FREE KIC - NO. 65 MARCH 11
ELECTION TIME PART II- MICK WALLACE
A few weeks ago I knew very little about the legendary Swedish family the Wallenbergs and little did I think that reading an article about Terumo a Japanese medical equipment company would be the start of a journey that would lead to me making an investment in Investor the Wallenberg family controlled company.
The article I read was about Terumo buying a company called Caridian BCT. I had never heard of Caridian BCT so out of curiosity I decided to have a look at it. I discovered that they had been owned by a Swedish company called Gambro. I had heard of Gambro because they had been listed on the Swedish stock exchange but I had not realised that in 2006 they had become 49% directly owned by Investor (they were further owned indirectly by Investor through a private equity fund in which they had invested.)
Once again out of pure curiosity I then decided to have a closer look at Investor. Having a closer look at something usually involves having a quick look at the annual report. Luckily the 2010 report had just been published.
There were a few things in my initial look at the annual report that really got me interested. The first thing was the share price relative to the underlying Net Asset Value (NAV). Here is the section from the annual report that attracted my attention:
Something that is trading at a 37% discount to NAV gets me interested because it appeals to my value investors desire to have a margin of safety.
The second thing that interested me was the list of core holdings that they own. These are companies with which I have a lot of familiarity. They are companies that I have researched or have been researched by former colleagues. A number of them appear to have strong barriers to entry and could potentially count as franchise stocks.
When I saw that Third Avenue was one of the biggest shareholders I really became interested because if Marty Whitman and Third Avenue are big shareholders I really pay close attention.
I have only mentioned Marty Whitman in one of my previous opinion pieces and that was as recently as December 2010 when I just included his name in a list of famous value investors but Marty is one of the all time greats.
I then had a look on the Third Avenue website and I found the following in a recent shareholder letter:
Investor AB’s reported net asset value has increased at
a 6% annual rate over the last five years, including
dividends. Investor AB is a Sweden-based investment
company with holdings in European blue-chip stocks
and private equity. Investor AB’s common stock
represented 4.1% of the Fund’s net assets, as of
October 31, 2010.
This is the only recent reference I could find to Investor and as you can see it does not give me any details as to why they own it but the fact that it represented 4.1% of assets tells me that it is a major holding for them. I presume that the big discount to NAV is part of their reason for owning it but it does not tell me the answer to the biggest question that enters my mind when I see a situation like this: can I trust the Wallenbergs to act in my best interest? The size of the discount involved made me think that the answer to this question might be difficult to answer but nevertheless I decided to try and answer it.
To my delight I found on the Investor website a video broadcast of their 2010 Capital Markets Day where management explained their thinking. Six hours of viewing allowed me to hear the Chief Executive and the Chief Financial Officer explain their philosophy. I could not find anything in what they said that would make me think that this company is being run by people that will destroy value.
One problem with the Capital Markets Day however was the fact that nobody from the Wallenberg family spoke. I was then left wondering whether management said one thing but the controlling shareholders represented by the Chairman Jacob Wallenberg said and did something completely different. I had already quickly read Jacob Wallenberg in the annual report and I had not felt any concern. I went back over what he wrote and in my opinion the following extract shows that he said all the right things:
I then knew that Jacob Wallenberg was talking the talk but I still wanted further reassurance to know if he was walking the walk. A quick Google search revealed that he had done a relatively long interview with CNBC back in 2007. I watched that interview and listened to him talk about leadership, business successes and mistakes and his views in relation to the discount to NAV. I am not going to write down what he said because it is available for anyone to see. All I am going to say is that after watching that video I made a judgement call that I could trust Jacob Wallenberg.
I then had to answer another important question: was I potentially buying when Atlas Copco (the biggest Investor holding at19% of total assets) is at the peak of the cycle? In other words did it make sense to buy when Atlas Copco had just had a record year with profit margins at all time highs and a share price that reflected that success?
The honest answer is that I do not know whether Atlas Copco is at the peak of the cycle and there are some analysts suggesting this could be a particularly long cycle but as a value investor I try to avoid making those predictions. Instead I focus on the fact that even if the Atlas Copco share price fell by 50% this would only reduce the Investor discount to NAV to around 28%. I still think that this gives me sufficient margin of safety.
In fact one might even argue that another holding like Astra Zeneca is the complete opposite to Atlas Copco because it is really out of favour as the following chart shows:
I have therefore come to the conclusion that I cannot base this decision on trying to analyse the underlying companies. I have to trust Jacob Wallenberg to do a good job over the long term and as the following chart shows the Wallenbergs have done a reasonable job over the last quarter of a century.
Before I made a final decision about whether to buy the shares I listened to their most recent conference call and read the annual report in a bit more detail.
The only thing I want to highlight from that further research is in relation to balance sheet strength among the Investor holdings. I am delighted to say that the following companies have no net borrowings: ABB, Astra Zeneca, Ericsson, Electrolux and Saab. As a value investor I think this balance sheet strength adds to the margin of safety and helped in my decision to invest.
I then knew that I had a company trading at a discount, with management I think I can trust, that had another major shareholder I respected and where the underlying companies had strong balance sheets. My homework was finished! I then went out and bought some shares and so in conclusion I can now proudly say that I am wallowing with the Wallenbergs and I hope it will be a pleasant experience!
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