Friday, December 30, 2005

a new position, White Mountains (WTM)

A few months ago, I had written about White Mountains Insurance Holding Co. (WTM). Today, I decided to take the plunge and picked up shares at $559, or about 1.6x book value. Below are some comments from WTM's Q3 10q:

Book value at $345/share, down $14 seq. but up from $320 a year ago.

One Beacon (P&C unit):

Specialty lines -- combined ratio at 124 (24 loss ratio points due to hurricanes)
Personal lines -- combined ratio of 81 vs. 92 ly; net premiums down 26% in Q305 vs. Q304; I like to see this, it shows discipline. Co. cites unfavorable markets in NY and MA.

WM Re (reinsurance)
Whopping 156 combined ratio (63 from Katrina and Rita) for Q305 vs. 122 for Q304; gross written premiums down 10% yoy (again, shows discipline), Management notes that pricing is firming for reinsurance.

Esurance (online unit) -- 83% growth in net premiums; loss of $6.5mm pretax (a bit surprising, Esurance was pretax profitable in past q's). Expense ratio increase more than offsets positive claim frequencies.

Investment unit--inv. income up 33% in Q305 vs. Q304.

So why did I go long?
  • I view two big negatives in the quarter as non-recurring. WTM took big hit from it's Montpelier stock holdings and also lost $186mm after tax from Katrina and Rita (vs. $84mm from hurricanes in Q304). Of course, hurricanes will return next Fall but I doubt that the season will include a Katrina or Rita.
  • WTM practices what they preach in terms of underwriting discipline (not focused on just writing new business to grow premiums)
  • Insider buying has been occurring.
  • Low beta name.
  • WTM's investments are concentrated in short duration securities. As s-t rates rise, these securities, once they mature, will re-price at higher rates.
  • Post Katrina/Rita, pricing will firm.

John Makin's

take on what the Fed might do in 2006.

Thursday, December 29, 2005

a few quick notes

  • Goldman is out with some positive comments on Consellation Brands (STZ) today. For Q3, they see strong organic growth -- Mondavi charges tapering off into Q4 -- investors becoming more comfortable with quality of earnings. Valuation still attractive.

  • I'm thinking about Circuit City as a short if it can get to $25. In terms of operations and merchandise, I think CC has improved in recent years, but it's still a consumer electronics retailer (plenty of competition, slim margins). If the US consumer ever comes back to earth, the $0.97/share in EPS that analysts peg for next FY might be a stretch. Even if CC somehow gets to $0.97, valuation should cap the upside (25x at $25/share)
  • Provided nothing dramatic happens over the next few days, I'll be picking up some Tortoise Energy (TYG), a closed-end MLP fund. TYG yields almost 7% and trades at a 10% discount to its NAV at the end of Q3. Here are the most recent conf. call slides.
  • A couple of other names I'm looking at --Coke (KO) was brought to my attention by a successful value manager, decent div. yield, sits near 52 week low. I'm a contrarian so I'll take a look. Lions Gate Films (LGF) -- I like their strategy of putting out relatively inexpensive films targeted at niche audiences. They made a mistake with the "Usher movie" and shares were punished. I have a lot more to dig into here.

Sunday, December 25, 2005

Tax benefits from Stock Options

I've just about finished Charles Mulford's "Creative Cash Flow Reporting." One issue that he discusses in the book is the tax benefits that firms get on stock options. Essentially, co's get an expense deduction on their tax return that is equal to the market price of the shares less the exercise price of the option. Mulford argues that this and other items should be removed from Operating Cash Flow to come up with a more sustainable OCF number. For many technology firms, this stock option benefit is no small number. For example, in the year 2000, 40% of Microsoft's OCF came from tax benefits related to stock options.

Monday, December 19, 2005

Cadbury Schweppes (CSG)

I've previously written about the merits of gum/confections co. Wrigley (WWY). Even though I remain positive on the company, I'm not sure that, at current valuation levels, the risk/return is significantly in my favor.

Another confectionery giant that I've started to look at is Cadbury Schweppes of the UK. CSG has ADR's so trading this name won't be a problem. 2004 sales were 6.7 billion pounds with operating profit of 916 million pounds (13.6%). Market cap is about $19.1B and CSG pays a 2.5% yield. At today's close of $37.40/ADR, CSG trades at about 14x consensus 2006 EPS.

The data that I reference below comes largely from the CSG 1H05 report and also the co's most recent business update pr.

In the 1st half of 2005, sales came in at 3.1B pounds, up 6% yoy and op. margins came in at 14.4% vs. 14.5%.

