The reasoning was that the company may have lots of cash, but I don’t see it getting back to shareholders.

The underlying business is OK. They can earn close to or slightly above their long term cost of capital.

Since the start of 2010 there has been at least $9 million on the balance sheet as cash. The CCC is quite short (around 30 days) and it seems that this number may be overstating what is actually needed. There are also some equity investments that one could add as excess to the valuation.

In that time the company has earned around $10 million in operating earnings. With a market cap of $45 million, this looks really cheap. But none of it has been returned to shareholders. No dividend, and no buyback. They did purchase an equity interest in a small marketing firm.

I like when you have a decent company with a ton of excess cash. I don’t mind when cash is plowed back into the business at a decent ROIC. HCI’s ROIC is around 11% over the last 5 years. Not great, but not too bad.

If you were to get the excess cash on the balance sheet returned, I would put fair value between $4.15 – $5.35 (based on 6x EV/EBITDA). Without getting any cash you get $2.95- $4.14.

All this is assuming that the company will implement the ERP successfully in the next 6 months and not spend the cash stupidly. There is some reason to be positive as last quarterly earnings were very strong.

I think there is too much risk that you either get no cash returned or it isn’t spent wisely.

I would look at HCI again closer to NCAV or $2.00, if it gets there.

Dean

You can see from the chart that MCB has done a good job of taking advantage of the increased economic activity. Ebitda margins are near record and ROC is on its way up. The CCC is at an all-time low.

Why is this…

MCB has been deploying it capital intellegently. They recently (June 2011) announced that they would divest Rebel Metal Fabricators. Rebel manufactures and supplies vac and hydrovac systems to customers operating mainly in Western Canada. Earlier (February 2011) they announced another division sale, McCoy Parts and Services.

Apart these operations aren’t extremely meaningful. But together they show how important capital allocation is to management.

MCB had about $0.68/share in cash at quarter end. They recently announced they would issue a quarterly dividend of $0.03/share. Giving MCB a yield of 3.87%. I would expect the dividend to grow quickly going forward.

As you can see, MCB is trading near the valuation low of q4 2008 on an EV/Ebitda basis. Though we are at a larger premium to tangible book and EV/Revenue. You can see that the share price rebounded sharply and the stock appeared expensive on ttm EV/Ebitda basis. Now that those expected earnings have come in (quicker than I had expected), and shares are down 20% or so, the company is cheap enough to warrant purchase.

As long as we aren’t at peak cycle, I think MCB is worth picking up. Given the current economy and outlook, $4.50 doesn’t seem like a far stretch for fair value.   Upper limit fair value could be $6.00, but we’ll talk at $4.50 (if we get there).

Dean

Disclosure: The author is long MCB.to at time of writing.

Latest investor presentation.

I apologize in advance, this post contains way too many charts.

Let’s take a look at a price chart as well as some valuations.

Not a pretty chart. But we are only looking at the numerator. Let’s take a look at some valuations.

So the company is cheap on P/TB and EV/Ebit to its own history. But is that really cheap? Current P/TB is about 1.5x and EV/Ebitda is at 4.67x. Not liquidation cheap, but not pricey.

Let’s break down the two different divisions:

CVT

From their website:

“CVTech-IBC inc. manufactures CVT systems serving major manufacturers of recreational and utility vehicles as well as minicars. In addition, CVTech-IBC inc. operates a branch in France in order to serve the aftermarket parts segment and to maintain a proper customer service for the European market.

CVTech R&D inc. is responsible for the design of CVT systems for the clients of CVTech-IBC inc. Its main source of income is derived from royalties paid by CVTech-IBC inc. on the sales of products developed by CVTech R&D inc. CVTech is the owner of the trademarks and CVTech R&D inc. holds the intellectual property on products which are part of its technological solutions.

CVTech-AAB inc. specializes in the rebuilding of industrial crankshafts, cylinders and engines, the plating of cylinders and the sale of engine-related parts.”

Did you get it? What the heck is a CVT?

CVT stands for continuously variable transmission. Meaning these transmissions have no gears. The author knows a little about the technological advancement in automobiles over the last few years that may help.

