Tag Archives: Case Study

Part 1: Analyzing a Gold Mining Company–Where to Start?

Idaho_Gold_Minegold mine 2

Gold mine 3gold mine

 

 

 

Assignment: Analyze and value a gold mining company

Mario Gabelli once suggested to a group of Columbia MBA students to become an expert in an industry. The process will take at least six months of intensive reading and research to get to a level of what you need to know and what you can ignore. Then in a year or so move on to another industry. After five or six years you will have competency in five to six different industries.   Since investing is all about context, we first need to learn about the gold (precious-metals) mining industry.

Whether you will analyze a gold mining company, a shipping firm, a title insurance business or a media company, you will need to develop an understanding of the industry within which your firm operates.

Since we do not have six months to study, we will move at an accelerated pace.

OK, so what do you need to start with and how would you begin?  Pretend that you wanted to build a mining company from scratch, how would you do it? If you were airdropped into Northern Pakistan, what would you first need after hitting the ground?

Friday, I will post my suggestions and information sources. Meanwhile, you can think and search for yourself. Eventually, we will move on to the particular company.   Don’t hesitate to post questions if you are unclear or my instructions are incomprehensible.

Good luck!

Buy, Sell or Hold? Schiller Free Finance Course

Truck Photo

Arkansas Best Trucking

Annual 2012 Ark Best

Investor_Presentation_05-14-2013

2013_Proxy

big

Buy, Sell, or Hold?  Why? Is this a good business? Can costs be passed through to customers?  Is growth profitable?

Wrong answers will result in: http://youtu.be/6eXFxttxeaA

Free On-Line Finance Course from a Nobel Prize Winner:  http://oyc.yale.edu/economics/econ-252-11#sessions

Wmt vs. Cost Analysis; A History of Debt and Gold in Charts

Professor

Back to School!

The key is not to predict the future but to be prepared for it.–Pericles

Wal-Mart vs. Costco

Data         WMT      Cost Difference
Supercenters 3158 448
Discount Stores 561 0
Sam’s Clubs 620 0
Neighborhood Mkts 266 0
Foreign Stores 6,148 174
    10,753 622 17.3 times
Employees 2,200,000 147,000  14.97 times
Stock Keeping Units (SKUs) 70,000 3,600  19.4 times
Revs. ($bil.) 495 107       4.63 times
Return on Tot. Cap (VL) 15% 13% 2%
Ret. On Equity (VL) 22% 14.50% 7.50%
Gross Profit Margin 24% 10% 140%
Oper. Income/Margin 5.90% 2.85% 100%
Sales per square foot 437 976 110%
Book Value $25 $25 0%
Price Aug. 2 $78.55 $119.10
P/BV 3.1 4.8 55%
Debt 37000 4800
Equity 82,500 13,825
Debt to Equity 45% 35%
Est. Growth
     Sales 6.50% 8.50%
     Earnings 9% 11%

cost vs wmt

sm cost vs wmt

Comparing

I think when you compare numbers, what strikes you is the difference in # of SKUs between retailers. WMT’s business model is much more labor intensive coupled with a lower-income customer. The squeeze on the middle class has crimped WMT.  You would think with WMT’s higher ROC and ROE compared to COST’s that WMT would not be lagging CostCo’s in share price performance but remember that COST is growing faster above its cost of capital and has more room to grow than behemoth, Wal-Mart. In other words, CostCo can redeploy more of its capital at higher rates than WMT can (grow its profits faster).

That said, the market knows this and has handicapped Costco with a higher price to book and P/E ratio than WMT’s. As an individual investor, your time might be better spent looking at smaller, more unknown companies to find mis-valuation. Also, when a company gets as big as WMT (1/2 TRILLION $ in sales), the law of large numbers sets in and the company becomes a magnet for social engineering and protest. But if you had to have me choose what company to own over the next ten years, I would choose COST because its moat is stronger (greater customer captivity) shown by its huge inventory turns/high sales per square foot plus greater PROFITABLE growth opportunities.  However, I do see WMT becoming more focused rather than expanding overseas where their local economies of scale are lessened.

