Wednesday, September 27, 2006

Exxon, Berkshire, K-Swiss Pass My 15-15 Screen: John Dorfman

Exxon Mobil Corp., Berkshire Hathaway Inc. and K-Swiss Inc. all pass a simple but important test.

Their earnings have been growing at a pace of at least 15 percent annually the past five years. Even so, their shares are inexpensive, selling for less than 15 times the past four quarters' earnings.

To read further: Bloomberg.

It is good to know that John Dorfman likes my recommended shares: Berkshire Hathaway and K-Swiss.

Happy learning,

Dah Hui Lau (David)

Sunday, September 24, 2006

Warren Buffett's car sells for $73,200 on eBay

An eBay bidder bought Warren Buffett's Lincoln Town Car for $73 200 on Friday, almost five times the 2001 vehicle's worth. Along with the car, the winner will get Buffett's "THRIFTY" license plate and an engraved plaque bearing the investor's signature. Buffett also will pick up the winner at the Omaha airport when he or she comes to claim the car.

The winning bid was submitted by "billzanker".

To read the complete article.

Saturday, September 23, 2006

The 400 Richest Americans

This list of 400 richest Americans have been published.

Source: Forbes.

Investing Mistakes

There are great discussions on MSN BRK Shareholders' board on investing mistakes and what to avoid.

Thank you for sharing,

Thursday, September 21, 2006

SmartMoney: What Would Warren Buy?

THESE ARE SCARY TIMES on Wall Street. There's fear of inflation. Fear of Middle East tumult. Fear of slowing economic growth. But savvy investors have a different view: They call it Buffett Time.......

Berkshire Hathaway
......Based on his estimate of profit growth at the various companies in the conglomerate, plus Berkshire's $42 billion cash hoard, Tilson believes the stock is undervalued by 30%. That's what we call a margin of safety.......

......As they have with the other megabanks, investors have dismissed HSBC as stodgy and boring. But Buffett acolytes know that a conservative culture and straightforward style usually lead to lasting returns. "There are no glossy photographs in their annual report," Winters says.....

American Express
.....AmEx also has a wealthier customer base than Visa, MasterCard and Discover, and a virtual lock on the corporate sector. "If you are going to do any business with corporations, you really need to accept the American Express card," says Greenblatt......

.....UPS has been developing its extensive logistics network, which includes every address in the United States, for nearly 100 years, and it's expanding around the world. "It's basically a proxy on global trade," Auxier says......

Scotts Miracle-Gro
.......Scotts's stable of brands is impeccable. Each one is the leader in its category, with a collective market share of more than 50%.........

Mohawk Industries
........A mainstay of Buffett's investment strategy is to buy simple businesses that make things people can easily understand. A prime example is Mohawk Industries, which has a duopoly on the flooring business alongside Buffett holding Shaw Industries........

......Based on 7% to 9% in new-store growth and 1% to 3% in same-store sales, Tilson estimates Wal-Mart can deliver about 10% sales growth over the next five years and 12% annual earnings-per-share growth. Last year Wal-Mart earned $11.2 billion, or $2.68 per share, on sales of $316 billion. At 14 times earnings estimates — near its lowest P/E in a decade — Wal-Mart stock might just be as much of a bargain as its merchandise........

To read the complete article.

Sunday, September 17, 2006

The battle of the billionaires

You don't become a billionaire by making a lot of bad bets. But two of the world's richest men are now on opposite sides of a wager that may see one of them lose a fair chunk of change.

The two men: Warren Buffett, whose mastery of value investing has helped him accumulate more than $40 billion, and Carl Icahn, the corporate raider who has earned more than $8 billion with astute and aggressive stock plays.

To read the complete article.

To follow this discussion on MSN BRK Shareholders' board.

So, who is right?


Saturday, September 16, 2006

My personal view on Dell

A friend of mine asked me recently what do I think of Dell now....and this is my reply...