I borrowed the chart from another site.

http://forcechange.com/627/those-who-dont-know-their-energy-policy-history-are-destined-to-repeat-it/

It really doesn’t matter where from, but I wanted to illustrate how little fuel efficiency has improved over the last 20 years. What has really happened is cars have remained the same in efficiency, but have done so with much less harm to the environment. It’s also worth noting that cars (on average) require less maintenance than before. Scheduled tune-ups are now being pushed beyond 150,000 kms (100,000 miles), where they used to be every year or 6 months. It has only been recently that cars have become quite a bit more efficient.

There are all sorts of tricks that manufacturers are using. Variable valve timing, multi-cylinder displacement and yes CVTs. By having an infinite ratio of gears to choose from, CVT cars can perfectly match engine load to driver demand. If you need to pass a truck on the highway, you have a gear ratio that allows you to accelerate fast. If you are at a steady cruise, you have a ratio that puts very little load on the engine (and burns less gas).

So there are some nice tailwinds right. Well lets look at the CVT part of the company.

For a product in such demand you would think there would be more profitability here. What’s worse is the corporation has ended its relationship with Tata motors. This is not good news, but they are in talks with another Asian manufacturer to equip their product to the company’s small cars. I am putting fair value of the CVT division at tangible book value or around $0.12/share. I feel this is conservative as it gives no value to the over $8 million in R+D spent over the last 5 years or an additional $0.11/share.

Every financial statement press release through SEDAR over the last year has contained language that management is looking at selling the CVT division.

Energy

With the acquisition of Riggs Dislter in 2009, the energy segment has become a decent sized player in the maintenance and construction to the utility and heavy industrial markets. From the website:

“Thirau ltée is a general contracting firm specializing in the construction and maintenance of electrical power houses and substations as well as transmission and distribution lines. Thirau ltée has two wholly-owned subsidiaries: J.J.L. Déboisement inc. and Thirau LLC. J.J.L. Déboisement inc. specializes in the vegetation control on rights-of-way for transmission and distribution lines. Thirau LLC mainly carries out the above-listed Thirau ltée activities. Thirau LLC also owns a wholly-owned subsidiary, Riggs Distler & Company, Inc. (“Riggs Distler”), a leading provider of maintenance and construction services to the utility and heavy industrial markets.”

Better performance even though it is a tough business environment at the moment. Revenue has been flat as major customers have curtailed spending. I think this can only go on for so long as consumption of electricity in the United States will likely grow by at least 1%/year due to population growth.

I mentioned the sum of the parts valuation earlier. CVT lists its competitors in the energy segment. There are really 4 that are public that can be used for comparison:

MYRG, MTZ, PWR and PIKE. All are much larger than CVT. The smallest out of the 4 is about 4x the size of CVT’s energy segment.

Let’s look at the competition…

I took goodwill out of the assets as I though it may have muddied the waters a bit. ROA and ebit margins may be something to pay a little more attention to. I used what was available to me, maybe a better measurement would have been things like CCC and ROIC, but this will have to do.

CVT actually stacks up pretty well to the competition. So what is the energy segment worth if it traded like its competitors? I uses a few different metrics to determine fair value.

I am just using MYRG and MTZ for comparison. The other two companies didn’t show the same level of profitability so I excluded them from the calculation.

Taking the average of the above fair values, I get $1.65 or 73% higher than the last trade. This is without the CVT value which would push fair value to 85% above last trade. We are looking at a discount to the competition that is not based on growth. This is what I like about this trade, I don’t have to be right on the economy in order to make money. Though it would help.

Other valuations

In order to protect myself from looking only at sum of the parts as fair value, I took the company’s previous valuation history and averaged it out. Then I 33% MOS to arrive at a trigger price. Here’s how my trigger price shakes out…

Risks

The risk with the CVT division is that they don’t find another customer in Asia (or anywhere). The division will start bleeding cash. Though this could happen, I don’t see this as a major risk unless the company is willing to let the division struggle. With only $0.12/share of value in the CVT division, the bigger risk is if they don’t sell it and it bleeds cash. Once the CVT division is out of the financials, the energy division can be easily compared and priced to its competitors.

