the manual of ideas toby carlisle 2015 08

7/23/2019 The Manual of Ideas Toby Carlisle 2015 08

1/5

Value-oriented Equity Investment Ideas for Sophisticated Investors

A Monthly Publication of BeyondProxy LLC Subscribe at manualofideas.com

If our efforts can further the goals of our members by giving them a discernible edgeover other market participants, we have succeeded.

Copyright Warning: It is a violation of copyright law to reproduce all or part of this publication for any purpose without the prior written consent of BeyondProxy.Email [email protected] to request consent. 2008-2015 by BeyondProxy. All rights reserved. Terms of Use: www.manualofideas.com/terms-of-use

Investing In The Tradition of

Graham, Buffett, Klarman

Year VIII, Volume VIII

August 2015

When asked how he became so

successful, Buffett answered:

We read hundreds and hundreds

of annual reports every year.

Top Ideas In This Report

Barrick Gold(NYSE: ABX) .. 40

Cloud Peak Energy(NYSE: CLD) .. 56

POSCO(NYSE: PKX) .. 92

Also Inside

Editorial Commentary 3

Interview with YCG Investments .. 11

Screening Deep Value Equities 21

Gianluca Ferrari on Exor .. 31

Analyzing 20 Deep Value Ideas .. 36

Toby Carlisle on Movado 11610 Essential Value Screens 119

About The Manual of Ideas

Our goal is to bring you investmentideas that are compelling on thebasis of value versus price. In ourquest for value, we analyze the topholdings of top fund managers. Wealso use a proprietary methodologyto identify stocks that are not widelyfollowed by institutional investors.

Our research team has extensiveexperience in industry and securityanalysis, equity valuation, and

investment management. We bring abuy side mindset to the ideageneration process, cutting acrossindustries and market capitalizationranges in our search for compellingequity investment opportunities.

THEDEEPVALUEISSUE

Screening for Deep Value Bargains

20 Companies Profiled by The Manual of Ideas Research Team

Proprietary Selection of Top Three Candidates for Investment

Exclusive Interview with YCG Investments

In Depth: Gianluca Ferrari on Exor, Toby Carlisle on Movado

10 Essential Screens for Value Investors

Deep value candidates analyzed in this issue include

Avon (AVP), Barrick Gold (ABX), Benchmark Electron ics (BHE),

Callaway Golf (ELY), Cliffs Natural Resources (CLF), Cloud Peak (CLD),Encana (ECA), Kelly Services (KELYA), Kulicke and Soffa (KLIC),

Lands End (LE), LeapFrog (LF), Movado (MOV), Murphy USA (MUSA),

Oppenheimer (OPY), POSCO (PKX), RealNetworks (RNWK),

ScanSource (SCSC), Sears Hometown and Outlet (SHOS),

Tech Data (TECD), and Vale (VALE).

New Exclusive Content

in the MOI Members Area (log in at www.manualofideas.com

or email [email protected])

Arik Ahitov on Investing in Small- and Mid-Caps

Three Presentations from Wide-Moat Investing Summit 2015

Meetup Group, Curated Content, and More

REPLAY at ValueConferences.com

Become recognized as a value

investing thought leader by

sharing your wisdom with the

global value investing community

Email john@manualofideas com

Inside:

In-Depth Analysis:

Toby Carlisle

on Movado

With compliments of

The Manual of Ideas


2/5


2008-2015 by BeyondProxy LLC. All rights reserved. JOIN TODAY! www.manualofideas.com August 2015 Page 116 of 130

In-Depth Analysis: Toby Carlisle on MovadoCheap, Safe, Potential Compounder, Buying Back Stock

Its no secret why Movado Group, Inc. (MOV) is in the bargain bin. Investors

fear that the beast of 1 Infinite Loop, CupertinoApple, Inc. has done for

watches what it did for Walkmans (the iPod), desktop PCs (the iMac), music

(iTunes), laptops (the Macbook), and cell phones (the iPhone), not to mention

tablets (the iPad), and whatever the AppleTV replaced (the VCR?). With a string

of category- and competitor-killing hits like that, its no wonder that the stocks

of watchmakers are in the dumps. But when branded consumer goods producers

get beaten up I like to take a very close look. Nothing compounds like asset-

light consumer brands. And if you can get them at a deep undervaluation, the

risk:reward proposition becomes truly asymmetric, as I believe it is for MOV

now. Lets take a look at the company.

MOV designs and markets watches wholesale, and retail through the companys

outlet stores. Its portfolio of brands includes Coach Watches, Concord, Ebel,

ESQ Movado, Scuderia Ferrari Watches, HUGO BOSS Watches, Juicy Couture

Watches, Lacoste Watches, Movado and Tommy Hilfiger Watches. Based inParamus, New Jersey, it has operations in the United States, Europe, the

Americas, Asia and the Middle East.