Americas Beverage is the 2nd largest operating segment at CSG with 1h sales of 770mm pounds (up 5% yoy) and op margins of 29.1% (off 30bp yoy). The big carbonated brands here are 7up and Dr. Pepper. Carbonate share in the US was up 70bp in the 1H -- margins down due to heavy promotional support of brands. Launching new non-carbonate drinks (Mott's Plus, Diet Snapple drinks)--marketing spend up more than exp. here too. Sales of bevg. to Mexico up 20% (Penafiel water brand).

Americas Confectionary is the 4th largest op. segment with 1h sales of 457mm pounds but it is also the fastest growing (sales up 14% in 1H, margins up to 13.3% from 12.2%). Key brands here are Halls, Dentyne, Trident. US sales up 12%, Lat Am up 20%) Logistics/IT issues resolved.

Europe, Middle East, Africa (EMEA) is the largest segment (962 million in revs +6%, 12.8% op margin - down 100bp in 1H05). Plagued by weakness in developed Europe. Africa, Eurasia, Middle East had sales up 14% and Russia was up 19%

European Bevgs is a segment that CSG has struggled with (in 1H, sales up 2%, op profit off 2%). This segment is on the block -- transaction expected to close in early 2006 for 1.27 B pounds.

The final op. segment is Asia Pacific. 1H05 revs of 491mm pounds, up 7% yoy, op margins up from 9% to 9.2%. Cadbury chocolate in India has 72% market share (up 200bp). Leading gum share in Malysia, relaunched Cadbury dairy milk in China in 2H2004

2004-07 growth plan
  • Sales up 3-5% constant currency, ex-acq -- in pr, CSG said that they will be near high end for full yr. 2005
  • Underlying op margin growth of between 50-75bp per year constant currency (in 2005, op margins won't increase by this range -- heavy investment in brands, fuel, in 06, this should be better)
  • FCF of 1.5B pounds in four year period ending in 2007
I think CSG's plans for success make sense and are similar to those of WWY, namely, grow sales in the developed markets in the low-middle single digits, invest in your brands and earn high margins. In the developed world, the name of the game is volume growth. So in places like China and Turkey and Malaysia, CSG will establish their brands and set up opportunities for margin expansion.

Speaking of Turkey, CSG will acquire a further interest in the #2 confection co. there. This will allow them to establish a hub in the fast growing region and will also allow CSG to shift some supply of gum (that will make it's way to the EMEA) to a lower cost location.

To further generate cost savings in Europe, CSG will begin building a new gum factory in Poland in 2006 and is also currently investing $30mm pounds in a plant in Mexico (supply moving south from higher cost Canadians).

To sum it up, I like the business, the stock isn't too expensive. It's a defensive idea with a decent dividend. In the next 3 yrs, sales growth of 5% and op margin expansion of even 50bp annually sounds pretty good to me. I don't have funds available at this time but I'll likely do some juggling if we approach $36.

Sunday, December 18, 2005

one more post on Asta Funding (ASFI)

Interesting chart from the 10k. From this, it looks like the purchase price for an avg. portfolio is recovered in a 1-2 year period.


The following table summarizes our historical portfolio purchase price and cash collections on an annual vintage basis since October 1, 2001 through September 30, 2005.

                                                                # of Weighted
Cash Collections Total Collections Average Days
Purchase Purchase Including Cash as a Percentage Held During First
Period Price(2) Sales (3) of Purchase Price Year Acquired
------ ---------- -------- ----------------- -----------------

2001 $65,120,000 $93,785,000 144% 119
2002 36,557,000 50,703,000 139% 183
2003 115,626,000 132,758,000 115% 81
2004 103,743,000 93,910,000 91% 170
2005 126,023,000 39,762,000 32% 181

(1) Total collections do not represent full collections of the Company with respect to this or any other year.

(2) Purchase price refers to the cash paid to a seller to acquire a portfolio less the purchase price refunded by a seller due to the return of non-compliant accounts (also defined as put-backs).

(3) Cash collections include: collections from our third-party collection agencies and attorneys, collections from our in-house efforts and collections represented by account sales.

Saturday, December 17, 2005

Greenblatt's Value Investors Club (VIC)

Value Investors Club is a message board site that limits it's membership to 250 members. To join the club, you need to present a well-reasoned "value" idea to a VIC panel. If they accept your idea, you can become a member and are able to post to the site and read the ideas in real time. For the rest of us, through sign up, we can access the board on a 45 day delay. Check it out.

the Asta Funding (ASFI) adventure, part 2

more excerpts from the ASFI cc.....

on portfolio sales (more on this later):

  If we have paper that's got a value to it or a better
value to it we're not going to sell that paper. The resale
market has always been after this company. The company has
been selling paper for `99 and we stopped selling it and
we started picking up selling paper again in '03, '04,
'05. It's a business strategy that works very well for
this company by not having a large overhead. It gives us
another avenue to let the paper go rather than just keep
recycling it with collectives.

