Cardboard
-
Posts
3,622 -
Joined
-
Last visited
Content Type
Profiles
Forums
Events
Posts posted by Cardboard
-
-
Tembec also reported today.
http://www.tembec.com/public/Salle-de-presse/2010-04-28.html?isRecent=true&search=all
Pulp is quite important to them since it currently represents 65% of total sales. It is also a high cost producer such as SFK.
Their pulp business did quite well (although low production rates), but not enough to show earnings overall due to their lumber, newsprint production, depreciation and interest charges. The way I see it, is that SFK is somewhere between CFX and TMB. It does not suffer from lumber and paper production, but it is not a pure NBSK pulp play due to RBK and also not a low cost producer such as CFX. It has no dividend. So it deserves a lower multiple than CFX, but higher than TMB.
Annualizing Q1 numbers we have roughly today:
TMB: 2 times EBITDA, 5.2 times EV/EBITDA
SFK: 2.3 times EBITDA, 4.8 times EV/EBITDA (my estimates)
CFX: 6.1 times EBITDA, 6.7 times EV/EBITDA
So I think that SFK should trade around $2.60 based on competition. It could be more if we see debt repayment moving rapidly and if the RBK mills finally deliver some value.
I suspect that EBITDA will be very attractive next week, but that headline earnings could be kind of weak. RBK is also a big unknown and the Street is likely taking a wait and see approach. A stock price above $3 may take longer to occur than we currently expect or until earnings become truly apparent and that a good chunk of their debt has been repaid. A take-over offer is nice, but you can't count on that as an investor.
Cardboard
-
"Earnings: Dow Chemical (DOW, Fortune 500) reported earnings of 41 cents per share, coming in well ahead of the 30 cents EPS that was expected by a consensus of analyst opinion from Thomson Reuters."
Analysts are still way behind on earnings from cyclical companies (big ones, not under-followed companies) and the market turns higher whenever these positive earnings show up. When the market no longer responds positively to good news then you should question yourself about Greece, Portugal and other macro stuff.
Here is an article that I read yesterday that is in line with my current thinking, talks about 2007 and that does a better job explaining what I mean.
http://www.gold-eagle.com/editorials_08/swanson042610.html
Unless you can't find or don't hold cheap stocks, going to cash now because of various fears seems premature. The trend is still up and at worst could turn flat. Also, there are no signs of a 1987 crash. This should remain a good market for stock pickers (buy low, sell high, repeat).
There is a reason why Prem is only hedging 25-30% of his stock position at the moment and he is more vulnerable than a small stock picker: his liabilities and related payment terms remain constant while market swings could hurt his capital base and cash availability. Unless you are levered, you don't have this disadvantage and you are able to take advantage of market swings IF they occur by selling cheap stocks for cheaper ones.
Cardboard
-
http://finance.yahoo.com/news/Level-3-Announces-Redemption-bw-4131896284.html?x=0&.v=1
Nice to see this announcement this morning. In the past, Level 3 was only swapping near term dated debt with longer dated ones. Unless they issue something else in the near future, it could be a sign that free cash flow is now sufficient to fund these redemptions over time while keeping the cash pile stable.
Redeeming this convertible with cash now will reduce interest payments by $17 million a year or increase pre-tax earnings by the same amount and eliminate a very dilutive security which had the potential to add 48 million shares at a very low conversion price of $3.60.
With Qwest being acquired by CenturyTel, there are now very few options available to carriers to upgrade their national network unless they want to build from scratch and spend 10's of billions. Level 3 network is the most recent with completion in 2001, Qwest was in 1996 and Verizon (MCI), AT&T and Sprint were completed in the 80's. Some others were completed at the same time as Level 3, but they are not national.
In the 80's! Just imagine how out dated that is and how much retrofits have been made to keep this running. There was no internet for everyone back then. It must be a mess, unreliable and must take very knowledgeable technicians and engineers just to understand and keep running.
Cardboard
-
SD,
First of all, thanks for your analysis on SFK. I truly hope that you will make a killing on this one as you likely helped many board members making a lot on this idea.
Regarding:
"All that we actually know, per managements statements, is that SFK has been receiving various expressions of interest."
Is this based on discussions that you had with them?
Second,
"More importantly - there have now been 3 ‘seeds’ in the last 2 weeks; & whatever the plan, it’s starting to leak."