MOV has a market capitalization of $593 million at its $24.61 share price at the

time of writing. It has $159 million in net cash on its balance sheet, and

generated operating earnings over the last twelve months of $70 million. That

puts it on an acquirers multiple of 6.2x. The acquirers multiple is a variation of

the more familiar enterprise multiple, the valuation ratio used by activists and

private equity firms to find attractive takeover candidates.

It examines several financial statement items that other multiples like the price-

to-earnings ratio do not, including debt, preferred stock, and minority interests;

and interest, tax, depreciation, amortization.

It is calculated as follows:

Enterprise Value / Operating Earnings

where enterprise value is the market capitalization plus total debt, minority

interests, and any preferred stock less cash and equivalents; and

where operating earnings is a measure comparable to earnings before

interest and taxes (EBIT), but constructed from the top of the income statement

down (EBIT is constructed from the bottom up). Calculating operating earnings

from the top down standardizes the metric, making a comparison across

companies, industries and sectors possible, and, by excluding special items

earnings that a company does not expect to recur in future yearsensures thatthese earnings are related only to operations.

It is based on the investment strategy described in my book Deep Value: Why

Activist Investors and Other Contrarians Battle for Control of Losing

Corporations(Wiley Finance, 2014). The Acquirers Multiplewebsite has a free

list of the cheapest stocks in the largest 1000 US exchange-traded stocks and

ADRs. (MOV is on the paid All Investable Screener.)

MOV stands up on other value metrics too. It trades on a PE of 13.2x, and has

generated a free cash flow / enterprise value yield of 9 percent over the last

Nothing compounds

like asset-light consumerbrands. And if you can

get them at a deep

undervaluation, the risk-

reward proposition

becomes truly

asymmetric, as I believe

it is for MOV now.


3/5



twelve months. It pays a small dividend, yielding 1.7 percent at prevailing

prices.

So we know MOV is unusually cheap, and we know why, but, as Laurence

Oliviers evil Szell asks over and over again of Dustin Hoffmans character,

Babe, in 1976s Marathon Man, Is it safe? There are a number of statistical

tools we can apply to drill MOVs teeth, and well get to those shortly, but its

squeaky clean, cash-rich balance makes for an attractive starting point. Its

Altman Z-Scorea measure of the likelihood that a company will end up in

bankruptcy within 2 yearsof 5.86 indicates that it is far from financially

distressed (greater than 2.6 is considered safe). MOVs Piotroski F-Score is 5

out of a possible 9, which is about average for a stable company. (It misses on 4

dimensions but remains strong on each: Its return on assets slipped year-on-year,

but it still generated 8.35 percent on assets; its gross margins fell, but remain

very healthy at 52 percent; its current ratio slipped, but remains very high at

5.4x; and its asset turnover slipped, but still sits at about 1x, down from 1.1x last

year). MOVs Beneish M-Score of -2.67 also indicates that its not an earnings

manipulator (anything greater than -2.22 is good news). From a statistical

perspective, its not close to financial distress (in fact its financially strong), andtheres no indication of earnings manipulation. Oh, its very safe.

Short interest spiked in May to 10.84 percent of the float, but has fallen each

month since to its most recent 9.61 percent on July 15. Its close to its historical

peak, and short money tends to be smart moneyits certainly been the right bet

since MOVs ~$47 stock price peak in November 2013but the fact that short

interest is now declining may indicate that the shorts have got what they want,

and are ready to move on.

An issue for MOV is that management dont own much stock. Collectively they

hold around 3 percent of the company, most of which has come from option

grants. The largest holder is Vice Chairman Cote with 1.77 percent, and he is a

net seller. CEO Grinbergs stock has a market value of $2.48 million. While thatis nice sum, in context with his $2.5 million in compensation this year, it isnt

material. I believe that when managers have a significant holding in their own

stock (material relative to their own net worth and income) they tend to be

focused on the price of stock relative to its intrinsic value. A Henry Singleton-

type managerone that thinks like an ownerwould use some of MOVs huge

cash hoard to buy back the stock while its cheap. Doing so increases the

intrinsic value of each share remaining outstanding, and allows shareholder who

want to sell to get out of a relatively illiquid stock. Shareholders who believe in

the company get a tax efficient boost to the value of the shares they hold. To

managements credit, and despite their small holdings, MOV has a substantial

$100 million buyback authorization in place. (The board increased an existing

share repurchase authorization to $100 million on November 25, 2014.) In thefirst quarter that resulted in net repurchases of around $22 million at an average

price of $25.87a small premium to the current market price. At this pace,

MOV will buy back the full $100 million before the end of the yeara material

sum relative to its ~$600 million market cap, equating to about 15 percent of the

outstanding stock at current pricesand be left with more than $100 million in

cash and equivalents, excluding whatever they earn between now and December

31. With any luck, theyll complete the buy back and re-authorize another the

same size.

