Archive for the ‘Holmes Osborne’ Category

Sanofi-Aventis (SNY) and Glaxosmithkline plc (GSK) From Third Avenue Int.

Friday, August 22nd, 2008

In last quarter’s letter, we discussed the Fund’s purchase of shares of Sanofi-Aventis S.A. (“Sanofi”), one of the largest pharmaceutical companies in the world. Numerous issues which are clouding the outlook for the pharmaceutical industry – including a stricter Food and Drug Administration, the upcoming Presidential Election in the U.S., intensifying generic competition, and the ongoing push by governments to contain health care costs – in addition to company specific issues, enabled Fund management to purchase shares of this well-financed, highly profitable and cash generative business at what we believe is an attractive valuation, without attributing any value to Sanofi’s pipeline. While we believe Sanofi represents an attractive investment opportunity for the Fund on a stand-alone basis, the company, and the pharmaceutical industry ingeneral, are subject to inherent uncertainties whose outcomes are difficult to predict with a high degree of certainty.

One of the most notable of these uncertainties is the ultimate level of clinical and commercial success attained by the potential drugs in companies’ pipelines. Therefore, we believe that, if (and only if) we find additional candidates which meet our strict investment criteria on a stand-alone basis, it would be prudent to invest in a portfolio of well-financed, attractively valued pharmaceutical companies, in order to provide some degree of diversification across various pipelines and product lines. We believe that GlaxoSmithKline plc (“GSK”) is one such company which represents an attractive investment in its own right and complements the Fund’s holding in Sanofi.

U.K.-based GSK, one of the largest branded pharmaceutical and vaccine manufacturers in the world, has seen its share price suffer in recent months due to general industry concerns, as well as company-specific issues, including negative press questioning the safety of its diabetes drug Avandia. Additionally, there are general concerns among the investment community that the company’s late-stage pipeline over the short term will not offset the loss in sales from upcoming patent expirations. Despite the various issues and uncertainties which drug companies currently face, the industry continues to benefit from favorable industry dynamics which we find attractive, including its highly profitable, cash generative nature, stable demand and solid long-term fundamentals (i.e., an aging population in the U.S., growth in emerging markets, etc.).

Furthermore, like Sanofi, we believe that GSK has a number of attractive, companyspecific attributes, such as its strong balance sheet, which should provide the company with the financial flexibility to pursue agreements or acquisitions to bolster its pipeline and/or research capabilities. GSK also benefits from a sound and diversified revenue base. Aside from Advair, GSK’s asthma medication which made up roughly 15% of sales in 2007, no other singledrug accounted for greater than 5% of sales. Its vaccines business, which has been growing briskly and is relatively more resistant to the threat of generics, made up about 9% of sales in 2007. Additionally, GSK’s consumer healthcare division (roughly 15% of 2007 sales), which produces and markets over-the-counter medicines, oral care, and nutritional healthcare products, has been a provider of stable cash flow to the company, having generated an average of over £750 million (roughly $1.4 billion) in EBITDA over the past four years.

Each of these businesses appears to possess elements of recession resistance and should mitigate the company’s exposure to individual drugs. Emerging markets, many of which have large populations which are increasingly able to afford quality healthcare, represent a significant source of potential growth for the company. The U.S. and Europe currently comprise a large majority of the global pharmaceutical market, highlighting the potential for longer-term growth elsewhere in the world. GSK has responded accordingly, recently announcing the reorganization of its corporate structure to emphasize growth in these markets; the company continues to steadily grow itspresence in these regions. GSK has also aggressively approached cost cutting, as its “Operational Excellence Program,” announced in October 2007, is projected to deliver £700 million in annual, pre-tax savings by 2010. The costs that are wrung out of the business should mitigate the impact of patent expirations and pricing pressures over the short term.

As was the case with Sanofi, shares of GSK were purchased at what we believe are modest multiples of earnings and cash flow, even in a “reasonable worst-case” scenario, which does not attribute much value to GSK’s pipeline. If one were to estimate a theoretical market value of GSK’s vaccines and consumer healthcare businesses, two areas which appear to be quite marketable and have seen transactions at healthy multiples in the recent past, the valuation of GSK’s core pharmaceutical business appears even more modest.


Holmes R. Osborne III, CFA
1223 Wilshire Blvd., #1471
Santa Monica, CA 90403

More Pain to Come for Major Banks

Thursday, July 31st, 2008

While we all hear about the subprime home loan problems the banks are having, we have not heard about credit card write-offs. If a person was to default on a home loan, why wouldn’t they just go ahead and stop paying on their credit cards? Their credit score would be ruined anyway and there would be no incentive to keep up payments. Credit card debt is unsecured–banks can’t reclaim dinners at McDonald’s and vacations taken five years ago.

