Tuesday, September 30, 2008

OneSteel makes cheeky bid for minority shareholders

Crikey mate! They are at it again.

Those cheapskate Aussies are trying to steal (pun intended) Steel and Tube [STU.NZX] off shareholders for the measly price of NZ$4 a share.

OneSteel [OST.ASX] has today launched a bid for the 49.73% of Steel and Tube they don't already own.

It has shades of the Contact Energy[CEN.NZX] takeover bid last year about it when Origin Energy attempted to buy the approximately half of Contact they didn't already own, for a knock down bargain basement price and the board of Contact, which had a number of Origin aligned directors on it approved the bid.

It wasn't until an independent report came back that the bid by Origin was seen as the highway robbery it clearly was and Origin was rightly sent packing.

I assume that OneSteel have a number of directors on the Steel and Tube board sympathetic to Origin's charms, so it doesn't take an Einstein to figure out that they will probably want to rubber stamp their parent company's bid without so much as a "hold your horses mate" (insert Australian twang here).

Apart from the cheek of the bid, it once again highlights the major gaps in New Zealand's financial regulatory and takeover laws, where a majority holder in a listed company thinks they can dupe the remaining shareholders simply because they have board control and therefore the controlling votes.

Of course this is where Steel and Tube shareholders are crucial in this scenario. If they are dumb enough to sell for 4 bucks well you just cant help some people.

Seriously though, times are tight so investors could be forgiven for folding but the company is worth more than $NZ4(at today's AU/NZ exchange rate cross only AU$3.28 )

Steel and Tube is a cyclical company. Currently the building and construction sector is experiencing a slowdown and raw materials are getting more expensive to buy to make their products. The current credit crunch and market jitters isn't helping either and as a consequence the share price is trading at multi year lows.

This will change, there will be a construction upswing, market turmoil will abate and raw steel is going drop in price.

Guess what, that means profit and the share price will rise.

OneSteel's bid is therefore very opportunistic. I don't blame them, it is a smart move.

But and it is a big but (insert OZ accent again) it is up to shareholders to have some steely resolve and and just say no to those aggressive little buggers across the ditch.

I have been an unwilling participant in a cheapskate takeover before. The Transpacific Industries [TPI.ASX] "merger" of Waste Management NZ a few years back left me with a bitter taste in my mouth.

The CEO of Transpacific made what he called a "fair bid' for an almost monopoly company that had been growing profit at 20% per annum for over 5 years and shareholders fell all over themselves to take the cash.

A made a large profit on a large number of shares but I didn't want to sell. Waste Management was going to be a good long term company in my portfolio.

As I am a small shareholder in Steel and Tube, my advice to shareholders is to hang on tight for the independent directors report on the OneSteel bid.

See what they have to say and if they approve tell OneSteel and the directors where to get off.

Steel & Tube @ Share Investor

Long Term View: Steel & Tube Ltd
NZX's Top 10 Dividend Returns

Discuss STU @ Share Investor Forum

Download STU Company Reports

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c Share Investor 2008

Friday, September 26, 2008

The $700 Billion Question: How much will the taxpayer bailout affect my investments?

I have been busy consumed with dirty politics over the last few weeks and haven't been writing much on investing. I cant help myself, these are interesting times in which we live.

I, like many of us, have been nervous about global economic problems and what that might mean to my investments.

I have a share portfolio, a house, a business, money in the bank and other financial interests that are going to be deleteriously affected by the fallout from the Sub-Prime meltdown.

Whatever your politics or attitude to investing, the US$ 700 billion taxpayer bailout of the US banking system is a necessary evil-I happen to be vehemently opposed to this kind of corporate welfare, but that is another story-we will suffer more economically if nothing is done.

So lets get to the point of this little rant.

Assuming the bailout will go ahead in a reasonably swift fashion, and it is likely to happen, how much impact will there be on your assets?

To be sure there is no free lunch when this size bailout is made, someone has to pay, in this case the American taxpayer digs deep and pays directly and the rest of the world will get caught in the fallout in a more indirect way.