An issue for MOV is

that management dontown much stock.

Collectively they hold

around 3 percent of the

company, most of which

has come from option

grants.


4/5



MOV possesses many of the qualities I like in a stock. At $24.61, it trades on an

acquirers multiple of 6.2x, which is very cheap. With $160 million in net cash

on the balance sheet, its cash rich, and liquid, and it passes all of the safety

screens with flying colors. While management dont hold a lot of stock, the

company is undertaking a material buyback that will significantly boost per

share intrinsic value. Thats usually enough for me to take a position. I know

many investors need to dig into the business, which is something Iveconspicuously not done here. How the watch business will fare against the

category-killing beast from 1 Infinite Loop is anyones guess. My sense is that

watches are different from other tech gadgets because they serve as jewelry too.

I own almost all of the other Apple gadgets I listed at the start of the article, but

the watch doesnt appeal to me at all, while high-end watches do. (Ive talked

about it previously, but not in detail: Ten years ago I bought a swiss watch from

the auction of the deceased and bankrupt estate of flamboyant Australian

corporate raider, stock market operator, and insider trader Rene Rivkin. I paid

less than the value of the gold content in the watch. When I had it appraised 5

years later I discovered that, despite the gold price trebling in the interim, I had

somehow managed to overpay. Whats worse is that its a really garish watch

Ive worn five times, wearing a dinner suit each time because nothing else seems

appropriate. Shows how little I know about watches). I digress. I wont pay up

for compounders, but Ill buy them cheap. And MOV is a very cheap stock, with

the potential to continue its historical compounding. Most importantly,

management is proactively embracing the opportunity to exploit the discount in

the stock by buying it, if not for their own accounts, at least for the companys. I

am doing the same. Long MOV.

Tobias Carlisle is a founder of the website acquirersmultiple.com. He is best

known as the author of the website Greenbackd, the books Deep Value: Why

Activists Investors and Other Contrarians Battle for Control of Losing

Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioners

Guide to Automating Intelligent Investment and Eliminating Behavioral Errors

(2012, Wiley Finance). He has extensive experience in investment management,

business valuation, public company corporate governance, and corporate law.

Prior to founding the forerunner to Carbon Beach in 2010, Tobias was an

analyst at an activist hedge fund, general counsel of a company listed on the

Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer

specializing in mergers and acquisitions he has advised on transactions across a

variety of industries in the United States, the United Kingdom, China, Australia,

Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam. He is a

graduate of the University of Queensland in Australia with degrees in Law

(2001) and Business (Management) (1999).

Toby is a ValueConferences instructor and spoke at Deep Value Summit 2013.

the company is

undertaking a material

buyback that will

significantly boost per

share intrinsic value.


5/5

The Manual of Ideasresearch team is gratified to have won high praise for our investment ideageneration process and analytical work.

I highly recommend MOI the thoroughness of the product coupled with the qualityof the content makes it an invaluable tool for the serious investor.

TIM DAVIS,MANAGING DIRECTOR,BLUESTEM ASSET MANAGEMENT

Wonderful.

THOMAS S.GAYNER,CHIEF INVESTMENT OFFICER,MARKEL CORPORATION

We do similar work ourselves.

GLENN GREENBERG,MANAGING DIRECTOR,BRAVE WARRIOR CAPITAL

The Manual of Ideas is a tremendous effort and very well put together.

MOHNISH PABRAI,MANAGING PARTNER,PABRAI INVESTMENT FUNDS

Outstanding.

JONATHAN HELLER,CFA,EDITOR,CHEAP STOCKS

Very useful.

MURAT OZBAYDAR,SOROS FUND MANAGEMENT

Very impressive.

SHAI DARDASHTI,MANAGING PARTNER,DARDASHTI CAPITAL MANAGEMENT

The best institutional-quality equity research to come along in a long time.

PAVEL SAVOR,PROFESSOR OF FINANCE,FOX SCHOOL OF BUSINESS

An extremely valuable resource.

GUY SPIER,AQUAMARINE CAPITAL MANAGEMENT

You are quickly becoming one of my must-read sources.

CORY JANSSEN,FOUNDER,INVESTOPEDIA.COM

FIND OUT WHAT THE BUZZ IS ABOUT.

WWW.MANUALOFIDEAS.COM

the manual of ideas toby carlisle 2015 08

Documents