Kara Murphy:

So would it be safe to say in '06 then that you would
expect to have like the same proportion of sales to
purchase this?

I honestly couldn't tell you that. You know, again we'll
look at the portfolios and analyze them and see how old
they are, how many times they've been worked and whether
or not it makes sense to sell the paper, if it's
opportunistic or not. Price certainly does fit into that
because we don't give this stuff away. But again we are
getting prices that we feel are acceptable to us and it's
for paper that we really don't want.

on the new bankruptcy law:

It's been (unintelligible). Much better than expectations.
We did not expect the influx of portfolios being brought
to market as quickly as they have been. That's part of the
reason why we've been able to step up this quarter's
purchases to its, you know, that the level we have an
anticipate closing on some other material transactions
shortly. That's why we increased our credit facility.

Despite the very strong Q4 and FY05 report, a few
analysts (Stephens and American Growth) are both
concerned with the stepped up pace of portfolio
resales (38% of collections). I think what they're
worried about is the sustainability of resales and
how best to model their impact going forward. From
a P&L standpoint, it's much easier to figure out
the eps impact when Asta purchases a portfolio for
3 cents and winds up collecting 7 compared to a
situation where it buys a portfolio for 3 cents,
collects 3 cents and then sells the paper off for
an additional 4 cents. In the latter situation,
the earnings gains should be higher because the
costs on collecting that last 4 cents are avoided.
In general, I think this resale issue is overblown.
I haven't seen any indication that Asta has been
buying paper for 3 cents and re-selling it for 2
cents. I'm on board with Gary Stern's comments
that Asta will continue to be opportunistic with portfolio
sales going forward.

In summary ASFI executed nicely in Q4 and FY05 and
continues to validate it's outsourcing business model.
Plus, FY06 is already off to a strong start in terms
of new portfolio purchases. And finally, like I thought,
ASFI FY06 (ends Sept.) EPS estimates are up to $2.50.
Right now, we're only 11x that figure. I'm staying put.

{note that I am long ASFI shares}

the Asta Funding (ASFI) adventure, part 1

ASFI did a good thing in making it's Q4 and FY2005 cc transcript available through an 8k. If you're interested in ASFI and have 15 minutes, I'd recommend checking it out. While you're at it, give the 10k a look too. Below are some of the key excerpts from the cc.

on industry changes:
we have seen a lot of activity in our space
due to a variety of factors, including a change
in the bankruptcy laws and anticipated increases in
minimum payments on credit cards by the issuers.
Both of these have led to increase charge-offs
and have enabled us to make significant purchases
during the first quarter of fiscal year 2006
and have greatly increased our pipeline.We also
anticipate closing on more purchases in the year

on ASFI's purchasing philosophy:

Firstly, Asta typically bids on
larger portfolios to reduce competition and given the
larger size of the portfolios, it enables us the
flexibility to use our various strategies of collecting to
the maximum.

Secondly, every portfolio is different. We scrub or
analyze each portfolio prior to purchase and implement
proprietary techniques to estimate how well the portfolios
could perform. The bottom line, pricing a portfolio for
purchase is the number one key to successful profits in
our business.

And although our blended rates are not in a consistently
tight range, that does not mean we are struggling with our
purchases, actually, on the contrary. We find that our
success in the last several years is due to our
disciplined approach to purchasing our portfolios and
making sure that whatever we invest in has a solid chance
of returning superior results to our investors.

on the collections process:

Asta mitigates
turnover risk and the risk of hiring and managing hundreds
of thousands of collectors by outsourcing a vast majority
of its collections with a network of collection agencies
and law firms that the company has developed over many
years. We have excellent relationships with these firms
and the results have been excellent whether it be credit
card or telecom paper.

While their job is to collect, let me emphasize that it is
our duty to continually monitor the collection process. We
are in touch with our network of servicers on a consistent
basis, making sure the process is going smoothly, and that
each and every firm is working the paper up to our

Asta, due to its flexible business model, has the ability
to act quickly and move paper around. In the normal course
of business, we usually move paper from one group in our
network to another and continuously do that process in an
orderly fashion to maximize results. This moving usually
occurs within a six-month period and usually at around six
months, which is the industry norm.

on capacity of outsourcing firms to handle more ASFI business:

we select the people we do business with.
Actually all of our people, all of the services, law firms
and agencies, constantly ask us for more paper. They have
excess capacity.