$700 billion of extra debt for the biggest economy in the world means higher interest rates, higher gas, food and living costs and much, much more for the rest of us. All this unproductive spending means higher inflation, a slow down in the US economy, and a cut back by corporations-even outside the crippled financial sector-which will clearly have an impact on employment.

A decent recession is something we will have to look forward to and this will impact on asset classes of all kinds. When $700 billion is removed from an economy like that, your house, shares and business are going to be worth less.

Even though I am a long-term investor in all the assets that I hold, it is still hard to take the day to day devaluing of those assets.

I wrote a piece the other day about what companies you might consider buying during an economic slump of this kind and came to the conclusion that buying stocks in companies that sell day to day commodities or things that people will still use during a recession is a relatively safe bet.

I called it "The Monopoly Board" approach to investing, buy the eclectic, water and airport company monopolies and you will soon see your wealth increase.

Clearly shares in companies that sell widgets that are not essential are going to struggle during the coming downturn and as a result they ain't going to be worth as much.

If the bailout works and it probably will in the medium term, we will still need to hunker down and live a bit more frugally than we have been over the last 15 years or so.

Global economic growth was astounding in those years, assets increased in value multiple times and you shouldn't be surprised if your current assets lose half of their value before things get better. Even with a decrease of that nature we will still all be better off than we were at the beginning of this century.

Oh well, at least I still have my health.

Buy Toughen Up: What I've Learned About Surviving Tough Times

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c Share Investor 2008

Tuesday, September 23, 2008

Free Market to Pollies: We dont want you!

The meltdown of world financial markets has been headlined in the news to the max over the last couple of weeks and the prequel to it has been simmering for more than a year.

Massive collapses of Sub Prime related lenders like Merrill Lynch, Lehman Brothers, Bear Sterns and a whole host of other major lenders have bitten the dust. Some have been "rescued" by the US Fed and some have simply died a natural death. They took the risk, so they should therefore die by their own sword.

Unfortunately these lenders are not being allowed to die a natural death. Uncle Sam is getting involved, in a big way, and that will be a big problem sometime in the future.

Much finger pointing from the left of the political sphere that the "failure of true capitalism" or "the free market" is the fault of the free marketeers and their greed and it just goes to show that capitalism doesn't work.

That is rubbish of course and nothing could be further from the truth.

Capitalism or the free market in its current form hasn't been allowed to be free from interference from Governments the world over, and as we scramble to yet another taxpayer bailout of private investors and publicly listed companies we see the same sort of interference that has brought the whole credit market down, begin all over again.

The facts are that bad lending was forced on lenders by Congress back in the 1980s:

Congress set up processes (Research the Community Redevelopment Act) whereby community activist groups and organizers could effectively stop a bank's efforts to grow if that bank didn't make loans to unqualified borrowers.

Real Clear Politics

This has led to the current and inevitable blow out that we are now experiencing.

Rather unsurprisingly two of the first lenders to go were the State backed Fannie and Freddie, now laughingly called Feddy because it is now fully State owned.

Ironically, Fannie Mae was set up in the 1930s as a State antidote to the crazy lending of the 1920s, the stockmarket crash in 1929 and the depression of the 1930s to lend money to the "secondary mortgage market" (sounds familiar doesn't it). Freddie Mac was set up by the Federal Government in the 1970s when Fannie was privatised but Fannie still had Federal input.

Even more bizarrely, New Zealand politicians from the left are contemplating setting up our own sub prime mess by allowing people who cant afford to borrow to buy houses the ability to borrow money with the help from the State.

Will we ever learn?

The free market must be left to function perfectly as it would if left alone. That is, those that take risks either benefit from those risks or lose their shirts, that is how a free market truly works.

Until politicians keep their sticky little interfering fingers out of that free market we will continue to experience economic meltdowns of the wonderful variety that we are currently grasping to fully understand.

I can hardly wait for the "carbon trading" collapse.

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c Share Investor 2008

Saturday, September 20, 2008

Follow the Monopoly Board

One question an investor in the stockmarket might be asking themselves right now is just when should one start buying stocks again.

