Back with Buffett Case Studies: Dempster Mills and Sanborn Map

“We are what we repeatedly do. Excellence then, is not an act, but a habit.”–Aristotle

My Black Ops Ninja team was able to crack Buffett’s safe in Omaha and bring back these case studies for your enlightenment and study. Mr. Buffett was found passed out on his desk from a Cherry Coke drinking binge.  This video was running on his TV: http://www.youtube.com/watch?v=-0PrTkE5jG4&feature=related  Mr. Buffett is preparing for this weekend’s Buffett Lovefest.

Buffett’s Case Studies:

Dempster Mills

& Sanborn Map

Dempster_Mills_Manufacturing_Case_Study_BPLs What lessons are there here for us to build upon?
 Sanborn_Map_Case_Study_BPLs

8 responses to “Back with Buffett Case Studies: Dempster Mills and Sanborn Map

  1. 1) Evaluate investments opportunistically. It’s ok to sell something with a 20% discount to IV to buy something else with a 30% discount.
    2) Buffett was willing to take a really large position and go activist when necessary. Small investors may not have the luxury of doing this.

  2. Very interesting, John. Geoff Gannon’s website is a great source for discussion of net-nets, and he talks about what it’s like for the small investor.

    Actually, I think the most important sentence in the report is this: “Many times Generals represent a form of “coattail riding” where we feel the dominating stockholder group has plans for the conversion of unprofitable or under-utilized assets to a better use”. You might think that an odd choice of mine.

    It’s interesting because most investors think almost exclusively in terms of buying normal operating businesses, but here Buffett is telling us that he is mostly interested in special situations. It’s a strategy that might be most replicable by a small investor. Coat-tailing activist investors seems like a great idea. I know that in the Uk, for example, Laxey Partners are heavily into activist value onlocking. It’s then a case of searching through regulatory news services, and seeing what positions they hold. Then pull up the accounts. You’ll probably find that there’s a big discount to net assets. This seems quite an interesting aproach, as the discount is usually quite obvious, and you have the advantage that the activist has done way more due diligence than anyone else, plus you know that they’ll be actively fighting to unlock value.

    • Dear Mcturra2000.

      Good points. An EVEN better website is http://www.greenbackd.com on activist investors in net/nets, cheap assets. Click through some of the old posts.

      Then follow those small hedge funds that are activist. If you combine a VERY cheap price with bad management and an activist you have something worth pursuing.

  3. Pingback: Buffett and the “Generals” category | mcturra2000

  4. Pingback: Notes – Case Study Digest #1 – Sanborn Maps, Dempster Mills, Nintendo’s Rise (#casestudy, #valueinvesting, #buffett, #nintendo) | valueprax

  5. A reader provided a good analysis of Sanborn Map

    For whatever reason, these case studies didn’t generate much discussion. I actually went ahead and answered your study questions. Whenever you get a chance, let me know what you think.

    Sanborn Map

    1. How did WEB find this investment? Not explicitly stated in the case study. Was he searching for low book value companies?
    2. Valuation? He separated the company into (1) the map business and (2) the securities portfolio. He assigned the market value to the securities portfolio. He conservatively calculated the value of the operating business. As the investment portfolio was worth $65/share and the stock was trading at $45, not much valuation work needed to be done.
    3. Unlocking value? As stated above, he unlocked the value in the securities portfolio by getting the majority of the shareholders to accept securities in exchange for their Sanborn shares.
    4. Market pricing? Who knows? I am not a behavioral psychologist. I can only assume that they though the map business was in a slow decline and just ignored the company and didn’t dig into the latent value on the balance sheet.

    Dempster

    1. Search Strategy – Low P/B, Local, Within circle of competence?
    2. Valuation/Intrinsic Value – WEB used liquidation method to value the company. He treated the book value of all the liabilities as real and conservatively discounted all of the assets based on what they would fetch in an orderly wind up of the company (not a fire sale).
    3. Magin of Safety – WEB had 2 levels of margins of safety.
    a. Asset Value – WEB bought for much less than his conservative estimate of what the assets would fetch at auction. WEB stressed that the estimate of FMV was very conservative: “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results. The better sales will be frosting on the cake.” This initial bargain price provided the margin of safety. He bought for 25% of book value.
    b. Control – WEB took a controlling interest so he would have the power to unlock the value of the company on his own

    4. Type of investment: This is clearly a net/net and not a moat. For one thing, it is literally a net/net as WEB bought for less than NCAV. For another, the company had limited profitability, and low ROIC. Further, WEB sates that “(t)he qualitative situation was on the negative side” with a “fairly tough industry.” I see no reason to construe a moat.

    5. Lucky?: WEB was clearly not lucky. He made the bulk of the profit while the market was going down. Second, he made his own luck by taking an activist position and unlocking the value by selling off under-utilized assets.

  6. Dempster Mill:
    His margin of safety was the low price of the purchase compared to book value and the fact that the company was not losing money even though it was not earning much.

    Dempster Mill’s purchase was a typical Benjamin Graham play of buying a
    cigar butt (P/BV 0,25), taking a last puff and selling it. The company did not have any earning power and its return on the invested capital was lousy. Buffett can be considered lucky in this investment because he was not able to make the turnover by himself and if he had not found Harry Bottle to clean it up selling assets, repaying debt and allowing him to invest the turnaround was not possible.

    Graham would have been a control investor leaving the work to others. He would have kept the stock for a couple of years and sold it regardless of profit/loss which would be held through diversification.

    Question: Do we have more information on Harry Bottle modus operandi? I would be interested in reading more about how this “turnaround” occurred. Was it only a for show (selling) or did it actually make the company viable?

  7. I refer to the following statement made in the 1962 letter: “The successful conversion of substantial portions of the assets of Dempster to cash, at virtually 100 cents on the dollar, has been the high point of 1962. For example, inventory of $4.2 million at last yearend will probably be about $1.9 million this yearend, reducing the discount on this item by about $920,000 (40% of $2.3 million reduction).” Can anyone walk through the math with me?

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