Monday, October 26, 2009

IGK vs ING stock

A tale of two cities. ING announced 7.5bn Euro capital raise. The hybrid security is up 11%, while the stock is down 11%. Such a cool long-short.

Another good long short pair might be MO-RAI.

Friday, October 23, 2009

FAG Bearings

Very bad results. Margins have taken a massive hit. Stock is down 5%. Company doesn't talk to investors - so difficult to figure out what is really going on. Company is on track to do a Rs 40 EPS - 12x PE, which is not dirt cheap. I used to think this is trading at 8x-10x PE, assuming Rs 60 EPS for full year. Point to note with this company is - revenues go up sequentially. 3Q08 was a sharp jump over 2Q08, so yoy 3Q09 is down quite massively. This doesn't seem to be a seasonal business.

Considering 20% of my India portfolio is in this stock, I want to exit it. But considering it is so illiquid, I will need to figure out a better time to exit.

NRB Bearings is up 8%. It also reported numbers today. 1H profit is 8.5 crore. If we annualize it, we come to 17 crore. Market cap of FAG is 300 crore. So it is trading at 15x. FAG is still cheaper.

I hope this is the bottom of margins. Hopefully Schaffler group is not screwing us - the minority shareholders of FAG.

Monday, October 19, 2009

Mark Twain's quote

It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.

Wednesday, October 14, 2009

Selling out Godfrey

Selling out Godfrey Phillips. 1Q10 earnings had a excise benefit of 16 crore, as well as other income of 24 crore (vs 10 crore in 1Q09). Remove these two items, and core profits grew 20% instead of doubling. So 2Q10 profits should be down sequentially - quite massively. This is probably not what the market is looking for right now.

Excise Duty cuts continue to help

Exide Industries - the big battery manufacturer in India - reported Sep 09 earnings earlier this week. The crucial bit is this - gross sales went down by 5%, but because excise duty rate is lower this year, net sales were the same. Company reported a 50% jump in profits. But if one were to assume the same excise rate as last year, profits would have jumped by 25% - aided by lower commodity prices (lead).

It is possible that the reversal of excise duty cuts will be a big headwind for profit growth next year - especially in the manufacturing sector. Most analysts will probably take this year profit numbers and project growth on that. That might prove to be really wrong.

Disclosure: No position in Exide.

Tuesday, October 13, 2009

People not shaving as much!!

From Barron's article on Energizer past weekend:

Trouble is, consumers aren't trading in their razors and replacing their blades as often as they used to. "A lot of people you see around aren't shaving as much as they used to," P&G CEO Bob McDonald said recently.

That is very strange indeed.

Verisk Analytics

Verisk Analytics had its IPO last week. Barron's mentioned over the weekend: "The company's business bears resemblance to the likes of Visa and the Chicago Mercantile Exchange - once-cooperatively owned, low-capital-intensity, high-margin growth businesses. There are also similarities to current market darling MSCI, a data and risk-modeling leader." What that implies is a biz growing topline in low-double digits and expanding EBITDA margins leading to a high teens EPS growth rate - what Visa and MSCI promise.

Verisk has two segments - Risk Assessment (52% of revs) and Decision Analytics (48% of revs). Decision Analytics is growing much faster. Risk Assessment has grown its topline at 4% over last four years (from $450mn in 2005 to $525mn in 2009E by annualizing 1H09). Decision Analytics, on the other hand, has become 2.5x between 2005 and 2009 (from $197mn in 2005 to $481mn in 2009E by annualizing 1H09). Some part of that growth has come through acquisitions - between Jan 2006 and June 2009, Verisk acquired 10 companies, 9 of which were in Decision Analytics segment.

Now one can focus on the low teen growth rate, high (and expanding) EBITDA margins in the low 40's, and low capex (low single-digit capex-sales) and get excited. But the most crucial element in this story is probably acquisitions.

a) Six month ended June 30, 2009 revs - $503.7mn. Six month ended June 30, 2008 revs - $437.7mn. Increase of 15.1%. Ex acquisitions, rev grew $50mn, or 11.5%. Positive.

b) FY2008 revs - $893.6mn. FY07 revs - $802.2mn. Increase of 11.4%. Ex acquisitions, rev grew $52.8mn, or 6.6%. That's not encouraging.

c) FY2007 revs - $802.2mn. FY06 revs - $730.1mn. Increase of 9.9%. Ex acquisitions, rev grew $24.6mn, or 3.4%. That's definitely not encouraging.

The problem with acquisition led growth is - acquisitions don't come cheap. Verisk acquired a company XactWare in 2006 for $188mn. Additional contingent payments of $98.1mn and $62.9mn were paid in April 2008 and May 2009 as XactWare achieved certain financial results. XactWare had $63mn in revs in 2007 - now its revenue run rate should be $90-100 mn. to have triggered the contingent payments. Clearly, XactWare's performance has been much beyond whatever the initial expectations were - so it is a success. But equally clearly, Verisk has till date been sharing that success. And if an acquisition doesn't succeed, then Verisk shareholders carry the bag.

Can this company grow revs in low double digits on an organic basis? Because if the organic revenue growth is mid-single digits, and the company pays up for acquisitions to get to double digit revenue growth, then that is quite different from what Visa and MSCI are all about. 2009 has so far been a great year on organic revenue growth. But is there something one-off - like a major contract or pricing increase, which will slow down pricing growth in future years?

It is entire possible that under the old structure, the company didn't pass regular price increases to its owner customers. As an independent company, the company will be more focused on profits. So we might see much higher organic revenue and profit growth going forward.

Verisk has around 200mn shares outstanding - 113mn Class A, 67mn class B, and 24mn stock options at strike price of $9.38. At $26, the company is valued at $5.2bn. We don't know the consensus EPS estimates right now. 1H09 PAT was $90mn. This number includes some one-time expenses like IPO expenses and pension costs. Still, it seems like the stock is already valued in the mid 20's multiple on FY09E EPS and low 20's on FY10E EPS.

I doubt that bullish broker reports once the silent period is over will be enough to catapult the stock into the low 30's anytime soon - assuming markets don't rocket another 20% by that time. But it will definitely be a very interesting stock to follow.

Disclosure: No positions in Verisk, but might change at anytime.

Thursday, October 08, 2009

Converting paper profits into real money

Over the last few months, I have cut out and then got back in a few times. It might have been better to buy and hold since April - the profits would have been more - but the periodic profit taking has enormous benefits psychologically.

But now, I am cutting out on all the positions I have even a little doubt on. The ones left in US portfolio are Berkshire, Philip Morris (best play on dollar weakness), Cinemark, Long CTSH - Short Infy, and a few odd here and there. The ones in India are Jagran, FAG, and GSK Consumer, and a few others here and there.

After this, I am close to 40% into equities.