratios are, as I said before, useless because Investor practices a great deal of M&As and other actions which dilute earnings metrics such as P/E and EPS. Better, as I see it, to use book values, NAV comparisons and similar metrics. All of these point to the single fact that Investor now isn't necessarily all that more appealing than before.

You may argue that the current discount to NAV, of 21%, is well above the usual average discount to NAV on a longer-term basis, which comes to around 16-19% on a 3-5Y average basis. However, at times Investor has traded closer to 30% discount to NAV, and this hasn't even necessitated a coronavirus pandemic.

I've bought Investor when discounts to NAV exceed 25% and when general conditions going forward can be considered favorable. As such, I'm not interested at these prices. It's still slightly overvalued, and that's why I'm neutral on Investor at this time.

Thesis

Nonetheless, Investor remains a long-term solid choice of the first order. It's a well-managed, excellent company providing exposure to an appealing mix of companies that you otherwise couldn't get. When we compare it to funds, the expense ratio is extremely low, and Investor has proven time and time again for nearly 100 years, that it knows how to manage capital extremely well.

Let me quote my previous article on Investor.

Investor is an investment I view as one of the safest in my entire portfolio. The company is a family powerhouse, a proven and successful overall allocator of capital with a progressive dividend strategy and a very appealing, industrial-focused investment portfolio. Investing in Investor AB means gaining exposure to many of these companies, including Ericsson. I choose to invest in Investor to:

a) avoid individual exposure to more cyclical, volatile companies, like Ericsson.

b) Gain exposure to quality Swedish industrial stocks

c) Gain exposure to stocks/companies which are not publically traded, but are quality companies (such as Permobil).

(Source: Seeking Alpha "Investor AB: The Company Chugs Along, Year After Year")

These reasons still very much stand, and now stand stronger than ever before, seeing how the company has managed the coronavirus pandemic. Many people treat the company in a similar way to an index fund or a mutual fund, as I've mentioned before. The comparison, given portfolio size and diversity, isn't wrong. Investor is also, in fact, bigger than many mutual funds.

With that being said, however, Investor AB still isn't appealing enough to buy on a valuation-centric basis. The discount still isn't high enough, and while there were times during the coronavirus crisis that the company may have been considered buyable, this isn't the case at this time.

I do want to reiterate that if there is one company you should be watching in Sweden however, it is Investor AB, as this is as timeless as it gets, even if my stance on the company at its current price remains the same.

Stance

Because I want to see a 25% discount to NAV for Investor before considering extending my position, I'm currently at a "HOLD" for the company and consider the outlook "Neutral."

(Author's Note: Investors should be mindful of the risks of transacting in securities with limited liquidity, such as IVSBF and IVSXF . The Investor AB listing in Stockholm, STO:INVE-A, offers stronger liquidity).

Analyst’s Disclosure: I am/we are long IVSBF, IVSXF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment. I own the European/Scandinavian tickers (not the ADRs) of all European/Scandinavian companies listed in my articles.

Comments

[Investor Max]

Great article, would love to hear your thoughts on InvestorsAB considering its trading somewhat above NAV, which is very rare for Investment Holding Companies on a historic basis. Another obvious choice for Swedish Conglomerates is Industriavarden, although it is based largely on Volvo Trucks and Consutructoin, which is a more Cyclical play.

[niller007]

Great article, I bought the stock last month. @Wolf Report is it possible to see your portfolio in shareville?

[jbelohlav]

What is the difference between IVSXF and IVSBF?

[Kluring]

The A-class (IVSXF) has one voting right, and the B-class (IVSBF) has a tenth of a voting right.
They are entitled to the same dividend amount, etc.

[jbelohlav]

Thanks. You are widening my horizons on what to purchase.