Warren Buffett used his massive multi billions in cash to buy an energy company, Constellation Energy yesterday for a bargain price and he seems to be the only person in the world buying things, except the US federal government buying up private debt to "stop the markets from crashing".

Clearly nobody knows just how long this credit purge is going to continue for but what we do know is that there is more bad news to come.

That would indicate to me that there is more downside risk for stocks to come.

As long as the purchase you make is one that you can afford to hold and not have to sell if you need the money then a good beaten down stock is definitely one worth taking an educated punt on.

If one uses the Monopoly Board type style of investing that Warren Buffett has been using over the last year, buying utilities and more shares in staple producing companies like Coca Cola and Kraft foods an investor would do well to purchase similar shares if they exist on the NZX.

So what would you buy and what is resilient in these times of economic uncertainly and market turmoil?

Any of our energy stocks would be a good buy, Trustpower Ltd [TPW] Contact Energy [CEN] and Vector Ltd [VCT] will all do well in an extended downturn.

A company that I own, Goodman Fielder [
GFF] is an Australasian food giant with great brands and a whole range of staple food items from breakfast to dinner and all the snacks in between that people are still going to buy.

Auckland International Airport [
AIA] which I also have a shareholding in, is another good monopoly that will do OK during a downturn and its shares are currently at multi-year lows.

Even Telecom New Zealand [
TEL] would be worth laying some money down at anything less than $2.50 and it is getting close to that price. Even during a deep recession people will still need to communicate.

While there are plenty of cheap stocks worth looking at, especially in retailing, transport and export sectors and they are worth buying for a long-term investment, these companies are going to find the going tough during the long recession we are going to face.

Look for companies with strong brands, monopoly or near monopoly positions in their markets and the ability to cuts costs without impacting too heavily on their business.

The power companies that I mentioned would probably be some of the best performers over the recession and market sentiment as it currently is, that is, it is crap, like Warren Buffett you might get a relative bargain.

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c Share Investor 2008

Friday, September 19, 2008

Pumpkin Patch takes a hit

Kids clothing retailer and manufacturer Pumpkin Patch Ltd [PPL.NZ] profit result out yesterday was a tale of two different stories.

Long-term and short-term stories.

In the long-term Pumpkin Patch will probably do very well but at the moment it is suffering and suffering for a number of reasons, some of them obvious and some of them not so obvious.

The biggest hit on its bottom line is being taken from its stores in the UK and the USA. Both these units are relatively small and have not been established for long.

Although they are growing revenue through increased store numbers, the cost of expansion-they opened 16 US stores last year bringing the total to 34-has hit overall group profit hard and an almost 9 million dollar loss for the year on US stores is a big hit when your profit tips in at just over NZ $17 million.

Not only is the expansion costing money but US retailing is in an even worse state than it is in Australasia, where the bulk of Pumpkin's sales and profit currently come from. The UK division has suffered a similar fate for similar reasons, although losses have been lower than in the US because the brand and its 35 stores in the UK have been established for longer and initial establishment costs have been somewhat ameliorated.

What I like about management's updated growth strategy for the UK and US is that only one store in each country will be opened in 2009 and they will concentrate on establishing the brand further, cutting costs and focusing on margins.

This outlook is the most sensible given current market conditions and the negative retail environment and may have to continue past the end of 2009 because of impacts from the credit crunch.

The break in store growth in these 2 markets will put expansion of the brand into hiatus and delay the economies of scale and logistical capabilities and brand growth that comes with a larger number of stores but the reassessment of growth plans is a decision based on the poor outlook for the retail sector.

Two positive factors in Pumpkin's profit release was the New Zealand and Australian arms of the business.

Australia's 107 stores achieved strong sales, up 11.4% to $198.5m and was the highlight of an otherwise downbeat profit result while New Zealand's 52 stores grew sales 2.0% to $65.6m.

These results were achieved in an Australasian retail market that is experiencing a severe downturn and a recession in New Zealand-management have done well in these two relatively mature growth markets .