Regarding Dell, there are so many bad news that come out already. Batteries recalls, SEC subpoena, etc. I would presume that the price that we see now is as depressed as it could be. Most importantly, Dell's moat is still intact. Dell's situation now seems a bit like Geico in the past or American Express with the salad oil scandal. Some similarity. In fact, Dell is much better position and financially stronger in comparison with Geico or American Express. Rationally speaking HP or IBM or Acer could not take away all Dell's market share. Impossible. Plus, Dell now realized that they need to beef up its customer services and thus, invested $150M to do just that. Dell also realized that price is not the only focus by customers and the experience and personalised service. As long as Dell acknowledges its mistakes and improves on them, it would be a very formidable company.

The most important question is whether to invest in Dell or not. The biggest risk is their turnaround take too long. As importantly, as a small investor is may be more profitable to concentrate digging for smaller caps with potentially higher returns. Dell is almost a $50B company and it is very hard to triple in size in comparison with a company with $1B size.

In my opinion, Dell is a good buy for big institutional investors i.e. Mason Hawkins who manages billions of funds. As for private investors, we should search for the next hidden gems. Having said that, I recommended Dell on my blog because I truly believe that it is a market beating company in the next few years. I also want to inform you that I do not own any Dell shares, but my position may change if price plunges! :)

All the best,

Columbia Greenwald Class Lectures.

Recording of Bruce Greenwald's Columbia GSB guest lectures with Michael Price, Glenn Greenberg, Tom Russo and others.

To visit the archive.

Thank you bonechip of MSN BRK Shareholders' board for the excellent link.

Happy learning,

Wednesday, September 13, 2006

Investment success like the masters

George Soros and Warren Buffett are the world's most successful investors. Can ordinary investors learn anything from their investment habits? John McCrone finds out.

To read the complete article.

Happy learning,

Monday, September 11, 2006

The Buckle Inc. (BKE) at $35.10

Step 1: Do you understand The Buckle Inc.’s business?
Incorporated in Nebraska in 1948, the Company commenced business under the name Mills Clothing, Inc., a conventional men's clothing store with only one location. In 1967, a second store, under the trade name Brass Buckle, was purchased. In the early 1970s, the store image changed to that of a jeans store with a wide selection of denims and shirts. The first branch store was opened in Columbus, Nebraska, in 1976. In 1977, the Company began selling young women's apparel as well and opened its first mall store. The Company has experienced significant growth over the past ten years, growing from 164 stores at the start of 1996 to 338 stores by the close of fiscal 2005. The Company changed its corporate name to The Buckle, Inc. on April 23, 1991.

The Buckle, Inc. is a retailer of medium to better−priced casual apparel, footwear and accessories for fashion conscious young men and women. The Company markets a wide selection of mostly brand name casual apparel including denims, other casual bottoms, tops, sportswear, outerwear, accessories and footwear. The Company emphasizes personalized attention to its customers and provides customer services such as free alterations, free gift−wrapping, easy layaways, The Buckle private label credit card and a frequent shopper program.

Most stores are located in regional, high−traffic shopping malls, and this is the Company's strategy for future expansion. All of the Company's central office functions, including purchasing, pricing, advertising and distribution, are controlled from its headquarters and distribution center in Kearney, Nebraska.

Throughout the years many changes have occurred in fashion, retail, and within the company but one constant has driven Buckle’s success…..the mission "to create the most enjoyable shopping experience possible for our guests".

The Company provides merchandise designed to appeal to the fashion conscious 12 to 24−year old. Denim is a significant contributor to total sales (42.7% of fiscal 2005 net sales) and is a key to the Company's merchandising strategy. The percentage of net sales contributed by denim has increased from 36.2% (2003) to 42.7% (2005).

The average store is approximately 4,900 square feet (of which the Company estimates an average of approximately 80% is selling space), and stores range in size from 2,600 square feet to 8,475 square feet.

The top four members of this buying team combined, have over 90 years of experience with the Company. The experience and leadership within the buying team contributes significantly to the Company's success by enabling the buying team to react quickly to changes in fashion and by providing extensive knowledge of sources for branded and private label goods.