My analysis is cursory, but for those that picked out the main differences, you have a better grasp of whether WMT can raise its employees’ wages to the level of Costco’s. It can not unless it reduces its SKUs and employees.

More analysis from others:

Why Wal-Mart Will Never Pay Like CostcoBloomberg writer Megan McArdle hits the nail on the head with her analysis of the situation in Why Wal-Mart Will Never Pay Like Costco.Wal-Mart is trying to move into Washington, a move that said local housing blog has not enthusiastically supported. Hence, we’ve been treated to a lot of impassioned reheatings of that old standby: “Costco shows it’s possible” for Wal-Mart to pay much higher wages. The addition of Trader Joe’s and QuikTrip is moderately novel, but basically it’s the same argument: Costco/Trader Joe’s/QuikTrip pays higher wages than Wal-Mart; C/TJ/QT have not gone out of business; ergo, Wal-Mart could pay the same wages that they do, and still prosper.Obviously at some level, this is a true but trivial insight: Wal-Mart could pay a cent more an hour without going out of business. But is it true in the way that it’s meant — that Wal-Mart could increase its wages by 50 percent and still prosper?Upper-middle-class people who live in urban areas — which is to say, the sort of people who tend to write about the wage differential between the two stores — tend to think of them as close substitutes, because they’re both giant stores where you occasionally go to buy something more cheaply than you can in a neighborhood grocery or hardware store. However, for most of Wal-Mart’s customer base, that’s where the resemblance ends. Costco really is a store where affluent, high-socioeconomic status households occasionally buy huge quantities of goods on the cheap: That’s Costco’s business strategy (which is why its stores are pretty much found in affluent near-in suburbs). Wal-Mart, however, is mostly a store where low-income people do their everyday shopping.

As it happens, that matters a lot.  Costco has a tiny number of SKUs in a huge store — and consequently, has half as many employees per square foot of store. Their model is less labor intensive, which is to say, it has higher labor productivity. Which makes it unsurprising that they pay their employees more.

But what about QuikTrip and Trader Joe’s? I’m going to leave QuikTrip out of it, for two reasons: first, because they’re a private company without that much data, and second, because I’m not so sure about that statistic. QuikTrip’s website indicates a starting salary for a part-time clerk in Atlanta of $8.50 an hour, which is not all that different from what Wal-Mart pays its workforce.

Trader Joe’s is also private, but we do know some stuff about it, like its revenue per-square foot (about $1,750, or 75 percent higher than Wal-Mart’s), the number of SKUs it carries (about 4,000, or the same as Costco, with 80 percent of its products being private label Trader Joe’s brand), and its demographics (college-educated, affluent, and older). “Within a 15–minute driving radius of a potential site,” one expert told a forlorn Savannah journalist, “there must be at least 36,000 people with four–year college degrees who have a median age of 44 and earn a combined household income of $64K a year.” Costco is similar, but with an even higher household income — the average Costco household makes more than $80,000 a year.

In other words, Trader Joe’s and Costco are the specialty grocer and warehouse club for an affluent, educated college demographic. They woo this crowd with a stripped-down array of high quality stock-keeping units, and high-quality customer service. The high wages produce the high levels of customer service, and the small number of products are what allow them to pay the high wages. Fewer products to handle (and restock) lowers the labor intensity of your operation. In the case of Trader Joe’s, it also dramatically decreases the amount of space you need for your supermarket … which in turn is why their revenue per square foot is so high. (Costco solves this problem by leaving the stuff on pallets, so that you can be your own stockboy).

Wal-Mart’s customers expect a very broad array of goods, because they’re a department store, not a specialty retailer; lots of people rely on Wal-Mart for their regular weekly shopping. The retailer has tried to cut the number of SKUs it carries, but ended up having to put them back, because it cost them in complaints, and sales. That means more labor, and lower profits per square foot. It also means that when you ask a clerk where something is, he’s likely to have no idea, because no person could master 108,000 SKUs. Even if Wal-Mart did pay a higher wage, you wouldn’t get the kind of easy, effortless service that you do at Trader Joe’s because the business models are just too different. If your business model inherently requires a lot of low-skill labor, efficiency wages don’t necessarily make financial sense.

