In earlier post, I talked about Greenwald's 3 tiers of value and promised to share my best picks in each tier.
Here is the best pick from bottom tier i.e. Asset Value play.
This pick comes courtesy Rohit (Understanding and Applying value Investing Principles) who has written about it a few times. Please read his blog and discussion there to understand the background. Search for 'Cheviot' on the blog.
Cheviot Company (Information from FY07 Annual Report):
Enterprise Value = Mcap + Debt = 109 + 11 = 120 Cr
Net realizable assets = Investments + Net current assets* = 87 + 34 = 121 Cr
*Investments are in liquid MFs and stocks of high quality large caps, thus the realizable value might be slightly higher in the current bull market. Most of the current assets are inventory which is Jute - I think it is fair to assume that a bulk of it will be realised.
Bingo, a net-net bargain if there ever was one. How and when the value will be appreciated by market? I have not a clue and I wouldn't worry about it in this part of portfolio. The idea is to put a bunch of them together with the confidence that downside risk is extremely low.
It does not hurt that Cheviot has been consistently profitable and has earnings power of about 23 Cr per annum. But let's leave that aside as that will mean getting into the next tier of value.
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11 comments:
You may add to your analysis a good dividend history(consistent for last 10 years)
Current Div yield is more than 3.5%
High RONW, ROCE
The stock was beaten down due to strike at their plant last financial year.
The only downside risk is the dollar-Rs as much of their produce is exported.
Alok
Alok,
Good points.
There is also value in land (34 Cr as of balance sheet - which is likely way understated).
So this company might be worth a lot more dead (then you can liquidate all the assets) than alive :)
change the name of the company to reliance jute or something limited and the price will jump 10 fold ...just joking
rgds
rohit
Hi ,
I have different opinion.
I run a simple check after my valuation of a particular company satisfy my value criteria.
I just close my eyes and question myself " Is this company is going to exist after 10 years from now ? If yes , Is it going to be bigger than the current Size ?"
If both my answers are clear "No" , then I simply dont buy it though the valuation is very attractive
Just examine few companies in Buffets portfolio. Ex: Gillete , Coke
These companies passed my crieteria.
Now I am closing my eyes and asking myself "Cheviot is going to exist after 10 years from now ?"
Answer " I dont know"
Vishnu
Vishnu,
There are values and there are values.
Cheviot is of the flavor 'deep value'. The values you are referring to are 'long term buy and hold' values. Different.
For what it is worth, here are 10 long term buy-and-hold picks of Fortune magazine in 2000.
http://www.ft.com/cms/s/2/d5725a3c-624a-11dc-bdf6-0000779fd2ac.html
Stocks to last the decade?
Here’s how each of the Fortune picks would have fared had you bought on July 19, 2000 and held through September 7, 2007
%
Broadcom -78.1
Charles Schwabb -44.9
Enron -100.0
Genentech 110.7
Morgan Stanley -17.2
Nokia -36.1
Nortel -97.8
Oracle -45.3
Univision -36.0
Viacom -49.2
Average -39.4
Russell 3000 (No dividends) 3.5
Source: Value Investor Insight
I agree with Ravi, normally we tend to have a bias towards big(glamorous)names as the companies which are going to survive/thrive.
Cheviot looks to be typical Graham type of a stock (unglamorous,undervalued,not loved by market). the idea is that some day market will realise the value which will then reflect in stock price.
(I also agree with Vishnu that Cheviot might not have reflected in Buffet portfolio which focuses on Management,growth prospects etc. That does not mean that it is not a good investment idea)
alok
actually buffett has invested in deep value plays in the past and does so now too. however deep value plays are now for his personal account. for large sums of capital he invests in companies such as BNI or similar large caps which will do well for long periods of time
vishnu - look at it this way. the company by the end of the year would be selling for cash in the bank and underlying business which is still making good money will be for free
regards
rohit
Alok, Vishnu, Rohit,
Thanks for all the comments. I really appreciate it.
I especially appreciate the divergent views. After all, the main purpose of putting stuff up on blog is to expose the thinking to the outside world and try to understand the flaws.
Please keep commenting.
Thanks and Regards,
Ravi
Hi Ravi,
Can you please take a look at this company Paramount Communications.
EV = Mcap + Debt = 257.32 + 189 = 337.44.
Net Realizable assets = Net current assets + Investments = 271.73 + 2.08 = 273 Cr + (Fixed assets of 79 Cr) amounts to 354 Cr.
So net realizable (ignoring the fixed assets is very close to EV).
Does this fit in your "Value in bottom tier".
PE is ~ 5.6, their net profit has been soaring in last two years. They are making around 37 cr PAT..
Only nagging thing is their Debt to Equity is 1.5...
I took all references from stockhive.com.
Please let me know your thoughts. thanks.
Hi Ven,
Thanks for pointing to Stockhive site. Very nice site, indeed.
Without knowing what kind of current assets these are, it is difficult to asses its true value.
Increasing current accounts is a BAD sign and usually RED flag, unless of course the increase is in cash and cash equivalents.
Let's look at 2 major components of current accounts: Inventory and Accounts Receivable.
(1) Inventory for a cable manufacturer will be worthless if the technology has changed / customer specs have changed. I am not saying this is the case with Paramount - I don't know - I am just pointing out the possibility and the need to dig deeper.
Efficient companies manage with less inventory each year for a given sales number. Paramount sales have barely increased from last year so I don't see a reason for increase in inventory.
2) Increase in accounts receivables
This indicates that the company is not able to collect its dues from customers in time. Not good.
===
Above questions could be better answered with a look at Annual Report.
Just to recap, Paramount is quite far from being a value and definitely not a deep value.
Regards,
Ravi
Cheviot is certainly deep in the money but appears more like a cigar puff investment rather than a long term value investment.
Risk in owning this business:
1. Jute bags and hessian cloth face increasing competition from chemically manufactured substitutes - polyurethene i think.
2. Export dependence implies dependence on dollar exchange rate.
3. Labor strikes are not one-off events in Bengal but have recurred several times over the past 5 yrs and there's no predicting when the next one will occur.
4. Lack of complete transparency in financials (historical annual reports) although company has been around for 100 years.
Statistical pitfalls
1. The business can be valued either from its balance sheet or free cash flows to owners but not both since that may amount to double counting. For example although land held is large, they use it to produce jute. So if land is sold the owner foregoes future cash flows that would have been generated from this asset.
2. Balance sheet valuation leads me to believe its worth about 150 crores for shareholders from net current assets and land. Current market cap = 118 crores. So its in the money here.
3. From an operational perspective the company generates about 20 crores per year in cash flows but reinvests 8 crores in fixed assets (check cash flow statement) leaving 12 crores in free cash flows for the owners. Fair valuation of future cash flow is about 140 crores as well.
I don't see either as that much of a deep value unless we have reason to believe that free cash flows will increase over time. The bigger issue is about its long term operating potential.
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