As of April 11, 2006, the Company operated 341 stores in 38 states, including 4 stores opened and 1 closed during fiscal 2006. The existing stores are in 4 downtown locations, 11 strip centers, 16 lifestyle centers and 310 shopping malls. The Company anticipates opening approximately 17 new stores in fiscal 2006. For fiscal 2006, nine of the new stores are expected to be located in higher traffic shopping malls and eight of the new stores are expected to be located in lifestyle centers.

As of January 28, 2006, the Company had approximately 6,500 employees − approximately 1,227 of whom were full−time. The Company has an experienced management team and substantially all of the management team, from store managers through senior management, commenced work for the Company on the sales floor. None of the Company's employees are represented by a union.

Step 2: What are the potential risks of owning BKE?
The men's and women's apparel industries are highly competitive with fashion, selection, quality, price, location, store environment and service being the principal competitive factors.

The Company's success is largely dependent upon its ability to gauge the fashion tastes of its customers and to provide merchandise that satisfies customer demand in a timely manner. The Company's failure to anticipate, identify or react appropriately and timely to the changes in fashion trends would reduce the Company's net sales and profitability. Misjudgments or unanticipated fashion changes could have a negative impact on the Company's image with its customers, which would also reduce the Company's net sales and profitability.

Many of the Company's competitors are considerably larger and have substantially greater financial, marketing and other resources than the Company, and there is no assurance that the Company will be able to compete successfully with them in the future. Furthermore, while the Company believes it competes effectively for favorable site locations and lease terms, competition for prime locations within a mall is intense.

The distribution function for all of the Company's stores is handled from a single facility in Kearney, Nebraska. Any significant interruption in the operation of the distribution facility due to natural disasters, system failures or other unforeseen causes would impede the distribution of merchandise to the stores.

Net working Capital (NWC) / Sales has been increasing slowly over the years. Other competitors such as Abercrombie & Fitch (ANF) (11.4%), American Eagle Outfitters (AEOS) (4.4%) and Limited Brands (LTD) (8.3%) have better NWC / Sales.

Year Net Working Capital / Sales (%)
01/06 12.5
01/05 12.2
01/04 12.0
01/03 12.0
01/02 11.7
01/01 10.9
01/00 11.4
01/99 10.8
01/98 10.2
02/97 11.2

Inventory increased by 32% over the last quarter from $68.7M to $90.9M. However, in comparison to 2nd Quarter last year, the inventory level was actually lowered ($100.9M 2nd Qtr 2005).

Step 3: Insider Holdings
Insiders hold significant amount of stocks, approximately 55%. The Chairman and founder’s son, Daniel Hirschfeld, holds 9.4M of shares, which are equivalent to about 48% of the company. Dennis Nelson, who is the Chief Executive Officer, owns approximately 1.79M shares or about 5% of the shares outstanding.

It has been shown that companies with significant insider holdings, especially with the presence of founders, flare better over long term.

Step 4: Is BKE a good Company?
A good company is a company that has high return on invested capital (ROIC) and performs consistently over a long period of time. Looking at BKE, it is an excellent company despite in an extremely competitive industry. Net income compounded at 16% and 8.3% for 9 years (1997 – 2006) and 5 years (2001 – 2006) respectively.

Year Sales (m) Net Income (m)
01/06 501.1 51.91
01/05 470.94 43.23
01/04 422.82 33.68
01/03 401.06 32.08
01/02 387.64 32.64
01/01 393.25 34.8
01/00 375.53 34.03
01/99 337.92 34.03
01/98 267.92 23.33
02/97 206.39 13.62

Return on equity (ROE) and return on asset (ROA) are good.

Year ROE(%) ROA (%)
01/06 17.3 13.9
01/05 13.0 10.7
01/04 11.5 9.5
01/03 12.3 10.1
01/02 14.0 12.3
01/01 17.9 15.1
01/00 22.9 18.8
01/99 23.3 18.3
01/98 21.6 16.1
02/97 17.5 13.4

Net profit margin is impressive with most current one over 10%.

Year Net Profit Margin (%)
01/06 10.4
01/05 9.2
01/04 8.0
01/03 8.0
01/02 8.4
01/01 8.8
01/00 10.0
01/99 10.1
01/98 8.7
02/97 6.0

BKE has solid balance sheet; net cash/equivalent of $123M on April 2006. It is a great cash machine; earning free cash flow of $50.5M (2006), $55.9M (2005) and $37.6M (2004).