If you want Wal-Mart to have a labor force like Trader Joe’s and Costco, you probably want them to have a business model like Trader Joe’s and Costco — which is to say that you want them to have a customer demographic like Trader Joe’s and Costco. Obviously if you belong to that demographic — which is to say, if you’re a policy analyst, or a magazine writer — then this sounds like a splendid idea. To Wal-Mart’s actual customer base, however, it might sound like “take your business somewhere else.”
Read more at http://globaleconomicanalysis.blogspot.com/2013/08/wal-mart-is-not-costco-so-why-should-it.html#s5mT9QlDRl4fqLdG.99

 

From www.Morningstar.com

Concentrating on fewer stock-keeping units generates buying power for Costco on par with, or perhaps even greater than, larger mass merchants. At first glance, excluding gasoline, at about $60 billion in U.S. sales Costco seems at a scale disadvantage against Wal-Mart’s WMT $265 billion domestic purchasing power. However, Costco concentrates its merchandise purchases on 3,300-3,800 active SKUs per warehouse, compared with the average 50,000-75,000 SKUs at a Wal-Mart superstore. As an illustration, if we assume a straight average, that calculates to more than $16 million in sales per SKU at Costco compared with just over $3.5 million-$5 million per SKU at Wal-Mart. Moreover, the company limits its buys to only specific, faster-selling items. Costco turns its inventories in less than 30 days. This variable cost parity with larger mass merchants, along with the little or zero mark-up requirement of its membership business model, produces price leadership for Costco on the products it chooses to sell.

Note sales per square foot: http://www.wikinvest.com/stock/Costco_Wholesale_(COST)/Data/Sales_per_sq._ft

Unlike its big-box peers, Costco’s international operations generate returns above its cost of capital. The company owns about 80% of its properties, operates its business at an EBIT margin below 3%, and is at the earlier stages of international expansion but still generates on average 12% returns on invested capital because of its low fixed asset base. In its fiscal 2012 year, just 439 domestic warehouses generated roughly $60 billion in revenue (excluding fuel). That calculates to $135 million in sales per unit, or $960 per square feet, which we estimate is about 2.3 times higher than Wal-Mart supercenters. That powerful unit model also works in international markets, where sales productivity levels remain high at $900 per square feet. As result, despite likely lacking logistical scale, returns on net assets for operations outside of North America are roughly 12%, above the company’s cost of capital. This is in contrast to the 6%-7% RONA range for Wal-Mart’s international operations over the past decade.
Economic Moat 05/09/13

We assign Costco a narrow economic moat. We base this on its business model’s loss-leader capabilities and ever-increasing buying power. Membership fees are the main driver of operating profits, so Costco has the ability to sell virtually any consumer product at wholesale rather than retail prices. This makes it very difficult for other retail concepts to compete with Costco on price. Moreover, its price leadership position is reinforced because the company concentrates its merchandise buys on much fewer and faster-turning SKUs, which generates disproportionate purchasing power for its size. Additionally, the company does not advertise and its austere warehouse format requires much lower maintenance capital expenditures. Therefore, the membership wholesale business model has a sustained cost advantage versus other retail operators that sell the same product categories.

Costco WalMart Case   The document to read

COSTCO_Why Good Jobs Are Good for Retailers_ZTon

WMT Annual Report 2013  and Costco 2012 Annual Report (7)

 

For those who feel they DESERVE a prize simply email me at aldridge56@aol.com with PRIZE in the subject heading.

Gold, Debt and History

Gold-Bull-Debt-Bear-in-50-Charts-by-Incrementum-Liechtenstein

Note page 10, the Stock to flow ratio for gold is 65 years compared to about a year for both oil and copper. Gold is money.

Pages 60 to 61, how Austrian Economics is applied.

Notes: I hope to post my rough draft of the CSInvesting Analysis Handbook by the end of the week.  I have a book recommendation coming…….

 

Case Study on Buffett’s Purchase of The Washington Post

The-Washington-Post-logo

Buffett began acquiring shares of the  Washington Post in early 1973, and by the end of the year held over 10 percent of the non-controlling “B” shares. After multiple meetings with Katherine Graham (the company’s Chairman and CEO), he joined the Post’s board in the fall of 1974.

