Lesson: Arcelor Mittal (MT), Posco (PKX)

Why did I buy MT ?

  • Cheap on EV/EBITDA. Started buying around $18 and kept it up until $10. Sold at $7.
  • Management owns ~ 40% shares.

I coat-tailed in PKX because of Mohnish and because this is also cheap over EV/EBITDA.

What I learned ?

  • Importance of the business. The iron & steel business is difficult, capital intensive and is a commodity business.
  • I did not want to sell PKX because I think it  has a competitive advantage. But, I feel uncomfortable because I have problems understanding the management culture especially after some of them are being sued.
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Distribution Now (DNOW)

Awesome balance sheet (Q2, 2015)

$114M cash/$1.9B equity/$457M Goodwill/$80M LT Debt.
EV ($18) = $1.7B

Management

Same people who ran National Oilwell Varco (Pete Miller, CEO of NOV for 13 years, is executive chairman).

Valuation

A 5% net margin is quite achievable. With P/S of 0.5 at the moment one is paying a P/E of 10.

Business

Pipe, valves and valve automation, fittings, instrumentation, mill and industrial supplies, tools, safety supplies, electrical products, drilling and production equipment, fabricated equipment, and industrial paints and coatings.

Colfax Corp (CFX)

Background: read about Danaher and the Rales brothers [The Outsider]

CEO was changed this year but the previous and the next guys are related to Danaher. The older CEO was around 59 year so it is not very clear why he moved (was CEO since 2012).

Management Compensation:

Screen Shot 2015-09-09 at 10.13.00 PM

Shareholding 2014

Screen Shot 2015-09-09 at 10.15.28 PM

Shareholding 2013

Screen Shot 2015-09-09 at 10.19.24 PM

So, BDT as well as Rales have sold shares in the last two years.

Balance Sheet

$305M cash/$2.8B goodwill/$1.5B LT debt/$3.3B equity.
No debt convenants. There are some clauses about interest coverage but this seems quite safe.

Valuation

EV = ~ $6B ($37/share)
EBITDA = 600M
EV/EBITDA = 10x

Business: Fluid handling, equipment/filler metal for welding, precision air and gas handling equipment.

Hunter Douglas

Business

Maker of window coverings and architectural products.

Management

The Sonnenberg family owns 28,764,039 common shares (81.2%) and 34,242,517 preferred shares (99.4%). CEO Ralf Sonnenberg’s two sons work as COO and Co-president.

Balance sheet

$373M Long term debt/$160M cash/$1B equity.

Valuation

EV ($1.5B)/ EBITDA ($281M) ~ 5.33

Mullen Group (MTL.TO)

Business

Oilfield services vs Trucking/Logistics (2:1 revenue).
Oilfield services: transportation, drilling, well-servicing, dewatering.

Balance Sheet

$700M LT-Debt. $248M cash. $900M equity.
Covenant: Total-debt < 3.5 x OCF
It is currently at 2.42.

Management

Shares +2%/year (last 7 years).
CEO Murray Mullen owns 2.8M shares. CEO since 2001.
Good shareholder letters.
Read [Chairman’s Message, 2015]

Valuation

D&A ~ 80M/year
Income before tax ~ 110-192M
EV = $2.2B
EBITDA = 200M – 280M
EV/EBITDA = 7.8x – 11x
Not very cheap ! Something to keep on radar.

Seaworld (NYSE:SEAS)

Theme park business.

Balance sheet (2014): $44M cash, $335M goodwill, $1.6B LT debt.$579M equity. Not a great balance sheet.

On the other hand, the business is quite good and there is not a big risk of interest not getting paid.

Compensation bonus tied to adjusted EBITDA. There is also a severance package for each manager. But this is not too much < $1M for each.

Shareholding

Positives:

Theme park business. Has moat and competitive advantage.

Negatives:

New IPO (2013)
Animal abuse?
CEO resigned (Dec 2015).

Chicago Bridge and Iron (CBI)

One of Berkshire holdings approaching 10% ownership.

Fluffy shareholder letter.

Balance sheet at $4.2B in Goodwill (~ half of all total assets of $9.3B), $350M in cash and $1.5B in LT debt. The tangible book value is -$1.3B. This is one bad balance sheet. It seems that before Shaw acquisition there was not much LT debt nor a lot of Goodwill. So, all this comes from Shaw it seems. They spent $3.4B on Shaw acquisition and added $3.3B in goodwill.

I am sure that people at Berkshire have competence advantage here. But, I don’t find myself comfortable enough to invest here.