Step 5: Is BKE management shareholders-orientated?
Of course BKE management is shareholders-orientated, especially when founder’s son and current Chairman, Daniel Hirschfeld, owns approximately 48% of the company. Dividend payments almost tripled in 2 years from $4.3M (2004) to $11.8M (2006). BKE has also repurchased significant amount of shares last year; totally $82.4M, which is more than 10% of its market capitalisation.

BKE is led by dedicated management; Daniel Hirschfeld has been with the company since 1965 while Dennis Nelson (President and CEO) has been with the company for over 30 years. He began as a part-time salesman while he was a college student and continued full time after graduation. He has helped lead the company to over 300 stores and is actively involved in all phases of the company’s operations. Executive Vice President, Jim Shada has been with the company 25 years. Kari Smith, Vice-President of Sales, has been with the company for 25 years.

Step 6: Does BKE have a Moat?
Unfortunately, no.

Step 7: Does any superinvestor invest in BKE?
Third Avenue Management LLC holds 1.5% of the company.

Step 8: Is BKE undervalued?

Method 1 (EV/(EBIDTA – MainCapex):
Price per share = $35.10
Enterprise Value (EV) = $563M
EBIDTA – Maintenance Capital Expenditure (EBIDTA – MainCapex) = $54.3M

Thus, EV/(EBIDTA – MainCapex) = 10.4X

Method 2 (Adjusted FCF yield vs. Treasury yield (30 years):
Free Cash Flow (FCF) = $50.5M
Adjusted FCF = $48M
Adjusted FCF is calculated by deducting after tax interest income from FCF.

Thus, adjusted FCF / EV yield = 8.5%
Treasury yield (30 years) = 4.92%

The Buckle Inc (BKE) is an interesting retailer with excellent management, solid balance sheet and undervalued. Current pessimism over sales, net profit margin and comparable sales declines provides opportunity for long-term value investors to invest.

To conclude, let me quote our famous investor, Warren Buffett… “The most common cause of low prices is pessimism -- some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.”

Happy investing,
Dah Hui Lau (David)

Is online gambling now definitely illegal in the US?

The simple answer is: sports betting has always been illegal, but the situation with other parts of online gambling – such as casino gaming and poker – is still unclear.

The relevant legislation is the 1961 Interstate Wire Act. It is clear that sports betting via phone lines, which includes the internet, is illegal. Only one person – Jay Cohen, former president of World Sports Exchange – has been convicted for running an online gambling company and it’s notable that the company concerned was an online bookmaker. Sportingbet, similarly, is primarily a bookie but it does offer casino and poker gaming. It is harder to make the case that these products are illegal under the Wire Act. The US Department of Justice has stated that it regards online gambling as illegal.

The important thing to note is that the law has not changed: the Wire Act still applies. A Bill to ban explicitly all online gambling is being discussed in Congress but may not become law. All that is happening is that different states are applying the Wire Act in different ways.

To read full the full article TimesOnline.

Happy learning,


Intel: Fat to Lean

"Intel Corp. said it will cut 10,500 jobs, or about 10% of its work force, as part of the most significant restructuring at the chip giant since the 1980s."

"Intel said the restructuring moves, which include sales of underperforming business units, should generate $2 billion in cost savings in 2007 -- a figure that it expects to increase to $3 billion in savings annually. The company, which also expects to save $1 billion on capital spending, put severance costs at $200 million by next year." (From

Although slashing jobs are extremely bad for people who are involved, it is a necessary way of improving efficiency, complacency and focus.

To read my previous analysis on Intel: Part 1; Part 2.

Happy investing,


Friday, September 08, 2006

Zacks Buy List: K-Swiss (KSWS) Strong Buy listed K-Swiss as one of its four strong buys, which is not surprising to me. K-Swiss is an excellent company with excellent management, generating tons of free cash flow.

This is what said about KSWS.....