According to Buffett’s 1984 speech The Superinvestors of Graham-and-Doddsville, in 1973, Mr. Market was offering to sell the Post for $80 million. Buffett also mentioned that you could have “…sold the (Post’s) assets to any one of ten buyers for not less than $400 million, probably appreciably more.” How did Buffett come to this value? What assumptions did he make when looking at the future of the company? Note: All numbers and details in this article are from the 1971 and 1972 annual reports and “Buffett: The Making of an American Capitalist” by Roger Lowenstein.

ANALYSIS

The purpose of this exercise is to reverse engineer Buffett’s analysis of the Washington Post Company—in other words, to construct a reasonable analysis given the facts as of 1973 that will lead us to the same conclusion Buffett arrived at.

READ more………..Washington_Post)Buffett Analysis (Thanks to a reader)

and 1972 Annual Report: Washington_Post)Buffett Analysis

Cisco (CSCO) Case Study; The Lord of Dark Matter

SLAP

Next the statesmen will invent cheap lies, putting the blame upon the nation that is attacked (Syria), and every man will be glad of those conscience-soothing falsities, and will diligently study them, and refuse to examine any refutation of them; and thus he will by and by convince himself that the war is just, and will thank God for the better sleep he enjoys after this process of grotesque self-deception.” –Mark Twain

“When the rich make war, it is the poor that die.”–Jean-Paul Sartre

Case Study of Cisco:

CSCO Chart

Case Study on Cisco Third Quarterly Earnings  (includes 2012 for comparison purposes).  Instructions and questions in the document.

CSCO_VL   (for reference) CSCO March 2013 Qtr Report

Please explain what you see.

The Lord of Dark Matter

Fleckenstein:  “Probably anyone who listens to your wonderful interviews already understands that money printing can’t solve anything … Most recently the housing bubble led to the collapse in 2008/2009, and now we’ve got QE of biblical proportions being foisted upon us by the Fed, BOJ (Bank of Japan), Swiss National Bank, and probably the BOE (Bank of England) soon, etc.

The irony of it all is that 5 years into zero rates, and America alone (with) $5 or $6 trillion of deficit spending, the economy is still crummy.  No one ever says, ‘Why is that?’  Well, the reason is because money printing doesn’t work.”

….Everybody and his brother is bearish.  I get sent two articles a day about some knucklehead who’s bearish on gold.  Well, you know what?  They are all bearish for the same two reasons:  The chart looks bad, and the price is wrong.  Like they know what the price (should be).  How do any of us know what the price is supposed to be?  It’s just a price.

Click the link below to hear the twelve-minute interview:

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/6/6_Bill_Fleckenstein.html

HUI CHART

Serial Bubbles: 

http://www.zerohedge.com/news/2013-06-06/why-serial-asset-bubbles-are-now-new-normal

 

P.S. I have been a bit swamped with work, so I will post next week. Be well and BE CAREFUL!

 

 

Apple (AAPL) 100 to 1 in the Stock Market

Apple

After buying Apple during the depths of the Tech Bubble Bust in 2003 around $6.94, I recently had to sell about ten years later around $700 for a compound annual return over 10 years of 58.5%. Eat your heart out Munger, Buffett, Soros, Graham, Tudor Jones, etc., etc.

And now what? 

Ok, Ok, I live in fantasy.  A friend recently said that he wished he had sold his Apple after buying it last year. Coulda, shoulda, woulda doesn’t advance your skills as an investor. What can we learn A Priori (before the fact) to help us as investors in finding and or managing our investments?  What lessons can be gleaned from Apple’s history? In Part 2: We will begin to prepare our case study file on Apple.

