Tag Archives: Asset Based Investing

Funeral Industry Case Studies

Getting rid of a delusion makes us wiser than getting hold of a truth. –Ludwig Borne

Funeral Industry

We can always learn in any situation like a family death about an industry such as funeral homes or the death-care industry.  Interestingly, bankruptcy statistics show the lowest failure rates for small businesses in the funeral industry. Funeral homes typically have high fixed costs like 24-hour call service and staff, hearses, showrooms, vaults, and embalming rooms yet low failure rates. Perhaps funeral homes act as local monopolies–they have local economies of scale. Many funeral homes are family-owned and passed from generation to generation. One of the firms I spoke to as been in business at that location for 80 years.

What should strike you as an investor is that there is strong stability in the asset and earnings power value of funeral homes–hence the business longevity and low failure rates.  I quickly found out the power of their local monopoly through my battle to obtain the lowest prices for a funeral service. After all, I am a bargain hunter to the core. What was so bad about going “Dutch” on my honeymoon?

I asked why the prices were so high to move the deceased. The funeral director asked where the deceased was currently located. In my car trunk right here in your parking lot, I replied.  I was quickly informed that one needed a license and death certificate to transport a body. Beyond fifty miles, I needed a refrigerated container. There went my chance to shop around.

The Loewen Group, Inc. and Service Corporation International Case Studies

I placed two case studies on the funeral industry:

The Loewen Group Inc. (Dec. 2000): An industry roll-up and the perils of debt to finance growth.

Service Corporation International (July 1996): How to manage a high growth company in a low-growth industry.

Though we will soon go over Chapter 6: The Dilemma of Growth in Competition Demystified by Bruce Greenwald, these cases can act as a supplement to studying economies of scale and corporate finance. I will send the key to the folder to anyone who has already asked for a key to strategic logic case studies. If you do not have a key by this evening or you are new to this blog, you can email me at aldridge56@aol.com with just FUNERAL HOMES in the subject heading, and you will receive a key.

Death is part of life. The goal is to live and learn fully. See the advice my Papa gave me:http://www.youtube.com/watch?v=AloNERbBXcc&feature=related

Thanks Papa!

QUIZ. Good Learning Resources: Net Nets, Liquidations and Special Situations

Net/Nets, Liquidations and Special Situations

I have a large library on special situation investing and eventually all will be posted or in the value vault. However………

The near-term focus of this blog will be strategic logic and valuation, but I want  investors who are starting their journey to have access to resources for asset-based (non-franchise) investing.

You can learn how to invest just as if you were analyzing a company. Start with the balance sheet and work down from simple to complex.  Cash is a more solid asset than a tax asset, for example.

But as you read the following resources always be thinking as a business person. Ask what is the economic reality of this asset or liability.


Can YOU name a fixed asset on a balance sheet that really is economically the same as a current asset, almost as liquid as cash?  Conversely, can you name a situation where a current asset is less liquid than a typical fixed asset?   Hint: Marty Whitman of Third Avenue Value Fund has preached this lesson often. (see links below).

Please take no more than 20 seconds to answer the first question. Prize: A tip from Jim Cramer on CNBC. C’mon, you can’t expect to win much on such a simple quiz!

This document has several excerpts from Graham, Klarman and Whitman on liquidation values.  A good primer on liquidation analysis.


If you are going to pursue asset-based investing then you need to study Marty Whitman. Read his first book (not a breezy read, though)


And his shareholder letters: http://www.thirdavenuefunds.com/ta/shareholder-letters-mf.asp

If you are a shareholder or a student you can call his office and ask for his book of shareholder letters: 1990 to 2005.  Highly recommended.

Marty Whitman on value and corporate governance

You can learn from blogs that focus on this type of investing.

My favorites: www.greenbackd.com (excellent. If you read all his posts and analyze past investment ideas you will have a solid grounding in net/nets.)

For podcasts on investing and net/nets from a self-taught investor: www.gannononinvesting.com

Also: http://www.manualofideas.com/blog/



Another good overall resource:


A reader kindly offered to share his resources here: http://motiwalacapital.com/blog/

And he suggested viewing these videos and materials: http://www.bengrahaminvesting.ca/resources/videos.htm

You are on your way………….

Valuing Assets: Hudson General Valuation Case Study

When you look at a business, glance at the financial summary to gain a feel for the financial characteristics of the business, then go to the balance sheet. Or you can start with the balance sheet. Wall Street analysts often spend too much time on the income statement without looking at quantity and QUALITY of the assets that generate the income and cash flow.

Below is the link to the 1997 10-K of Hudson General Company.  Try to value this business and show your work.


If you struggle, you can go to the book: Value Investing from Graham to Buffett and Beyond by Bruce C. N. Greenwald and read Chapter 4 starting on page 51.

The complete analysis will be posted in a few days.

June 4, 2012: Here is the analysis. (DON’T CHEAT. Try on your own first)

Hudson General Case Study_Read this Second

Valuing Hudson General and Analysis

Good luck

WSJ: Home Forecast Calls for Pain

Thoughts on SEARCH STRATEGY.  Where to find ideas.

I will paraphrase John Templeton, “Go where the outlook is the worst.”

“Hit’em where they ain’t” –Yogi Berra

The headline today in the Wall Street Journal shows one area of pain–the housing market. From the Wall Street Journal (Sept. 21, 2011) “Home prices are expected to drop 2.5% this year and rise just 1.1% annually through 2015, according to a recent survey more than 100 economists to be released Wednesday.”

Anytime you have many of the 100 economists bearish on an industry, there is usually light at the end of the tunnel. Despite all the interference from the Federal government in housing through Freddie and Fannie, bank lending practices, etc. the market is doing its job of shutting off building due to the oversupply of homes built during the housing bubble of 2002 to 2006.

If you click on the commentary on the recent housing data below, you will notice the overbuilding in the 2005 and 2006 is being corrected severely for the past few years as building is at 1/3 the boom-time levels.  Mal-investment is being cleared and resources are leaving the housing market to be better applied elsewhere.


The longer housing starts remain at low levels, in fact, the higher the probability that the market will go into a shortage situation, since the rate of family formations is running above the current level of starts. There are plenty of charts and data on housing here: http://www.nahb.org/showpage_details.aspx?showpageID=311 and here: http://www.esa.doc.gov/economic-indicators/economic-indicators-6

Note in the chart below comparing XHB (Homebuilders ETF), MDC and TOL, bad news is not driving the prices to new lows. Perhaps bad news is being priced in? The market is a discounting mechanism.


Gensis 41:53:

The seven years of plenteousness ended. Over and above the proportion purchased for the government during the years of plenty, the people could still have husbanded much for future use. But improvident as men commonly are in the time of prosperity, they found themselves in want, and would have starved by thousands had not Joseph anticipated and provided for the protracted calamity.

Since ancient times there have been cycles of plenty and famine. The famine in housing may be nearing an end give or take another 18 months, so I will look at homebuilders with decent balance sheets that I can buy at or below their clean book values (low goodwill).

I will start with MDC Holdings (MDC).  This company has no competitive advantage, therefore paying a premium to its asset value would leave no margin of safety.

This post is to introduce you to a search strategy–where and how to look. This is NOT a suggestion for YOU to run out and buy homebuilders’ equities at random.

But certainly, this area is one place I might look for a small portion of my portfolio.  I think world-class companies like Novartis (NVS) or Applied Materials (AMAT) today seem more compelling than asset plays since these are franchises (consistently over a business cycle earn high returns on invested capital) with little or no growth priced into their stock prices.

Have a good day.