I went to American Express’ web site and looked at a shareholder presentation. It listed the following. Bank of America has $161B in credit card loans and 29% is subprime (FICO less than 660). Citigroup has $194 in credit card loans and 24% is subprime. JPMorgan has $151B in credit card debt and 20% subprime.

Now, let’s look at the tangible assets (capital) of each bank and what percentage is equivalent to its subprime credit card debt. Citigroup has $60.6 billion in equity (capital) and $46.56 B in subprime credit card debt , which equals 76.83%. Bank of America has $68 billion in equity and $46.7 B in subprime credit card debt, which equals 68.7%. JPMorgan has $74 B in equity and $30.2 B in subprime credit card debt, which is the least amount at 40.8%.

What the FDIC covers is the following: $100,000 for one person’s certificates of deposit and savings; $200,000 for a joint account; $250,000 total for retirement accounts (IRAs, 401Ks, SEPs, Roths, etc.); if it is a trust account, it can be up to $100,000 for each person on the trust.

Don’t be foolish and have more than these limits!!!!! If you know someone who is elderly and has a large slug of cash at a bank, make sure that it is divided in such a way as to be covered by the FDIC.

Here is a 33 page guide from the FDIC.

Let us hear your thoughts below:

What to invest in this year?

Wednesday, July 16th, 2008

With the Dow Jones Industrial Average down 17.36% year-to-date, folks are pretty jittery. They should be. Blue chip stocks such as Fannie Mae and Freddie Mac are about as close to belly up as a company can be. Back in the old days, a person simply “sat tight” and waited for the market to rebound. Sitting tight might not work so well this time around.
The Vanguard Index funds of the world aren’t doing so well.

Here is what I recommend.
1. Stay away from financials. Just because they’re cheap does not mean they won’t get cheaper.
2. I have some of my growth accounts invested in the money market at a rate as high as 45%. These accounts are holding up much better than the stock averages this year.
3. Stay away from oil stocks. Oil came down today and probably has more to go.

What investments do look attractive?
1. Glaxo Smith Kline and Sanofi Aventis. Two European drug companies with dividend yields of 4% to 5%. Also a big pipeline of drugs that will be company onto the market in the next few years. Warren Buffett owns both.
2. Japanese companies. Keyence and SMC are two companies where the cash on the balance sheets equal about 1/3 of the stocks’ prices. Furthermore, they have almost doubled their sales in the last five years. Keyence does not have an ounce of debt.
3. Consider looking at money markets backed by US government T-Bills. They only yield about 2%, but better a low yield on something that is guaranteed.
Not all money markets are guaranteed.

Some stocks and stock mutual funds are worth holding onto and some are worth getting out of. The hard part is knowing the difference.

Holmes Osborne

Swimming Happily Against the Tide — Third Avenue’s Marty Whitman Finds Lots to Buy

Monday, April 7th, 2008

IN THE MIDST OF THE MARKET MAYHEM last August, Third Avenue Management sent a two-page letter to shareholders in its four mutual funds, including its flagship $10 billion Third Avenue Value Fund. The message: It’s time to buy.

Far from taking shelter, the firm’s chief executive, David Barse told investors that the emerging bear market was irrelevant, except that it was making attractive stocks cheaper by the day. “As long as we continue to have available funds to invest, we intend to continue to take advantage of the unprecedented opportunities presented to us during this bear-market ‘panic’,” the letter said.

When Marty Whitman reviewed the shareholders’ letter at home, he was impressed — and acted. “I was about to put some money into muni bonds for my wife, and instead put it into Third Avenue Value,” he says. Perhaps that’s not surprising, given that the marketing pitch reflected the investment philosophy and outlook of the 83-year-old Whitman, Third
Avenue’s1 founder and manager of the fund (ticker: TAVFX).

Leave it to other value investors to step back from the ongoing market turmoil; Whitman thrives on snapping up securities that others shun. “We worry infinitely more about value than market outlook — and since the near-term outlook stinks, no matter where you go, that is helping to create a lot more value for us to take advantage of,” he observes.

THE VETERAN MONEY MANAGER NEVER HAS SHIED away from a bear market, and he’s not going to start now. Along with Barse, he’s slashed the fund’s cash holdings from 20% of its assets as of last summer to 10% today, and reopened two of three funds that had been closed to new investors. (The firm is pondering reopening the remaining one, Third Avenue Small-Cap Value2 (TASCX).)