There is the one this morning about Domtar on Stockhouse, the one last week about a "Boston" investor on the Yahoo board, what is the 3rd one?
Cardboard
-
"To me at least, it's like fall of 2007 all over again. We're seeing the first rain drops of the storm, but for some reason the markets seem to think it can all be contained. "
One thing I have learned the hard way during the crisis about this macro stuff is to look at what the stock market is doing relative to it. Value investors such as myself tend to work in a vacuum and to ignore what the market is doing, but we cannot dismiss that the overall amount of knowledge that drives the stock market is greater than what is known by any individual.
Back in the fall of 2007, the market made a new high following quite a hiccup in August following the collapse of two hedge funds managed by Bear Stearns. However, if you take a bird eye view and look at a 5 year chart of the S&P, you will see that despite this new high that 2007 showed nowhere near the uptrend of 2005 and 2006. The market was going more or less sideways. So you can say that the market as a whole was growing uncomfortable with the decline in housing which was apparent since early 2006. We were also many years into a rebound following the 2001 recession.
If you look at the chart today, the uptrend is extremely strong. This seems to indicate that the collectivity must be seeing improvements in earnings and in the economy strong enough to offset Greece and other sovereign issues. I am not saying that this will remain like that forever, but at the moment, it would seem dangerous to bet against the crowd based on that. I would wait for the market to at least trade within a sideways channel for 3 to 6 months before betting against it.
This may sound like complete garbage for bottom up value investors, but if the level of the market starts to influence your capital allocation decisions: you sell or don't buy cheap stocks because you think that the market is high at the moment or that some macro issue like Greece's debt will drive it down, you may come to regret your decision because the current trend is clearly up and will continue until it shows clear signs of fatigue.
We may get a double dip recession, we may be into a "V" shape recovery, I just don't know like I could not tell in early March 09 if we where into a depression. All I can say is that IMO there are still enough attractively priced stocks out there on an absolute basis to fill a portfolio and the market seems to indicate that the earnings trend for the economy is up.
Cardboard
-
"I have been told that at St-Félicien mill, there is a rumors again that SFK will be buy by Domtar after it become Fibrek INC. Lots of major CIE like Domtar, Bowater were interested in the past to buy SFK, but this was not possible because SFK is a fund."
I read that this morning and I don't buy into it.
First of all, Domtar has been very focused over the last few years getting into uncoated free sheet or your typical 8 1/2 by 11 white sheets of paper and selling their saw mills and other paper businesses. Buying into pulp mills would go against this strategy unless there is some supply advantage to produce UFS with the pulp supplied by SFK: lower cost, hedging or protecting supply. Does anyone know if Domtar is even a current customer of SFK? We all know that SFK is a high cost producer unlike CFX so it does not seem to make sense. I could be wrong, but that is how I see it.
Second, I still have not seen anyone providing me with data on why other companies could not buy SFK currently as a trust? I have seen many income trusts already being bought out by other companies. So this argument seems pointless to me.
Regardless, I am quite optimistic about SFK results in the first and subsequent quarters. I must say however that my decision to exit CFX.UN in December/January to go with SFK.UN has not been that rewarding so far. I took on more risk and the returns so far are similar. I hope that the release of first quarter results by SFK on May 4 will go a long way to repair the damage that they have created with a very disappointing Q4.
Cardboard
-
Thank you as well Valuecfa on the tax explanation. In any case, I hope that they work to protect the remaining $5.2 billion. Losing $5.2 billion is already bad enough.
IMO, Level 3 management has been really strong on vision and average at best on execution. They have a terrific asset with a replacement value in the billions, but its usage to date is weak. For example, why waiting so long to attract entreprises outside telcos, government and other very large data users? The initiative only began in 2006... This replacement value has not provided any margin of safety because it took way to long to earn enough cash flows from this asset.
Then I have a real problem with their financing culture. Some of their convertibles have been redeemed for shares in recent years at much less than their conversion price. Here are the prices: $2.14, $2.71, $3, $3.07. We also have $875 million worth of convertibles converting at $1.80 a share. So the end result is massive dilution to long term shareholders. You have people who may end up absolutely correct about the business, but totally wrong on the share performance. So I can feel the pain of investors who bought since 2000 at much higher prices.