With that being said, (there are) probably another 30
groups that we know of that have - we've known for a long
time that would love to do business with us. It's our
choice and we pick and choose who we do business with.

We've been doing this for many, many years. And we're also
loyal to the people that do a good job for us. And, you
know, we set the standards on how they should collect. We
try to be open minded with them and we constantly monitor

Tuesday, December 13, 2005

Economist reactions to the Fed's 25bp move today

Courtesy of The Big Picture.

Kasriel on the state of US Households

"With some analysts estimating that $2 1/2 trillion of household debt will be repriced upward next year because of the increase in interest rates, the household-debt-service ratio is bound to climb to new highs." more

Asta Funding (ASFI) on fire

Great news from ASFI today. The co. beat it's Q4 numbers on the top and bottom lines. Also, Asta mentioned increased paper availability in light of the new bankruptcy laws and is off to a strong start in FY06 in terms of purchases.

The analysts should have good things to say on Wed. and I wouldn't be surprised to see FY06 estimates taken up to $2.50+ from the current consensus of $2.40.

I'll listen to the cc this weekend and will have more to say then.

The deal is off for now (STZ and VN.TO)

The Motley Fool has a pretty good recap of the events that transpired. Also note that Vincor closed on Tuesday at $29.60, well below STZ's most recent offer of C$33-35. Well done Vincor management. To me this looks like a simple case of execs doing all they can to save their skin, shareholders be damned.

Monday, December 12, 2005

Stephen Roach's latest

Paul Kasriel

also thinks the Fed will be done at 4.5% in his December Economic Outlook.

Happy days are here again

It's hard to get more negative than Marc Faber on U.S. stocks and the U.S. economy. But even if he does take things to the extreme, I do agree with the idea that a 4.5% fed funds rate is as far as we go. And if that level coincides with consumer weakness or deterioration in the housing market, I think monetary policy could switch to very accomodative very quickly.

Sunday, December 11, 2005

John Hussman

is one of the sharpest fund managers around. If fact, Value Line puts him in the top 1% of all fund managers by risk-adjusted returns. He puts out a weekly note that is worth your time.

A play on Chinese dairy consumption -- American Dairy (ADY)

Before I begin, note that ADY is very thinly traded (sometimes in the hundreds of shares/day) and has a small market cap.

ADY($6.69/PCX) is one of the largest processors of milk in China under the Feihe brand. The co. is expanding rapidly with 2002 sales of $12.2 million and earinings of $0.3 million and projected 2005 revs of $65-$70 million and earnings of $11-12 million.

This co. is on my watch list mainly due to the current depressed levels of per capita daily consumption of dairy in China and the prospects of improvement in this metric as Chinese disposable income continues to advance. Currently, China consumes 11kg of dairy per capita vs. a world avg. of 100kg (US at 266kg).

Risks (in addition to those listed at the top of the post):
--majority of production concentrated in NE province in China (800 mi. drive to Beijing)
--ADY enters into contracts with small farmers for milk (might be limited supply, pricing risks)
--large multinationals moving into China. This has already happened with varying degrees of success. Likely that more JV's set up in the future.

For some reading material on ADY, see this most recent pr,
this company presentation,
this analyst initiation,
and the most recent SEC filings.

Tuesday, December 06, 2005

if you've read Stephen Roach

you've heard much of this before, but these 5 risks shouldn't be ignored in 2006.

Constellation Brands (STZ) and Vincor update

I just pulled 3 different analyst notes on STZ and Vincor. Note that all 3 notes are a few weeks old, published before the C$33-35 announcement.

Deutsche Bank--overweight--TP $30
  • question STZ pursuit of VN. Provincial regulations to worry about. DB says STZ indicated that much of VN would not be integrated, Canada as a stand-alone business. DB worried about lack of dd done by Constellation.
  • STZ has the debt capacity to make a deal happen
  • Benefits (selling, procurement, distribution, management) not as obvious as they were with Mondavi.
  • DB conducts survey of 20 wine distributors
    • sales trends remain healthy, up mid-high single digits
    • wholsalers worry about gas prices
    • see price increases coming in early '06
    • trend developing of consumers trading up from $7.99-$9.99 to $10.99+ segment
    • STZ continues to add many SKUs. Retailers starting to get fatigued
  • Financial statement review
    • inventory turns slowing -- due largely to Mondavi
    • receivables turns also area for improvement
RBC Capital Markets -- outperform on Vincor