"K-Swiss, Inc., a Zacks #1 Rank stock, topped the Street's earnings estimate for 10 consecutive quarters, most recently by 28.9%. The company increased revenues, expanded gross margins and grew profits for the past five years. KSWS has a price-to-book ratio of 3.0, compared to 5.1 for the market."

At current attractive price, KSWS is an good buy!

Happy investing,

Thursday, September 07, 2006

Berkshire Hathaway Intrinsic Value of $160K per share

There is an interesting article on Motley Fool website written by johannesclimacus, who explained why Berkshire's intrinsic value could actually be $160K per share or even higher.

Good read.

To read the Motley Fool article.

Cheers to all Berkshire's shareholders!

PartyGaming Plunging Price

Now I understand why Partygaming share price plunged despite great earning results... that's because Chairman of Sportingbet was detained in US. This is a very big news.

Partygaming is a very high risk company and do your due diligence prior to investing.

Dah Hui Lau (David)

Partygaming 1Qtr Results

Online gaming group PartyGaming reported a 47 percent increase in its first-half core profit.

The owner of the PartyPoker and PartyCasino Web sites said first-half underlying earnings before interest, tax, depreciation and amortisation (EBITDA) rose to $380 million (202 million pounds) from $257.7 million a year earlier.

The only thing that bewilders me is that having announced such an excellent results, the share plunged more than 10% today! What is Mr. Market thinking?!? Is it because the results were in line with expectation rather than over the expectation? One should be glad that Mr. Market is bipolar and therefore, patient investors could have an opportunity to invest into the companies that one likes.

To read my previous analysis on Partgaming.

Happy investing,

Dah Hui Lau (David)

Tuesday, September 05, 2006

MGIC Investment Corp (MTG) at $58.44

Step 1: Do you understand MTG’s business?
MGIC Investment Corporation is a holding company, which through its wholly owned subsidiary, Mortgage Guaranty Insurance Corporation (MGIC), provides private mortgage insurance (PrivateMI) in the United States to the home mortgage lending industry.

Mortgage insurance was invented by Max Karl, an attorney in Milwaukee, Wisconsin. He observed the struggles that people had with saving for a down payment, and understood the risks that mortgage originators faced in lending that money. He created MGIC and mortgage insurance in an effort to help people become homeowners faster by sharing some of the risk with the mortgage lenders.

What is PrivateMI? PrivateMI is a financial guaranty that reduces or eliminates loss to a lender in the event a borrower defaults on a home loan and the mortgage is foreclosed. In effect, MGIC shares the risk of lending money to a borrower. In essence, PrivateMI aims to make homeownership more affordable.

PrivateMI covers residential first mortgage loans and expands home ownership opportunities by enabling people to purchase homes with less than 20% down payments. PrivateMI also facilitates the sale of low down payment and other mortgage loans in the secondary mortgage market, including to the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Fannie Mae and Freddie Mac are collectively referred to as the GSE. In addition, to mortgage insurance on first liens, the Company, through other subsidiaries, provides lenders with various underwriting and other services and products related to home mortgage lending.

Step 2: What are the potential risks of owning MTG?
There are alternative or cheaper ways to buy a home rather than using PrivateMI. One of the most popular alternatives is piggyback loans, such as a first mortgage with an 80% loan-to-value ratio and a second mortgage with a 10%, 15% or 20% loan-to-value ratio (referred as 80-10-10, 80-15-5 or 80-20 loans, respectively). Unlike mortgage interest, PrivateMI isn't tax-deductible. This makes competing products like 80-10-10 loans more attractive.

Deterioration in domestic economic conditions generally increases the likelihood that borrowers will not have sufficient income to pay their mortgages and can also adversely affect housing values.