The short to medium term for Pumpkin Patch is going to be tough, especially for their UK and US stores but there are some bright spots along the way. A more favourable exchange rate will have a positive impact in 2010 and the removal of quotas for their US stores on Jan 1 2009 will clearly be advantageous to the bottom line.

Long-term Pumpkin Patch has the designers, brand awareness and management to push the company to a major global success story.

I own PPL shares in the Share Investor Portfolio.

Pumpkin Patch @ Share Investor

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From Fishpond.co.nz

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c Share Investor 2008

Wednesday, September 17, 2008

Quote of the Year

"...creating product that is impossible to comprehend..."

Mark Weldon-Newstalk ZB , 17 Sept 2008

Mark was talking about the current market turmoil and some of the dodgy financial instruments that have led to its current shake-up.

Unfortunately for us though Mark and his NZX are putting together financial products that are even harder to comprehend than sub-prime related instruments.

He is helping develop a carbon trading platform that will make the current mess look like a walk in Central Park, during daylight hours.

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KFC finally flying

Stepping away from market turbulence for a while(I have decided ignorance is bliss) I thought I would take a look at Restaurant Brands [RBD.NZ] sales figures for the 16 weeks ended 8th September 2008.

Sales are flattish overall for the last quarter for the 3 brands the company operates-Starbucks, Pizza Hut and KFC-but Starbucks is suffering and Pizza Hut continues to bleed cheese all over their dirty backroom floors.

What I want to look at is KFC because what is happening looks good.

It has always been the strongest of the 3 brands but having said that its sales figures have been patchy over the years but there looks like there is finally some reason for optimism for the revival of the brand and sales. For the year to date, KFC sales were $110.4m, while the last quarter KFC sales increased $2.7m to $63.4m, with sales up 5.5 per cent on a same store sales basis.

Back on December 12 I was reasonably skeptical about the "increase in sales" that management were crowing about:

Management are siting "record" sales at its fried chicken restaurants but the facts are that the year they might be comparing this latest result to, 2002, KFC did $177.1 million in sales. If you add the 2007 cumulative 3 quarter total of $151.8 Million to say a generous $48 million final quarter, you are still just shy of $200 million, an approximate 12% rise in dollar sales since 2002. Factoring in a generous 3% annual inflation since then though and sales are 3% down since their record listed year in 2002.

Lets do a little rough calculation to come up with a full KFC sales figure for 2008 based on the first two quarters of sales.

Lets assume another 5% growth of sales for the next two quarters and the company could be looking at as much as $230 million in KFC sales for the full year. That estimated figure would be around 30% more than their record $177.1 million in 2002. Factor in the 3% inflation rate for six years for a cumulative 18% then we see real growth in sales over 6 years of around 12% cumulative or 2% a year above inflation.

Now I have been watching this company for ten years and this is the best result in sales that KFC have achieved(if the sales figures pan out) so management efforts seem to be working.

It is hard to tell whether it is the better menu offerings and pricing or the store refurbishments that have been the reason, but I would put more emphasis on the menu and slightly better service.

Just one rider on the good news about KFC sales. Like other retail businesses, higher day to day costs like Labour, energy and ingredients are keeping a lid on margins.

KFC looks more promising though than it has for more than 10 years.

Shame about Starbucks and Pizza Hut.

Restaurant Brands @ Share Investor

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c Share Investor 2008

Monday, September 15, 2008

Strap yourself in Baby

I cant help myself, I'm starting to get more than a little concerned with what is going on in New York at the moment.

Without a doubt, things are going to get nasty overnight(NZ Time) on the DOW and European markets.

Over this weekend, Lehman Brothers, which is, significantly, 136 years old, and survived the Great Depression, has failed to be rescued by a consortium of banks or the US Fed.

Merrill Lynch, John Keys old stomping ground, has been acquired by Bank of America for a cut down price and the largest insurance company in the world , AIG, is in serious trouble, with a need for an injection of funds to keep it operating.

In my 12 odd years of investing in the stockmarket, which clearly isn't very long- I have never experienced anything like it-a sense of impending panic just seems to be around the next corner.