Whitman even mulled investing in Bear Stearns as the investment bank’s turmoil worsened. “Why not?” he says now, shrugging. “If it was creditworthy, it was going to $100.” He acknowledges, however, that his designated successor as manager of Third Avenue Value, Ian Lapey, “saved my ass on that one. He and I have to agree on any transaction in the fund, and he said ‘No way!’ on Bear Stearns because he couldn’t make sense of what was on their books.”

The ability to understand the nuts and bolts of a company’s business and its books is one of the three criteria Whitman trains his team to examine before plunging into any potential deep-value investment. “He has taught us all that three things signal safety: a strong balance sheet; good management; and an understandable business,” says Barse. “Together, these help you limit and manage the investment risk.”

Just because Whitman, Barse and Lapey ultimately passed on Bear Stearns doesn’t mean they are spurning other victims of the credit crunch.

One of their biggest new holdings is beleaguered bond-insurer MBIA (MBI), whose stock has plunged from its 52-week high of $72.38 last April to a low of $6.75 in January, before struggling back to around $14, where it’s been hovering for many weeks. The firm has been one of the prime targets of short-sellers, who argue that MBIA ultimately could face huge liabilities because its underwriters guaranteed mortgage-backed securities that include now-toxic subprime loans, defaults on which helped trigger the global credit crisis.

Whitman pooh-poohs that analysis. When MBIA went out in search of new capital, Third Avenue ponied up a chunk of cash, to the tune of some 15% of the total $2.6 billion infusion into MBIA in February, at a price of about $12.15 a share. He figures the stock is worth closer to $35 — at least. “Just because some of the securities are flawed doesn’t mean the backer is in trouble,” he maintains. “There are a whole bunch of amateurs out there running around and creating noise.”

Whitman is anything but an amateur.

Value Investing: A Balanced Approach, his recently reissued book on value investing, is viewed as a classic. Although Third Avenue Value didn’t open its doors until 1990 — when Whitman was already 65, a senior citizen by Wall Street standards — the value-investing maven learned his trade in a series of jobs as a Street analyst before launching his own firm in 1974.

WHITMAN’S ABILITY TO FERRET OUT BARGAIN-PRICED securities in even the trickiest of markets wins plaudits from Morningstar analysts. “Marty is precisely the kind of manager you want to be investing with in this kind of environment,” says Karen Dolan, director of fund analysis at the Chicago-based research firm. “He has a high pain threshold, as long as he sees the value and the potential in a company.”

Not every troubled-company workout generates for Third Avenue investors the kind of outsized profits that came from Whitman’s decision to invest in bonds issued by a then-bankrupt Kmart. After Kmart’s resurrection, culminating in its merger with Sears Holdings (SHLD), Third Avenue Value captured a “ten-bagger,” or tenfold, return, says Whitman.

Notes Dolan “Marty has an ability to identify more of those that do survive tough times; that knack has meant that the fund has only had two down years.” Those came in 1994 and 2002 — and Dolan adds that, even in the latter year, a particularly trying one for the stock market, Third Avenue Value fared better than half of its peers. And the following year, Whitman delivered a 37% return.

True, the prospects for a profitable 2008 don’t look great right now, even as Whitman, Barse and their team have taken the fund’s cash levels from 20% back down to 10% in their pursuit of bargains such as MBIA and other bond-insurance outfits.

This year, through Wednesday, the Standard & Poor’s 500 stock index was down 6.4%, and the Russell 2500 was off 6%. Third Avenue Value was down 8.4%%. That kind of short-term showing doesn’t rattle Whitman and his team, who have one of the longest investment horizons on Wall Street: As long as his analysis pans out or the value analysis remains compelling, Whitman doesn’t mind keeping his chips on the table for years, even decades.

Third Avenue Value’s biggest holdings currently include stakes in St. Joe (JOE) and Forest City Enterprises (FCE.A), both of which were initiated back in July 1991. Whitman admits that St. Joe, once a forest-products company, has failed to live up to what he sees as its potential as a land company. “It’s been very disappointing,” he admits, but adds that he isn’t prepared to walk away.