The energy segment may face some short term pain as customers are still reluctant to spend. The Canadian dollar swings can muddy the true earnings power of this division as well. I could also be comparing CVT to other companies that are in far better shape.

Management gets paid higher than I would like. Of course my boss probably says the same about me. I think inaction over the next 2 years is a risk. The CEO owns about 10% of the company and a board member owns 14%. I think their fate is tied to mine somewhat.

Dean

Disclosure: The author is long CVT.to at time of writing.

Company website

Latest investor presentation

I was down around 4%. Not too bad, but certainly not good.

Where did I go wrong?

The biggest issue was position size. I strayed too far and didn’t have any cash when the market tanked. I had to sell cheap to buy cheaper.

My ideal portfolio would have 3-5 core holdings making up 40-60% of my portfolio and 6-10 smaller positions. The core did OK in 2011. What I did was average down mindlessly. The two best examples are AEY and MGO.to.

AEY was kind of cheap when I first bought it around $3. Then I bought more at 2.75, 2.50, and 2.25. Not a bad idea, but I ended up overweight the company. Now I face the dilemma as to whether I should sell at this really cheap price or hang on. I still haven’t decided. Don’t get me wrong, I think AEY is a buy. But I only want 5% of my portfolio in at these prices.

MGO I also averaged down. I didn’t fully understand the risk of Chinese RTOs at first. Only after I turned my attention from operations to legitimacy did I made a mistake. Maybe MGO.to is a buy, but I only have so much room in the portfolio.

In order to prevent this in the future I have decided to make harder rules for position sizes.

The other factor was just my timing of adding to my portfolio. I was quite unlucky this year. Money was tight for a while as I was on parental leave for 3 months and also had some emergency house issues that required immediate attention. I seemed to add right at the peak and ran into liquidity issues at the wrong time. For example, when FES.to went below 10 I would have bought hand over fist. But I didn’t have the cash.

I have also learned to watch comps yoy. Really understanding where the company is on the industry map is important. Many companies are growing top line numbers, but with rising commodity prices have a lag in time before they can pass on costs. This is what is happening to HPS.A. They had some margin pressure, but have passed on higher costs. This means that 2012 comps should be better than 2011 as long as the top line sticks where it is at (or improves).

Let’s hope 2012 proves to be better.

Dean

From their website:

Pethealth Inc. (“Pethealth” or the “Company”) is North America’s second largest provider of medical insurance for dogs and cats to pet owners operating in Canada, the United States and the United Kingdom. It sells its policies under several different brand names using a model which includes co-branding, white labelling and private labelling programs with distribution partners. In addition, the Company is a leading provider of pet recovery database services in North America, a market it entered in February 2003 under the brand 24PetWatch™. Furthermore, the Company, through its web-based product, PetPoint™, has become the leading provider of management software to animal welfare organisations in North America, a market it entered in 2005.

What it really means is there is the insurance segment and the non-insurance segment. The non-insurance segment is actually a few different pieces lumped in as one.

Insurance

The insurance segment is easy enough to understand. Through an MGA (managing general agreement) with some insurance providers PTZ earns a small amount of income for marketing, claims adjustment, premium collection, etc. They do have some underwriting risk in their US and UK operations, but none in Canada. I think the best way to value this segment is to average out some of the peaks and troughs and put a conservative multiple on it.

As you can see, revenue took off due to an acquisition to enter the UK market. Though the Canadian market is not necessarily strong, the US and UK market is really soft at the moment. A prolonged soft market is a risk to the insurance segment. I think that the insurance segment should be worth more than 4x EV/EBITDA. So at if I average the insurance EBITDA over the last several years and put a 4x multiple on it, I get around $0.70 as fair value. This tells me that there is little value being ascribed to the non-insurance segment.

Before I move onto the non-insurance segment, let’s take a look at the last 5 years from a valuation perspective.

Since the insurance segment has turned EBITDA positive, the stock has slowly had a valuation adjustment downward. The revenue is on a consolidated basis. As you can see the company has never been cheaper. Looking back to the first chart, it appears that the company would have been too expensive to warrant investment as it was barely earnings positive. But that didn’t stop the market from building in high expectations.