Fortunately looking forward, IMO ValueCarl is correct that the opportunity to finally make big cash flows is there near term. If you add $1 billion in revenues to 2009 results and very little to costs since the base is already in place, you can see a huge impact on profitability. Timing seems to be everything with this one and I am not even sure that it is right this time.
Cardboard
-
I am starting to dig deeper into Level 3 Communications and I have a question relative to their net operating loss tax carry forwards.
They mention that due to some ownership changes with holders of 5% or more of their equity (think Southeastern Asset Management and Fairfax) that they lost 50% of their NOL's. So, it is now down to $5.2 billion. They also say that they could lose another 50% if more is done.
The main issue with Level 3 remains its capitalization since the company generates a fair bit of cash before interest. So if a well capitalized and profitable buyer was to show up, pay off all debt and offer something like $3 a share and assuming that they can utilize the remaining $5.2 billion in NOL's against all earnings (Level 3 and theirs) it could be a good deal for them.
So, how does it work if someone like Google takes it out? Will NOL's remain at $5.2 billion, go back to $10.4 billion or be cut? Can they take the full $5.2 billion in tax loss carry forwards and eliminate their taxes for the next 2 years? It would be quite an asset, almost as good as cash.
This is pure speculation on my part, but I am interested to learn the mechanics.
Cardboard
-
Ericopoly,
Since you call it a loan, I am assuming that you want to take the $27 in net proceeds and do something with it, like buying a home, business or other securities.
If that is the case, then the cash is no longer in the account to buy back your put and you will face a steep margin requirement on such deep in the money put. You could eventually risk a margin call if your collateral or other securities in your account decline quite a bit in value.
It is an interesting strategy, but I guess that you don't want to go over board with it.
Cardboard
-
NBSK is now at $900 U.S. and still climbing with 8% of worldwide pulp capacity taken out by the Chilean quake and some more by the strike in Finland. BHK is also following which drives up the price of RBK.
http://www.paperage.com/foex/pulp.html
SFK must be generating cash at these prices. The quarter is getting to an end, so it would be nice for management to come out and indicate how much cash they generated so far and what can we expect in terms of debt repayment. A necessary guidance IMO, considering the big miss vs market expectations in Q4.
Cardboard
-
Dundee's analyst target price is like the one at BMO: useless. The target at BMO is $0.75.
So, $1 and $0.75, what is common between the two? Target prices close to the trading price with a negative bias. That is it. There is no fundamental justification of any kind to offer such target price since the company was not profitable. Their target price is not a reasonable multiple of book, it is not a reasonable multiple of earnings or cash flows. Why not $0.25?
So if an analyst is positive on the company, he or she post a target price 20-30% above the current stock price. If he or she is negative then the target is 20-30% lower. As the stock price move, they adjust. They will never come out and do like Sharper and say that this stock could double or go to $2 since earnings are about to explode. You have to stick your neck out with cyclicals, if not what is the purpose of making predictions?
The conference call was actually pretty upbeat. I have a feeling that cash flows are now much higher in q1 2010 and that with debt repayment underway that it will become very accretive to shareholders. I think that T-Bone1 "back of the envelope math" is right on the money. The question is how much time do we have with high pulp prices as mentioned by Uccmal to fix the company?
Cardboard
-
The conversion to a corporation was expected since it has to be done by law by January 2011. My point was that 2010 should be profitable if pulp prices remain this high or go higher and being a trust would eliminate taxes on this income.
Now, most of the trusts are converting now or soon, so they must all fear that if they wait by the deadline that there might not be enough time/outside resources to get it done on time due to a surge in demand.
Regarding the structure impact on a sale, I can't see any. Trusts have been bought before by foreign companies. If it causes any issue, then the acquirer can convert this new sub from a trust to a corporation at any time.
Cardboard
-
This article does a decent job explaining why they are doing this.
http://www.marketwatch.com/story/bottler-acquisition-could-be-risky-for-coke-2010-02-25?siteid=yhoof
Cardboard
-
Coca-Cola appears to be in catch-up mode relative to the industry where Dr.Pepper Snapple Group was already under the integrated model owning its main bottlers and after Pepsico announced the buyout of Pepsi Bottling Group and Pepsi Americas last fall.
DPS is likely to cash in another $1 billion following this change of control at CCE North America and it will increase earnings a bit. They did beat analysts this morning and 2010 guidance is also above what was thought. This transaction along with debt reduction/share repurchases should move earnings to around $2.60, so it is still a cheap stock. I am very impressed by management so far and you always have the possibility of a take-over by either PEP or KO.