HP and Potential Growth Capex Case Study

The intrinsic value of a company lies entirely in its future–Warren Buffett

All intelligent investing is value investing–acquiring more than you are paying for. You must value the business in order to value the stock.–Charlie Munger

In the old legend the wise men finally boiled down the history of mortal affairs in the single phrase, “This too will pass.” Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, “margin of safety.” – Benjamin Graham

Potential Case Study on Growth Capex: HP

HP paid about $13 billion in 2008 and now announces a 62 percent write-off of its “growth capex” with this $8 billion dollar write-down of acquired Electronic Data Systems (EDS) Goodwill.  Are there any lessons here? Note the graph of EDS operating profit below.

http://hothardware.com/News/HP-Announces-8B-Writeoff-This-Quarter-As-Unit-Fails-To-Meet-Expectations/

History of EDS: http://en.wikipedia.org/wiki/Electronic_Data_Systems

Compare technology company acquisitions: http://technology-acquisitions.findthedata.org/

Note 5: Acquisitions (HP 2008 8-K) on Price Paid for EDS

Acquisition of Electronic Data Systems Corporation (“EDS”)

As previously disclosed in its Consolidated Financial Statements for the fiscal year ended October 31, 2008, on August 26, 2008, HP completed its acquisition of EDS. The purchase price for EDS was $13.0 billion, comprised of $12.7 billion cash paid for outstanding common stock, $328 million for the estimated fair value of stock options and restricted stock units assumed, and $36 million for direct transaction costs. Of the total purchase price, a preliminary estimate of $10.5 billion has been allocated to goodwill, $4.5 billion has been allocated to amortizable intangible assets acquired and $2.0 billion has been allocated to net tangible liabilities assumed in connection with the acquisition. HP also expensed $30 million for IPR&D charges.

The merger proxy from 2008 is here:HP Merger with EDS Financial Statements

HP did not pay a low price as you can see from the EDS financial statements above. Acquisitions of different businesses are fraught with peril: integration issues, CEO hubris, size over profits, and buying during the peak of the market (mid-to-late 2007).

I post this as a reminder to return and look more deeply into any lessons I can take away from this transaction.  Time, alas, is too short these days to stop and dig in.

Added 5 PM: Differing Opinions in 2008 on the merger

http://seekingalpha.com/article/77186-hp-s-eds-purchase-will-spur-tech-m-a

Hewlett-Packard Co.’s (HPQ) $13.9 billion purchase of IT outsourcer Electronic Data Systems Corp. (EDS) will likely shake up the sluggish high-tech M&A climate on many fronts, establishing HP as a successful acquirer of multibillion dollar businesses that could eventually pursue other large targets, while potentially spurring rival IBM Corp. (IBM) to explore purchases to solidify its shrinking lead in IT services.

As the largest high-tech acquisition so far this year, HP’s $25-per-share purchase of Plano, Texas-based EDS may also wake up other high-tech companies to the compelling values to be had now that stock prices are low, analysts said.

“In a recessionary climate, the reality is that many of these properties are pretty cheap,” said Rob Enderle, principal analyst at Enderle Group in San Jose, Calif. Enderle said larger acquisitions that emphasize acquiring people become particularly attractive in a weak economy, because a soft job market makes it more likely the target’s employees would stay, minimizing one key integration challenge.

HP’s $25 per share purchase price represents a 32.9% premium EDS’ share price on May 9, but it is still considerably cheaper than EDS’ market capitalization over much of the past year, and significantly below EDS’ 52-week high of $29.13 per share. Coming on the heels of Microsoft Corp.’s (MSFT) abandoned $47.5 billion bid for Yahoo! Inc. (YHOO), this message about the values in the high-tech sector resonates.

Opinion: HP’s acquisition of EDS leaves questions unanswered

http://www.computerweekly.com/opinion/Opinion-HPs-acquisition-of-EDS-leaves-questions-unanswered

Although Hewlett-Packard’s acquisition of EDS was expected, the premium that HP paid was unexpected, and potentially unwarranted, given EDS’s recent track-record and a depressed outsourcing market. This sentiment was reflected in the market’s reaction, which wiped £8bn off HP’s capitalisation – more the than £7bn HP paid for EDS. Not an auspicious start.