Obviously there is a risk here. The non-insurance operations could be bleeding cash and/or the insurance segment will look dramatically different going forward. I will try to disprove this notion.

The insurance market is commoditized. However, there are unlikely to be many new entrants at this point in the cycle.

Non-insurance

The non-insurance is made up of a few different businesses.

The microchip business which is really 24PetWatch RFID chips and database management. This is a low barrier to entry business, but the fact that the database is managed by Pethealth’s software is were they seem to have an advantage. Petpoint is offered for free to animal welfare organizations that purchase the RFID chips from Pethealth. This application is cloud based and allows for organizations to easily track any animal that has a Pethealth chip in it. PTZ is likely to represent 50% of the total adoptions in North America that come from welfare organizations. A fee based version will be available shortly with increased IT efficiency and agility. With the recent roll out of a new ERP, there has also been temporary margin pressure.

The other part of the non-insurance segment is petango. Petango.com is an online store that allows visitors to view real time data on adoptable animals. As PTZ expands their geographical reach they will be able to scale better with this business. Margins are also depressed from all the up-front costs associated with the website launch.

Obviously, all the different parts can be marketed to customers from its own unique value proposition.

The segment is about to break even on an EBITDA basis. Though there have been a few times where it almost broke even, but nothing that was sustainable. I believe that the segment has enough synergies and traction to actually turn to a profit in 2012. The ceo feels that 2012 will finally be the year that they make money on the non-insurance side. There has been a huge increase in expenses and intangible assets on this side of the business that is now winding down, this should support margins going forward.

As you can the downward trend in expenses. This combined with increased revenue will drive profitability in 2012.

Risks

You didn’t think there wasn’t any did you? Of course there are risks here. If you buy PTZ, you are buying a premium to book. And lots of that book value is in the form of goodwill and intangibles. It may not be worthless, but it is tougher to value than hard assets.

You could also get an extended period of tough insurance environment that will eat into the margin of safety. The non-insurance side could also not execute as planned. Though the stock may not drop precipitously, it could end up being dead money.

In 2002, the ceo was loaned money from the company to buy shares in the open market. He did indeed buy them, but at a poor time. The loan was a 10 year loan that is will be due soon. Since the shares are under water and the company is just starting to gain traction, I think the terms will just be extended.

A high Canadian dollar is also bad as it hurts the US and UK profitability when operations are translated back to Canadian dollars.

Other notes

The ceo bought 100,000 shares at $0.70 a few months back. This is a vote of confidence.

The company is raising chip prices in 2012 for some customers.

The company has the ability to to pre-fund some of its expansion plans with PetPoint. It collaborates with shelters to show them the benefits of Pethealth’s program. This first tranche of expansion included 55-65 organizations. It bodes well for future expansion plans.

PTZ has the ability to sell some of the massive amounts of data it has gathered from its partners.

There isn’t a close competitor that services all the different points of the pet ownership market, so I don’t have any company that I can use for relative valuation.

The ceo and chair own 20% of the company together. This should help align incentives between shareholders and management. Though compensation is a little high for my taste, but where isn’t it?

There is also two investment funds that own quite a bit of stock. Burgundy Asset Management owns about 15% of the company, and have owned since 2010. Goodman & Company own about 12% of the company, and have owned since 2007.

Summary

I have a hard trigger at $0.75. At that price I don’t think you are paying anything for the non-insurance segment. With a near term catalyst, I think I can find room in my portfolio for PTZ.

Dean

Disclosure: The author is long PTZ at time of writing.

Latest investor presentation

Petango.com

I originally bought FES.TO right around these levels in 2010. When the price rose dramatically faster than the fundamentals, I sold out. Now the opposite has happened. Flint has had its share price lose 30% YTD and the fundamentals of the company seem to be improving over the last 2 quarters.

They had a pretty major oil sands contract awarded (at $430 million). They also made a strategic acquisition that was funded partially by shares. The issue was that FES was actually quite cheap, so I would have preferred if they used all debt instead.