Cardboard
-
It has happened to me once before. :-[
In Canada, what you have to do is to "give" the shares to your broker. There is a name for this, but I can't recall. Then you will be able to claim your capital loss in the year when it is completed. I assume it is similar in the U.S., but I could be wrong. In any case, your broker should be able to help.
Cardboard
-
I am quite disappointed with the results. I suspected that RBK would be a hold back, but nowhere near that. This acquisition has certainly not paid off so far. Anyhow, as some have mentioned, I expect that it will look quite different beginning with this quarter of 2010.
The other thing that I don't like is this conversion to a corporation so quickly. Why not waiting for the deadline to convert and extracting as much tax reduction as possible?
Regarding a take-over of SFK by CFX, I would not hold my breath. CFX is profitable, but they don't have cash lying around and Canfor which holds 50% is just seeing recent improvements in lumber pricing. There is also quite a difference in margins between the two as recent results indicate. In any case, if there is a take-over, I will take cash, pay my taxes and invest elsewhere. By that point, I figure that there will be better opportunities in other industries. These are cyclicals and we have seen how bad it can get. I would not count on pulp going well above $1,000 a ton.
Cardboard
-
I did switch from CFX.UN to SFK.UN in December after seeing a very large change in risk/reward between the two. I think that we are still at very attractive ratios today. And, if we are to see a $5 stock price on SFK.UN under a scenario as described by SD, then it will be close to paradise. :P
The only question mark that I have at this point with SFK.UN is the performance of their U.S. mills. Wastepaper cost has gone up dramatically in the past year, while RBK pulp tends to follow the pricing of hardwood pulp (BHK). BHK is about $100 a ton cheaper than NBSK (and always cheaper), but it is up a lot as well from the low. Looking forward to see their margins there.
Nonetheless, I believe that $2 a share is a very achievable target near term. It's really a story about the improvements being there already to see, but the stock price has a lot of catch up to do. What I also really like about SFK is that they did not dilute their shareholders during the downturn. They did not panic, ran a tight ship and now reward is just ahead for their shareholders.
Cardboard
-
Missed that one... :'(
I am surprised by the timing. I thought that they would be more patient continuing accummulating shares in the open market to reduce total acquisition cost. Of course, it is more risky since the price can run up on you.
Still a good deal. I simply hope that they won't issue $200 million worth of shares. Preferred's are fine, but no equity via shares at these prices. I also don't understand what is so magical about retaining $1 billion at holdco. Why not $800 million following this deal? What is the difference?
Cardboard
-
"Best of my knowledge, Prem has paid $1 or less per share for most of his shares, SEAM a little higher but not as low as Prem."
I think that Prem paid a lot more than that. The only period where LVLT has traded sub $1 was between Oct 08 and Apr 09. Fairfax carried 116.7 M shares before that and added only about 22.5 M shares in the 4th quarter of 08.
It is an interesting situation, but determining the value is not easy. The company has 1.64 billion shares, around $5.6 billion in net debt and generated roughly $550 million in EBITDA - CAPEX in 2009. There is no doubt that replicating their network would cost a lot more than current net debt. The question to me is how much a buyer would be willing to pay above that?
At this point, it would seem difficult for a buyer to justify to his investors a purchase of LVLT above $10 billion including debt or around $2.70 a share. Current cash generated by the business does not justify much more. A bidding war could erupt, but I would be surprised if it goes sky high since most CEO's are short term oriented and will need the support from debt holders, shareholders to push it through.
What is needed IMO to create real big value is for LVLT to really increase its revenues or to fill its pipeline. Then the shares will go up, takeover or not. Bandwidth demand is really increasing, but so far we have seen little translation into their revenues. The Google experiment and now RIM warning about a bandwidth crisis may be signs that we are about to see some fundamental change in the industry.
Still, predicting these future revenues and resulting cash flows is near impossible. So it is value investing because the asset or their network is worth more than enterprise value, but estimating the terminal value is a pure guess.
Cardboard
-
It would be a great fit for Fairfax:
1- Long tail policies meaning a lot of float to invest.
2- They know management very well and the culture around disciplined underwriting is very similar.
3- They know this line of business very well (workers compensation): ORH, TIG.
4- Essentially debt free.