The same is true of long-time holding Toyota Industries (6201.Japan), which owns stakes in a number of operating businesses. Whitman’s analysis showed that the stock had been trading at a 40%-to-50% discount to the value of its share of the earnings of those underlying businesses, in addition to a conservative multiple of its own operations. While the stock has appreciated more than 50% in yen over the 9½ years he has held it, the discount remains.
“It’s a frustration,” he says. “It’s a great business performer, but an unsatisfactory stock-market performer.” [whitman]

Whitman — who worries “infinitely more about value than market outlook” — has found lots to buy in the volatile investment environment of the past year.

OTHER KINDS OF ECONOMIC HEADWINDS DON’T trouble Whitman and Barse in the least. Currently, some investors might recoil from real-estate stocks such as Brookfield Asset Management or Forest City. Yet real-estate names dominate Third Avenue Value’s list of holdings. Each offers the combination of an understandable business, strong finances and talented management.

“Bruce Flatt [CEO of Brookfield] is Canada’s Warren Buffett,” Whitman proclaims.

And sure, the credit crunch may have forced Forest City to postpone plans to build a massive residential and commercial real estate project around a basketball stadium in New York’s borough of Brooklyn; in addition, its stock trades around 38 a share, down from a 52-week high of 73.84, reached last June. But Whitman, who paid a mere $2.37 a share for his stake in Forest City, focuses on what, to him, is more crucial: the company’s strong financial position. “They can afford to be patient as some competitors struggle to survive,” he notes. Indeed, he points out, Forest City has snapped up building lots from troubled rivals at deep discounts.

Many of the more recent additions to the Third Avenue Value portfolio are of overseas stocks or domestic bonds rather than stocks. “We’re not going to add [U.S.] common stocks unless the company has a strong balance sheet,” Whitman says. “We’d prefer to own debt.” That, he says, is increasingly possible: the credit market deep-freeze has created many value opportunities in securities like GMAC senior unsecured notes and surplus notes issued by MBIA.

The Bottom Line:
Bond-Insurer MBIA is one of Whitman’s favorite stocks. He considers its critics ill-informed “amateurs.” Recently, trading around 14, MBIA ultimately could hit 35, he says.

The comfort factors? The MBIA notes rank senior to other company securities, while GMAC notes are supported by a great pipeline of receivables, Barse points out. “If I pick the right security, I don’t have to worry about today’s market value,” Whitman adds. “I just have to hold it to maturity and collect the income — and there is a lot of stuff out there that I can now buy with yields to maturity of 15%.”

Still, today’s market environment means that pursuing opportunity may require embracing volatility. Third Avenue Value’s current portfolio is dominated by a group of Hong Kong-based real-estate companies, from Henderson Land (12.Hong Kong) and Hang Lung Group (10.Hong Kong) to Cheung Kong Holdings (1.Hong Kong). Says Whitman: “We went in there two years ago, and were able to buy these companies — all of which have a big pipeline of property developments in China — at big discounts.”

CHINESE STOCKS HAVE PLUNGED THIS YEAR, but Whitman isn’t perturbed.
“Income-producing real estate is one of the businesses that is easiest to understand and value, and these are great long-term investments,” he insists.

“Sure, you have political risk, Tibet, pollution, crazy Communists and all kinds of other risks,” Whitman adds, but deciding whether to invest in China is all about the balance of probabilities. “Lots of things could go wrong — but part of seizing value is being willing to look past the noise, no matter how loud it is.”

“CASH AND KNOWLEDGE” are the keys to riding out a recession, says Bruce Berkowitz of the Fairholme Fund (FAIRX). Fairholme has lost just 1.10% this year, easily topping most funds’ performance. Even so, “I’m not happy with it,” says Berkowitz. “You can’t spend relative performance” when it’s time to pay dividends. A fund, he adds, “can bleed to death” in the current environment.

Berkowitz, whom Barron’s interviewed last month (“Betting Big, Winning Big,”
March 17), says it’s a particularly tricky environment because it’s impossible to understand some of the positions that embattled banks actually hold.

As a result, he recently had about 20% of his $7.4 billion fund’s assets in cash. His top equity holding: Berkshire Hathaway (BRK-B), run by Warren Buffett. He’s a great guy to have on your team as a tough season gets under way.

RHJ International (RHJIF.PK) – Private Equity on the Cheap

Wednesday, October 10th, 2007

RHJ International (RHJIF.PK) is a spin off from the New York based private equity firm Ripplewood Holdings. This division focuses on Japan and was the first private equity firm to go public, thus allowing investors to cash out on some of their huge profits. CEO Tim Collins has been in the business for years and has posted some strong returns.