According to analysts Flint should do $200 mil in EBITDA and $1.65 EPS in 2012. That’s gives you a EV/EBITDA of 3.6x and a 7.4 P/E. Though I don’t like to rely too much on future estimates, I take comfort in the fact that right now you can buy FES.TO at 1.1x tangible book. With earnings trends pointed in the right direction and increased expenditures from the major oil sands players, I can live with expensive ttm numbers for Flint. Oil seems to be stable even during the Euro-crisis.

Living in Alberta, I can tell you that nobody really knows about the crisis in Europe and it doesn’t seem to be affecting the energy sector one bit. As long as oil stays above $75, we are in expansion mode here.

Under $13 I think Flint is a buy. I promise to have more detailed posts than this one going forward.

Dean

Disclosure: The author is long FES.TO

http://www.valueinvestigator.com/en/valuefavourites/fes.php

DA+Davidson+Conference

My original idea with Migao was to buy a company that will participate in the growing middle class in China. A company like Migao was growing and was easy for the financial community to market to investors. Lets be clear, MGO (if it’s a legitimate company) is only an OK company if it’s in the right situation. As long as they have pricing power to their end-users they can stomach wide swings in their input costs (mainly potash).

However, I failed to realize how risky this company was. The real mistake was when I brushed off the RTO risk after a few companies in China were discovered as frauds. I didn’t think that MGO was a fraud given it’s high insider ownership and board. But that really doesn’t matter.

I sold MGO this last week after they were forced from the OSC to reveal the document that related to PEC (Potash Export Company). They were vague the entire time with who exactly PEC was and how they could supply so much potash without being on the radar of the investment community. I was actually OK with it. I figured that if MGO was to get a decent discount to the spot price, it would put the major suppliers in a tough spot. Once they were forced to issue the document, they still issued the bare minimum. I would have thought they would take the opportunity to explain to investors who PEC was. I was actually expecting a conference call or at least a detailed press release. Instead…nothing but the minimum.

Maybe this is a real company, but I just don’t feel right. That’s why I sold.

I am taking my losses and running for something I can really wrap my head around. This has been a very expensive lesson that I hope not to repeat again.

Dean

Here are 2 links that provide bullish cases

Whopper and NZhedge

and one that provides bearish (or at least cautious)

Oddball Stocks

my original is here

OK, now we are caught up.

Since my purchase I have had AEY lose a fair bit of value, going from $3 to $2.25. Though I can’t say for sure whether I am right or wrong, I can say I was definitely early.

When I first read Ben Graham’s work, it made sense. It still does, but it has limitations. NCAV is nice, but sometimes things don’t belong in the “current” side of the equation. Some things that are in the “long lived” or “non-current” belong in the “current” side.

Obviously I am talking about things like inventory, receivables, even cash on the current asset side. Some inventory or receivables can take longer than a year to turn into cash. As such they should be in the non-current side. Under GAAP and IFRS they may not need to be put there. A perfect example is the inventory at AEY. Some of it is turned over 6-8x per year, others aren’t. Does it mean that it is worth less? No, but you may not see that money soon. Conversely, a company may be selling a piece of equipment that is not current according to accounting rules, but certainly is current in reality.

You are asking why the cash may not be “current”. Many times it sits on the balance sheet doing nothing at all. Eventually it could be spent on something STUPID. I can see it and I find it hard to listen to on conference calls. “Strategic acquisition”, “weighing our options”, etc. are common excuses. Sometimes it makes me want to throw up. I mean buyback shares or issue a dividend already.

NCAV – the learning curve

Putting zero value to equipment will eliminate many companies from your NCAV screen. Though the assets aren’t liquid, they are usually worth something. Putting a % discount on them doesn’t make much sense either. To arbitrarily assign 50% or 25% of stated value may seem OK, but it probably shouldn’t replace some number crunching. Looking at equipment values relative to production capacity and stated value (net of depreciation) are two simple ones if you can find them. That’s where NCAV does make sense, you get all the PPE for free. At the same time you could be overlooking a company that is trading at 10% of liquidation value because all its value is in plants, or real estate.

ADD thoughts

I still own AEY. I have learnt the hard way about having a margin of safety with companies in decline and initial position sizing. Essentially I bought too much too soon. I have been buying on the way down and now have a position larger than what I am comfortable given the risks involved.