Competitions not only from other PrivateMI companies, but also with mortgage lenders through captive reinsurance transactions. [Lenders have established captives--private insurers--to reinsure MGIC's portfolio. Here's the catch: To win mortgage insurance business from these lenders, MGIC must cede as much as 40% of its insurance premium to the captive in return for protection against large losses. But lenders flexed their muscles and established a loss rate well above historical levels, so they will most likely never be contractually obliged to help MGIC pay a claim. The net result is that the most profitable part of MGIC's margins has been recaptured by its lender clients. The percentage of premiums the firm cedes has more than doubled since 2000 and now exceeds 10%. What's worse, more than 45% of MGIC's insurance portfolio is now subject to some type of this premium transfer, and we fear the percentage could climb. In our opinion, MGIC's margins are at least 15% lower as a consequence--and may never recover.] (From Morningstar)

Changes in the business practices of Fannie Mae and Freddie Mac could reduce the company’s revenues or increase its losses i.e. level of PrivateMI required, whether preference given to mortgage insurer with “AAA” rating etc. Fannie Mae and Freddie Mac control more than 40% of the mortgage market, which lets them dictate terms to mortgage insurers.

Net premiums written could be adversely affected if the Department of Housing and Urban Development (HUD) reproposes and adopts a regulation under the Real Estate Settlement Procedures Act (RESPA) that is equivalent to a proposed regulation that was withdrawn in 2004. HUD regulations under RESPA prohibit paying lenders for the referral of settlement services, including mortgage insurance, and prohibit lenders from receiving such payments. In July 2002, HUD proposed a regulation that would exclude from these anti-referral fee provisions settlement services included in a package of settlement services offered to a borrower at a guaranteed price. HUD withdrew this proposed regulation in March 2004. Under the proposed regulation, if mortgage insurance were required on a loan, the package must include any mortgage insurance premium paid at settlement. Although certain state insurance regulations prohibit an insurer’s payment of referral fees, had this regulation been adopted in this form, the Company’s revenues could have been adversely affected to the extent that lenders offered such packages and received value from the Company in excess of what they could have received were the antireferral fee provisions of RESPA to apply and if such state regulations were not applied to prohibit such payments.

Increasing default rate year after year is a worrying sign. Percentage of default has climbed from 2.17% (1999) to 6.58% (2005).

Step 3: Insider Holdings
Collectively, directors and officers own about 1.14% of MTG, a $65 million investment. Plus, the CEO and directors must own shares exceeding 5 times the value of their annual cash compensation. Even better, return on equity is the primary metric in the managers' cash bonus plan. (From Morningstar)

The negative point is that there were significant insiders selling. CEO (Culver Curt) sold shares worth $2.4M on Feb3, 2006.

Step 4: Is MTG a good Company?
MGIC has one of the largest market shares in the very concentrated private mortgage insurance industry, consistently 20%-25%. It was 22.9% in 2005. (From Morningstar)

MTG has excellent return on equity (ROE) and return on assets (ROA) over a long period of time. Although ROE and ROA have been declined over the years, the current ROE and ROA are still impressive.

12/05 15.1 9.9
12/04 13.4 8.7
12/03 13.0 8.3
12/02 18.5 11.9
12/01 21.0 13.9
12/00 22.0 14.0
12/99 26.5 15.1
12/98 23.5 12.6
12/97 21.8 12.4
12/96 18.9 11.6

Likewise, net profit margin is superior. MTG consistently earns one of the highest net margins in the S&P 500.

Year Net Profit Margin (%)
12/05 41.1
12/04 34.3
12/03 29.3
12/02 42.4
12/01 48.4
12/00 48.8
12/99 47.2
12/98 39.7
12/97 37.3
12/96 34.6

MTG’s current loss reserve (June 2006) stood at $1.09B, which is almost double the losses paid in 2005 ($612M). Its loss reserve has been increasing steadily over the year from $681M (1998) to $1.09B. In comparison to its competitors, PMI Group and Triad Guaranty Insurance have less than 1.5 times and 1.1 times loss reserve to its losses paid respectively. MTG is more conservative and better reserved than its competitors.

Step 5: Does MTG management shareholders-orientated?
I would let Culver Curt, the CEO, to speak for himself….

“Last year I wrote that we needed to maintain our discipline and not succumb to the “top of market” environment that existed at the time and chase short-term benefits. Rather we needed to stay focused on creating long-term, sustainable value for all of our constituencies. That was the objective then and it remains the same today.” (From 2005 Annual Report by Culver Curt)

Outstanding shares have been reduced by 23% over last 9 years from 118M (1996) to 90.7M (2005). Over the last 6 months, the management has repurchased additional 3M shares.