RHJ chose to be headquartered in Belgium to avoid capital gains. Its investments are in Japan so there is quite a bit to follow. The relationship between the yen, Euro, and dollar affects the stock. Its shares are denominated in Euros with an ADR on the Pink Sheets in the U.S.

The portfolio covers seven sectors with close to 50% in automotive. Some of the companies it owns are wholly owned subsidiaries and some are large interests in publicly traded companies. RHJ also owns a resort in Japan and Columbia Music Japan. In addition, it was sitting on a hoard of cash of about 508 million Euros at the end of its fiscal year in March 2006.

Prior to going public, RHJ had made some absurd returns. It bought the Long-Term Credit Bank of Japan and made six times its money in five years. On Japan Telecom, it made 4 ½ times its money in nine months. According to a report by KBC Securities, RHJ made a 50% internal rate of return on its private equity funds, directly managed by Collins, before he took out his fees.

One of the nice aspects of RHJ is that management does not take out a hefty fee like traditional private equity ventures. Collins only pays himself 100,000 Euros (about $140,000). He also owns about 15% of the company with 91% of his stock in a lock-up until 2010.

Stock market legend Marty Whitman of Third Avenue Value owns about 5% of the company. It’s no surprise. Collins used to be a teaching assistant of Whitman at Yale. Whitman likes to buy stocks on the cheap. RHJ is trading at a little under book value. Unfortunately for Whitman, he has been buying on the way down. The stock is almost at its all time low.

In the past, Ripplewood made a bid for Maytag and almost bought the company. Maytag held out and instead took a bid from Whirlpool (NYSE: WHR). Had Ripplewood succeeded, it would have held Maytag in several of its private equity funds, including RHJ International. Ripplewood is now in the midst of trying to win a bid for Land Rover and Jaguar from Ford (NYSE: F). Ripplewood has even gone as far as to hire former Ford chief operating officer Sir Nicholas Scheele.

What an investor is getting with Ripplewood is a holding company that has been superbly managed in the past. The biggest risks are with the yen, Japanese economy, and how this hodge podge of companies will perform. But who knows, you might get a Jag or Land Rover out of the deal!

Let us hear your thoughts:

Tesco: The British Are Coming!

Tuesday, August 7th, 2007

Bangers and mash, anyone? British supermarket behemoth Tesco is making its foray into the U.S. this fall, with a grand opening in Los Angeles and other western cities. Under the banner Fresh & Easy, the 10,000-square-foot stores will cater to health-conscious shoppers, people on the go, and a variety of budgets. Investors may want to take a closer look.

Downtown Los Angeles — once known for its poverty, but now booming with the development of lofts — will host one of the first stores. The nearest competing supermarket will be several miles away.

While most markets carry up to 10,000 items, Fresh & Easy will offer only about 3,000. Its focus will be on healthy foods and prepared meals for busy people. How healthy? According to a Barron’s article, the stores won’t even carry cigarettes.

Tesco has 3,263 stores worldwide, with 1,988 of them in Great Britain. Other operations are scattered far and wide: China, the Czech Republic, Hungary, Ireland, Japan, Malaysia, Poland, Slovakia, South Korea, Thailand, and Turkey. Not counting its stores in the U.S., Tesco plans on opening 75% of its new stores outside the U.K. It’s truly a global company, and it thrives wherever it goes.

That continued success is a result of conducting extensive market research before entering a new area. Before the Los Angeles move, Tesco went as far as opening a model store in an L.A. warehouse. Executives kept things secret by telling contractors they were using the site to shoot a movie.

Tesco does quite well going head-to-head with Wal-Mart (NYSE: WMT), which sometimes has a problem making its Bentonville way of doing things work overseas. For example, Seiyu, 51% owned by Wal-Mart, laid off 1,500 workers a few years ago in Japan. That didn’t go over too well in the land of the rising sun — in fact, out-of-work employees are still complaining to the media about Wal-Mart.

Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) seems to like Tesco, too. Its GEICO insurance investment division, managed by Lou Simpson, owns almost 3% of Tesco’s stock. And Simpson is a buy-and-hold type of investor who likes companies with strong brand names.

He’s no doubt aware that revenues and earnings per share have grown 11% a year since 2002. With the British pound valued at more than 2-to-1 against the dollar, U.S. investors have seen a 200% gain since 2003. And don’t forget that nice 2.45% dividend yield.

Tesco could be an appealing long-term hold. While baby boomers age in developed countries, Tesco is making a name for itself in emerging markets in Eastern Europe and Asia. Shareholders might just be able to sit back and watch Tesco eat the competition’s lunch.