The real missing element for ZNT to be an attractive business is their lack of investment skills, almost everything is in bonds and treasuries. In the hands of Hamblin Watsa, the portfolio would look quite different.
The issues I see for a deal:
1- Are they ready to sell?
2- Fairfax would need around $2 billion in cash and investments at holdco since they have mentioned a few times the desire to keep around $1 billion. We are not there even with the issuance of these recent preferreds. Share swaps with shareholders does not seem like their thing based on recent history: NB, ORH, Advent so we need to see cash. Not listed on the NYSE is also an issue for such option.
3- Over 50% of their business is in California. Too much for Fairfax's taste?
My guess is that they will continue accummulating the shares on the open market at these prices for quite a while. If the price don't move and cash starts to pile up at Fairfax holdco, then I could see a move.
Cardboard
-
This acquisition is a terrible deal short term and I am not certain how long it will take to really deliver large cost savings. I am also not too happy to see how Irene got this through by effectively shutting down shareholders with no vote anymore.
So what are you guys doing? Selling?
The stock is still cheap, but nowhere near what it was prior to this acquisition. They made about $2 a share in 2009 and EPS was forecasted around $2.20 for 2010. With Cadbury and assuming a full year, 2010 earnings would be around $2. So instead of a 12.8 P/E, we now have a 14.1. IMO, a P/E of 15-16 for Kraft with or without Cadbury is about all one can hope for. I have a feeling that the Street will take a wait and see attitude which could mean little upside for the next few years.
Cardboard
-
IMO, these guys are now entrenched in a belief and will not change their thesis no matter what. Long term treasuries have suffered huge loses in 2009 and it could continue in 2010. I have read strong opinions from both the deflationary and inflationary camps and I cannot say for sure who will win. I prefer to be more flexible.
Regarding inflation, here is a fact:
http://in.reuters.com/article/economicNews/idINIndia-45428620100115
The CPI is up 2.7% from a year ago while 5 year treasuries are yielding 2.41% and anything with less than 1 year duration is close to 0%. So you need close to a 10 year bond yielding 3.67% or a 10 year committment to ensure "some" real return above inflation. If these numbers don't indicate huge fear already priced in for deflation then I don't know what is.
So to me it is terrible to recommend people buying long term treasuries when you can go out currently and buy very high quality companies at 11-13 times earnings and with dividend yields alone already at or above long term treasuries. I am not talking about cyclicals here, but things like: KFT, JNJ, AMGN.
Cardboard
-
IMO this deal is negative near term (1-3 years) for Kraft in every aspect. It is dilutive to EPS. Cadbury margins are lower than Kraft, so forget about trading at a higher P/E because chocolate and gum are more sexy. It would also hurt Kraft's debt ratios. I applaud Buffett for his efforts.
To make this deal work, you need massive cost cutting and/or some growth from Cadbury. It is true that a bigger Kraft will gain in efficiency of scale with manufacturing/distribution/shelf space/marketing, but this usually takes time. Cadbury may also help Kraft enter India, but this is a big if.
Something that caught my eye and maybe an opportunity for the deal to work was the number of employees per $ of sales. Kraft has 100,000 employees for $40 billion in annual sales while Cadbury has 45,000 employees for just under $10 billion. Any insight on the big difference?
On a somewhat related topic, does any one of you hold Dr. Pepper Snapple Group Inc.? It trades around 12 times earnings, has good margins (better than CBY and KFT) and has recently agreed with Pepsico to receive $900 million for the change of control of PEP bottlers. After taxes, this will be used to repay some debt which will help earnings. Moreover, they recently introduced a dividend and a share buy-back program. This company appears too cheap on its own merits and now being a pure play like Cadbury it could be a target.
Cardboard
-
Here is what I have found explaining the "phenomenon":
https://us.etrade.com/e/t/invest/mfstatic?gxml=volindexoptions.html&rightrail=disable&skinname=none
So, the quoted VIX (spot VIX) is totally useless to compare with the options. It is not the underlying for the options. It is all based on the VIX futures. Thanks T-Bone 1 and Watsa_is_a_randian_hero for the help.
Cardboard
FFH relative valuation to MKL
in Fairfax Financial
Posted
Did you ever asked yourself why Berkley, Markel, Chubb, Berkshire Hathaway and some others who publicly state that they are disciplined underwriters all show combined ratios below 100% and Fairfax who states the same thing rarely ever does?
Cardboard