One major concern now has to be that HP has enjoyed great growth through non-exclusive partnering with rivals worldwide to secure business. Such partnering will now essentially come to a halt or be severely constrained. This comes on top of the huge and immediate task of integrating two very different business cultures. HP’s young and energetic “cut and thrust” team is now under the control of EDS chairman, president and chief executive officer, Ronald A. Rittenmeyer. This does not bode well for transferring staff, as EDS is far more formal, structured business.

HP’s “cheque-book funding” will allow EDS to tender for more US and UK government work where balance sheet considerations play an important part in the larger deal constructs. However, EDS’s margins are far lower than HP’s – group CEO, Mark Hurd, will demand better ratios in line with investment community demands and that HP has, up to now, a record of achieving.

Neither HP nor EDS has a serious business consultancy arm, and EDS squandered the talents of AT Kearney before selling it several years ago. The new company offers “customers the broadest, most competitive portfolio of products and services in the industry,” says Mark Hurd. Perhaps he forgets that clients favour multi-sourcing precisely to gain specialist skills and, importantly, innovation. Being the number two outsourcer by revenue globally will not help sustain this position if serious business consultancy is lacking. Is there another plan afoot to mitigate this structural and strategic short-fall? Given the decision delays in securing the EDS deal, I suspect not.

Infrastructure consolidation, virtualisation and greening is a big boys’ “scale is everything” game and one for those with deep pockets too. The new HP can win huge revenues in this end of the market, however it will be at the expense of profitability.

It was therefore hugely significant to note that no mention has been made of “deal synergies”. With a combined total of 210,000 staff, one would have expected 20% to be saved almost immediately. Integration of technologies would normally be expected too. This usually results in 10% in immediate savings, which could increase to 15% over time. Increased buying power would add 2% to 8% depending on the product or service being bought. None of this has been mentioned.

All of these savings should run to hundreds of millions of pounds. You only get one chance to impress clients, analysts, intermediaries and, most importantly, the market-makers and institutional investors.

The time to have captured the market’s mood and imagination was at the announcement, it has now passed Hurd by. Only results will count now.

This deal is likely to be the catalyst for additional outsourcing consolidation with Atos Origin, CapGemini and even CSC. Will the cash-rich Indian offshored services providers finally make a move? These are truly perplexing times for new and existing clients of outsourcing.

By Robert Morgan, director of Hamilton Bailey

 

CASE STUDY of Perception vs. Reality (Old Republic Insurance, “ORI”)

Perception vs. Reality

Old Republic (ORI) pulled their spin-off and looked what happened

What changed? I would advise you to listen to the current conference call: http://ir.oldrepublic.com/phoenix.zhtml?p=irol-eventDetails&c=80148&eventID=4797341 which will be available until July 3, 2012. It is a classic of how analysts view the stock price and the owner/operator/management views the reality of their business.  Old Republic (“ORI”) announced a spin-off of their money-losing Mortgage Guaranty Insurance business (“MGI”) but then on Friday decided not to go through with the spin-off for various reasons.

As you can see above in the short-term chart of ORI, the stock moved up upon announcement of the spin-off and the price neared $11 before plunging to below the pre-announcement price.

No matter what your assessment of intrinsic value was or is now, the mathematics of future cash flows has never changed. Actual risk hasn’t changed, but the PERCEPTION of risk has. If you read through the conference call transcript, you will see that several analysts/investors do not understand how run-off insurance operates. Run-off means that no new insurance is underwritten while claims of the old (past) insurance are paid down from stated reserves.  ORI will pay claims initially at 50 cents on the dollar as per the orders of their insurance regulators.

Ironically, management (Aldo Zucaro – Chairman of the Board, Chief Executive Officer) bought shares last month around $9 to $10 per share probably never guessing that shareholders would respond to the announcement as they did. Note his exasperation in having to repeat over and over that the economics of the business have not changed. Note the gap between perception and reality. I have highlighted certain passages of the transcript for emphasis. Markets are efficient?

See the case study here:

Case Study of reality vs perception for Property Insurer Old Republic_

Review of Old Republic here: ORI_VL, ORI_May 2012, 1Q12 FINAL Financial Supplement, and ORI_Morn_Spin

Mortgage Indemnity Business in Run-Off

Details of Old Republic’s Mortgage Guaranty and Consumer Credit Indemnity Businesses renamed Republic Financial Indemnity Group, Inc. (RFIG). This will help you understand ORI’s deferred payment obligation (“DPO”) for the run-off of its MGI business.  The DPO keeps the Mortgage Indemnity Insurance unit SOLVENT via the orders of the insurance regulators and in terms of STATUTORY ACCOUNTING.