Also, as mentioned before, ROE is the primary metric in the managers’ cash bonus plan.

Step 6: Does MTG have a Moat?
No. However, MTG has the oldest and most detailed mortgage history database, which adds a considerable advantage in underwriting skill. Lenders prefer to be insured by successful underwriters. (From Morningstar)

Step 7: Does any superinvestor invest in MTG?
Bill Miller and Bill Nygren own MTG, but only as a small percentage of their portfolio; less than 2%.

Step 8: Is MTG undervalued?
Yes. I will clarify these using three simple valuation methods.

Valuation Method 1 (Liquidation Value) (December 2005):
Total investment portfolio = $5,486M
Cash = $4.6M
Accrued investment income = $66.3M
Reinsurance recoverable = $14.7M
Prepaid reinsurance income = $9.6M
Premiums receivable = $91.5M
Investment in Sherman Business = $158.6M (Explained in part 1)
Investment in C-BASS = $555M (Explained in part 2)
Total Liabilities = $2,193M
Total (Liquidation Value) = $4,193.3M

Market Cap = $4,980M

At current price of $58.44, MTG is selling at 1.19X liquidation value, which is very cheap indeed.

Part 1:
Sherman business value on MTG’s balance sheet was recorded on equity basis. However, Sherman true intrinsic value is higher than stated on its balance sheet. Asta Funding (ASFI), which has similar business model to Sherman, is valued over 3X book value. To be conservative, I would value Sherman business at 2X book value as it has significant leverage in comparison with Asta Funding. Total assets: Equity for Sherman and Asta Funding are 4.14 and 1.24 respectively.

Equity value in Sherman business = $79.3M

Estimated intrinsic value = $79.3M X 2
= $158.6M

Part 2:
C-BASS business value on MTG’s balance sheet was recorded on equity basis. However, C-BASS true intrinsic value is higher than stated on its balance sheet. In 2005, MTG’s share of pretax income was $111M on $362.6M investment in C-BASS. It would be impossible to find a business that has pretax return of over 30%. Therefore, to be conservative, I would value C-BASS business at 5X pretax income.

Estimated intrinsic value = $111M X 5
= $555M

Valuation Method 2:
Price/Book ratio: 1.2. This is the lowest price/ book value in the last 10 years.

Year Price/ Book
12/05 1.40
12/04 1.60
12/03 1.48
12/02 1.22
12/01 2.17
12/00 2.92
12/99 3.58
12/98 2.65
12/97 4.76
12/96 3.28

The average Price/Book ratios for the last 10 years and 5 years are 2.5 and 1.57 respectively.

Book value/ Share compounds at 15.4% over the last 5 years; and 11.8% over the last 3 years; and 9.9% over last year.

Year Book Value/ Share
12/05 $47.31
12/04 $43.05
12/03 $38.58
12/02 $33.87
12/01 $28.47
12/00 $23.07
12/99 $16.79
12/98 $15.05
12/97 $13.96
12/96 $11.59

Let say the MTG could grow its book value at 8.5% over the next 3 years and its price/book ratio is 1.5 at the end of third year, its share price would therefore be $90.60, which is about 55% increase from current price of $58.44. This is a conservative assumption and if it could grow its book value at higher rate or is priced at higher price/book ratio, its potential upside would be higher.

Valuation Method 3:
MTG price to earning ratio (PE) is 8X. This is half of the S&P500 PE.

MTG is a simple to understand business, leader in PrivateMI, good management in place and undervalued. Although it does not have “Coke” competitive moat, it is a good investment with minimal risk of total investment loss.

P.S. To read my previous analysis on MTG in Feb 10, 2006.

Happy investing,
Dah Hui Lau (David)

Saturday, September 02, 2006

Chet Holmes: "America's Greatest Sales and Marketing Executive"

Chet Holmes was said to be "America's greatest sales and marketing executive" by Charlie Munger. Have a read on the interview with Chet Holmes.

To read the article.

To watch the interview.

Happy learning,