  • RBC believes that VN's various brands could be consolidated into an existing business of a variety of players to generate sign. higher contribution
  • A transaction will ultimately happen, north of C$31.
  • Consolidation of VN brands ex-Canada into STZ platform could reduce SGA by $45mm annually.
  • take-over basis valuation indicates range of C$36-$41 for VN
National Bank Financial -- sector perform on Vincor
  • forecasts revs of $738mm in FY06 and $780mm in FY07, EBITDA margin of 16.1% in FY06 and 17.6% in FY07
  • Vincor's arguments against the "inadequate" bid
    • VN claims that Sands offered C$36 plus for co.
    • VN CEO counters claims that VN lacks scale or brands to compete internationally
      • in US, VN revs up 17% vs. 8% for STZ (all TTM ended 9/30)
      • in UK, VN's share of the top 20 increased to 11% whereas STZ's declined
      • in Australia, VN has largest domestic share of $10-$15 range
    • VN's Return on Sales and ROA is higher than STZ's
    • Why VN deserves a Mondavi like multiple
      • Sales CAGR (June 96-Dec 04)--+20% VN, +7% Mondavi
      • EBITDA CAGR (same)--+23% VN, +2% Mondavi
  • NBF thinks STZ would pay C$37-$40 for VN resulting in 1.5%-2.6% earnings accretion
  • Smart for STZ to bid now--other players preoccupied with acq. of their own, if VN improves in 2006, price will go up.

{note that I am long shares of STZ}

Sunday, December 04, 2005

How Porter can help you

In Strategic Management courses, Michael Porter is a name that frequently pops up. Take a look at this diagram and write-up of Porter's 5 forces. I find it helpful to go through this kind of industry analysis when I'm looking into co's that might make it into my portfolio.

reasons for the Asta Funding (ASFI) slide

I recently picked up this note from Brean Murray(BM) dated 10-18-05. BM has a strong buy on Asta, TP=$38.

  • Some have questioned Asta's use of a regional auditing firm (Eisner LLP of NY) instead of one of the big national names. BM notes that Asta has used Eisner for 10 years and the co. has been in business for 40. I'm not particularly worried about a regional auditor. Didn't Enron and Worldcom use the big national firms?
  • ASFI's revenue and expense recognition policies are not the same as competitors. The reason for this is that the ASFI business model is different (95% of their portfolio purchases are outsourced).
  • There are concerns that the balance sheet is illiquid and Asta will have a tough time making future portfolio purchases. BM dismisses this. ASFI has $1.9 million in cash, $20.9 million in OCF from the first 9m of 05 and an $80 million credit facility.
  • Some on the Street are accusing Asta of "flipping" paper for a quick profit and leaving value on the table. BM points out that selling some paper has been a part of ASFI's strategy, usually after working on the paper for 2-3 years.
  • There is conjecture that ASFI has been blacklisted by some sellers of bad debt. BM hasn't heard this but admits it's a serious charge. Evidence contradicts this claim -- purchases up 11% yoy.
  • Critics point out that ASFI has been purchasing more telecom paper of late and are inexperienced in this type of collection. BM's checks don't indicate problems with telecom collections.
I decided to take a look at operating cash flow and operating income statistics at ASFI to get a better comfort level with the earnings quality of the firm. Admittedly, there is more to earnings quality measurement than this, but OCF and OI should grow at similar rates over time (Note: it's also useful to come up with "sustainable" OCF and OI measures, something I might attempt at a later date). I would hate to see OI shoot up 30%/yr and OCF up 5%/yr. Let's see how ASFI stacks up. I'm looking at 9 month periods here from 2003, 2004 and 2005.

9m 2005 OI=37.0
9m 2005 OCF=20.9

9m 2004 OI=26.4
9m 2004 OCF=11.5

9m 2003 OI= 12.3
9m 2003 OCF=6.4

If you look at the longest time comparison (9m '03-'05), OCF is up 226% and OI is up 200%, somewhat assuaging my fears on Asta's accounting.

{note that I am long shares of ASFI}

Friday, December 02, 2005

To my visitors

Thanks for stopping by. I hope you find something interesting on this site. If you have any questions or comments, please leave a comment or send an email to In November, we received a record number of visitors (following a record month in Oct.). How do I know this? Statcounter tells me. If you author a blog or are a small web publisher, I recommend that you check out statcounter. They provide a fairly large set of website tracking statistics. Plus their basic package is free.

In John Makin's Dec. Economic Outlook,

Roach calls for a China slowdown in '06

"In my view, the die is now cast for a significant slowing of Chinese GDP growth in 2006. At work is likely to be a downturn in China’s all-powerful investment cycle, driven by an important and surprising contraction in bank lending."