The Statutory Accounting Principles are a set of accounting rules for insurance companies set forth by the National Association of Insurance Commissioners. They are used to prepare the statutory financial statements of insurance companies. With minor state-by-state variations, they are the basis for state regulation of insurance company solvency throughout the United States.

You will then understand the lack of risk to the rest of Old Republic. Statutory accounting is the reality not GAAP. financial_supp_stat_exhibit_032112 and the Press Release of Old Republic’s Partial Leveraged Buyout and planned spin-off of its RFIG subsidiary’s stock to ORI shareholders: may_21_2012_ori_press_release

Some say the market is efficient. What do YOU think? Who are the sellers?

Post Script: I am backed up this week so I might be light on the posting. Be well and keep learning every day.

UPDATE 1#

Moody’s lowers debt ratings on Old Republic

NEW YORK (AP) — Moody’s Investors Service on Wednesday lowered its senior unsecured debt ratings for Old Republic International Corp., citing the company’s decision to withdraw plans to spin off a subsidiary.

The Chicago-based insurance underwriter announced last week it changed plans to spin off Republic Financial Indemnity Group Inc. The move came after stakeholders raised concerns that the spinoff would not be in their benefit.

The reversal prompted Moody’s to downgrade Old Republic’s senior unsecured debt ratings one notch to “Baa3″ from “Baa2.” That’s the lowest possible investment-grade rating on Moody’s scale.

The ratings firm also lowered the insurance financial strength ratings of Old Republic subsidiaries Old Republic General and Old Republic Title by one notch to “A2″ from “A1.”

Moody’s has a negative outlook on the ratings for Old Republic and its principal subsidiaries, which means there’s a 40 percent chance that the ratings could be lowered in the next 18 months.

The ratings firm said its outlook reflects continued risk of liquidity strain at Old Republic International, should regulators find that capital levels its subsidiary, Republic Mortgage Insurance Co., falls short of requirements, triggering an early redemption of the parent company’s senior notes.

Moody’s believes liquidity options exist in such a scenario but said such an event would still place pressure on Old Republic International.

“The intended spinoff would have helped protect Old Republic’s bondholders and insurance policyholders from further deterioration at the troubled mortgage insurance operation,” Moody’s analyst Paul Bauer said.

The risk of financial strain at Old Republic International could strain its subsidiaries’ financial flexibility, Moody’s noted.

Moody’s affirmed Old Republic subsidiary Manufacturers Alliance Insurance Co.’s insurance financial strength rating of “A3.”

It also maintained an “A3″ rating on Pennsylvania Manufacturers’ Association Insurance Co. and Pennsylvania Manufacturers Indemnity Co.

Old Republic shares ended regular trading down 4 cents at $8.29. The stock added 5 cents to $8.34 after hours.

Liquidity fears ebb at Old Republic

By Jochelle Mendonca and Sharanya Hrishikesh

(Reuters) – Old Republic International reassured investors that scrapping plans to spin off its money-losing mortgage insurance business would not lead to a liquidity crisis as regulators were unlikely to seize the unit.

The insurer had planned to separate the unit and had even entered into a deal to sell a fifth of the business in a leveraged buyout but shelved the plan following stakeholders’ objections.

The company’s stakeholders include its regulators, the government-backed Fannie Mae and Freddie Mac and bank customers.

Regulators in North Carolina have already placed the unit under supervision. It is now only allowed to pay claims at 50 cents on the dollar to preserve capital, leading to investor fears that the unit would be seized, triggering a default under the company’s debt covenants.

Old Republic eased those concerns on a conference call to discuss the canceled spinoff.

“We’re comfortable, based on our discussions (with our regulators), that receivership is not in play,” Chief Executive Aldo Zucaro said.

He expressed confidence that the company would be able to either refinance its debt or amend the terms, should a default occur.