The biggest risk is still the inventory and the Cisco agreement. The Cisco agreement prevents them from selling new Cisco products in Latin America and only selling to select end users in North America.

Cisco is a good chunk of revenue and new inventory, so this is actually a decent hit to a potential return to previous profitability. There will be lower margins on the Cisco products going forward as well.

The inventory is the largest part of the valuation mystery. There has been decent amount of older and refurbished inventory in preparation for a push into Latin America. This is why the latest acquisition makes sense to me. AEY now can push its old inventory through its new channels in Latin America. At least that’s how I see it. Though it remains to be seen.

AEY is still cheap. Less than NCAV and tangible book. I should have demanded a larger margin of safety on my initial purchase. I have retooled my trigger numbers for a company like AEY and it seems that all trigger numbers should be asset focused, not earnings. On that basis AEY is a buy under $2.35.

Yes we have hair on this one. I mean what do you expect with a NCAV stock. But I think there is a decent margin of safety. The latest agreement sucked. That’s the thing with NCAV stocks, the business usually sucks (at least in the short term).

Trying to envision a catalyst seems wasteful. Earnings will be driven by major whether short term and housing starts long term. This is of course only what my brain can see at this time, other catalysts may emerge.

Dean

Disclosure: The author is long AEY.

So it begs the question…”why?” Why would there be such a large gap between NAVPS and share price? I think there is no real confidence in management to execute or there is no real confidence in the sector as a whole. It may be true, things change and exchange market could look quite different from today.

I am selling because I blindly bought URB without dissecting why it was so cheap. I feel that the lack of liquidity has something to do with it. I also have no real opinion of the future of the businesses in the fund. So I feel that there are companies out there with clearer visibility. There has been around a 20% discount to NAV since summer 2008. I am selling cheap to buy cheaper.

More to come…

Dean

Disclosure: Author has sold URB.A

Why? Let me explain…

I bought NTRI because I thought it was a fast growing company that had a mis-step that was exasperated by the recession. It seemed that the company was making headway against competitors and the NutriSystem D line was just being launched. Lets keep in mind that NTRI has almost no moat. You can go buy healthy options from the store that aren’t in little packages and honestly it is probably better for you. The internet is full of FREE healthy eating tips and how to monitor your progress. NTRI caters to guys like me…brain off dieting. All this doesn’t mean that you shouldn’t own NTRI, it means you should pay a certain price.

The tailwinds in the industry attracted me. But this industry is extremely competitive. Not only internally from Jenny Craig and Weight Watchers, but externally from pharmaceuticals. I think that all expenditures are being spent to simply maintain market share here. And that the dividend is probably excess cash and maybe even some return of capital.

Some visuals always help…

The graphs show a company that has struggled to reach peak revenue levels. Management will tell you it is “the economy”, and maybe they are right. But NTRI does not have a moat. Earnings beats typically have come from expense reduction, not increased revenue.

It is OK to buy a company with falling margins. Buying a cyclical company during the height of a recession is usually a good investment. NTRI is not a cyclical, and you can see that because revenue has continued to fall even after the recession has ended.

So that leaves you with using assets to try and value NTRI. With price to book at 4.5x, I don’t really have a margin of safety here. I know, the customer relationships are worth something and all that money spent on advertising is worth something. I agree, but what? I don’t know and I won’t speculate.

I failed to realize the impact competitors have on NTRI. As such I have lowered my fair value to $14-15. Not leaving enough margin of safety, I have decided to sell in favor of better opportunities.

I think that it is tough to determine what NTRI will actually earn. It is possible to achieve the 33.9 million (or $1.18/share) in net income. But as witnessed by the company’s last few quarters, if a competitor launches a new product, NTRI must cut prices drastically to maintain market share. Not something I want to pay a premium for.

NTRI also has healthy executive compensation and lack of insider ownership. Two things I am fond of.

I have a revised trigger of under $10 given the risk. As with anything, I would be flexible if there was some more clarity.

Dean

Disclosure: The author has sold NTRI. Given his impeccable timing, you should buy and expect a nice return.