Old Republic said the mortgage insurance (MI) unit, which stopped writing new business when its capital levels cratered last year, would continue to lose money for the next two years.

“By (2014), our total loss since 2007 will have been $1.7 billion, versus the total accumulated profit of $1.8 billion booked in the first 26 years … of our mortgage insurance journey,” Zucaro said.

The company said almost all its statutory capital – the standard claims-paying metric – comes from deferred claim payments ordered by regulators. Deferred payments count as a liability under generally accepted accounting principles.

On a reported basis, the company said its mortgage insurance unit has no capital and that it does not have the funds to add to the business.

“To just keep the company solvent, you’d have to come up with $250 million, which we are not committed to doing,” a company executive said.

UNHAPPY INVESTORS

But even as the MI unit’s stakeholders got their way with the scuttled spinoff, many Old Republic shareholders are unhappy at the prospect of being saddled with the business for the foreseeable future.

Investors from hedge funds SAC Capital, Anchor Capital, Divine Capital and others grilled company executives on options for the unit, including voluntarily placing it into receivership.

“Why is it not better to simply spin this out and go out to your bondholders and amend the covenants if necessary or to go in receivership?,” Darius Brawn from SAC Capital asked on the conference call.

Even a sale of the business to investors specializing in run-off situations, where they just manage the existing book till the policies are exhausted, seems unlikely.

“I think the possibility of a runoff (investor) buying a mortgage guarantee business with regulatory approval is remote,” an Old Republic executive said on the call.

The company said it sees no need to amend its debt covenants in advance of a seizure, something shareholders asked it to consider, because it does not believe the default will occur.

“One of our sayings around here is that you don’t just jump off the roof because you’re afraid you’re going to fall off,” CEO Zucaro said.

“We don’t think we’re falling off the roof. So we’re not jumping.”

(Reporting by Jochelle Mendonca and Sharanya Hrishikesh in Bangalore; Editing by Viraj Nair, Anil D’Silva and Supriya Kurane)

 

Barnes & Noble Valuation Case Study

There are opportunities to learn all around us.  The recent announcement of Microsoft’s $300 million investment in the Nook–Barnes & Noble’s eReader provides a reference point for valuation.

Barnes & Noble (BKS) Case Study Materials

BKS and MSFT Agreement 8K April 27 2012 What valuation can you derive from MSFT’s purchase price?

BKS 10Q March 8 2012 The most recent 10-Q. Combine with the 10-K to value BKS on your own.  BKS 10K April 30 2011

The Amazon Letter discusses the Kindle: Amazon Letter to Shareholders 2011

Try to think about how you would value BKS. If you struggle, then look at the case study materials below, then return to the financial statements. Don’t become discouraged.  The research report below isn’t perfect (lacks a full competitive analysis of the different businesses), but the report does do a good job in showing you how the author reached a valuation. You may disagree with the assumptions, but you know what they are.

When you read of a public transaction for a company or part of a company, you have a reference point to test your valuation skills. Good luck!

Valuation of Barnes & Noble

Barnes & Noble Case Study

Chapter 10: Fox Becomes a Network (Into the Henhouse)

In my house there’s this light switch that doesn’t do anything. Every so often I would flick it on and off just to check. Yesterday, I got a call from a woman in Madagascar. She said, “Cut it out.” — Steven Wright

Chapter 10 in Competition Demystified: Into the Hen House

HBR Case Study on Fox News Network: https://rcpt.yousendit.com/1427965236/6c910671770adc188996bd7639688499

QUESTION 1: Describe how the three networks (ABC, NBC, and CBS) played the prisoner’s dilemma game in the 1960s and 1970s in regarding advertising pricing, advertising inventory, purchasing of shows, and hiring of talent.

QUESTION 2: How did Fox influence the other networks’ responses to its efforts to get behind their barriers to enter their market?

QUESTION 3: How effective was Fox’s strategy of having synergistic media business?

The analysis will be posted next Friday. Good luck!

STep Lightly

Have a good weekend and step lightly: http://www.youtube.com/watch?v=spv1a5NMyvw&feature=related