In my entire almost 43 years, there has been nothing as serious as this that has happened to financial markets, not since the Depression, where faith and trust in destroyed financial markets and more than a few bodies flew out windows, have things looked this dismal.

There are still more skeletons in the financial closet though.

However, the cards have been played and the market must keep plugging until the joker cards, both of them, turn up.

Hold on and lets hope there is an ace in the pack somewhere.

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c Share Investor 2008

Will the stalactites hold?

The financial meltdown has been making a mess on stock exchange floors and business boardrooms globally but nothing that has been tried so far seems to be freezing the tide of red ink.

Since the financial crises that kicked off in August 2007 it has beset markets and financial institutions all over the world, stockmarkets have lurched upwards, downwards and sideways since and seemingly at the whim of the market regulators in the United States.

The next collapse of a Bear Stearns, Northern Rock, Lehman Brothers or another New Zealand finance company seems just around the corner-if Bear Sterns Fannie and Freddie and Lehman Brothers have gone the way of the dodo, you can bet other Wall Street firms who have been drinking at the easy credit trough and lending to others whose assets are of dubious value are going to head the same way.

Last week a massive bombshell, one that has been on the brink for the best part of seven years, Fannie Mae and Freddie Mac finally collapse and the US Federal Government will pile 100s of billions of taxpayer dollars into it hoping to stem the flow.

All this has had a chilling effect on the credit market, the lifeblood of business, between financial institutions and other business and between individuals.

Heads of powerful investment banks have still not come clean about their exposure to the sub-prime derivatives market to in what Warren Buffett has called "financial weapons of mass destruction" and we continue to see new revelations everyday about previous cavalier attitudes to lending, and borrowing, coming home to roost.

The value of these derivatives in the Fannie and Freddie collapse are relevant to the bleak outlook for world markets and the global economy and likewise the recent Lehman Brothers

Optimism is well overrated in this market because the bubble of optimism keeps getting pricked.

Even Warren Buffett's assurances that the Federal Reserve did the right thing bailing out Fannie and Freddie had me worried.

It seems a tad self serving to me on his part considering he usually keeps his mouth shut and claims not to like the limelight-seems to me he has been popping up everywhere in extended interviews, ball games, TV shows and the like over the last year or so, most uncharacteristic of him and his style in the past.

My feeling is that investors are set for at least another year of this cloak and dagger stuff.

The market has so far been propped up by taxpayers around the globe-directly to help ailing banks and indirectly to allow cheaper credit to flow through financial markets and ease the pressure on doing normal business.

There is no sign yet that this approach has or will work in the future, having said that, the vast increases in new and different financial instruments in the 1990s and early 2000s and the resultant surge in speculation and bull runs in sharemarkets took time to reach their nadir.

Perhaps now that the bubble has burst it will take just as long to recover from the hangover than the credit binge party itself.

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c Share Investor 2008

Saturday, September 13, 2008

Warehouse sale could hinge on Extra decision

Today's announcement of profit (1MB PDF)at the big red sheds at The Warehouse Group [WHS] today had two significant pieces of information.

One, a good profit result-considering how other retailers like Briscoes Group [BGR] have fared recently- of $NZ90.769 million to full year July 27 2008 versus $114.834 million in 2007, a decrease of 21.0 % .

Sales were down on 2007 1.5% to $1.735 billion.

As I wrote in a column on Thursday, The Warehouse will do well in the long-term and today's announcement shows that in an extremely tough retailing environment the company has done better than most and weathered the recession well, so far anyway.

The second significant tidbit was the results of the trial of the 3 "extra" format stores:

"In relation to Warehouse Extra we have put considerable resource into refining the model and improving execution in both store operations and supply chain", Mr Morrice says. "As a result we have seen a measurable increase in customer acceptance and improved financial performance across our three Extra stores. Disappointingly however, the sales halo benefits that emerged in the first half did not maintain their momentum and have annualised well short of our expectations".

Mr Morrice said that the Extra strategy was under review. A decision regarding the future of the strategy would be made before the end of October.

Ian Morris, CEO

I'm very surprised that kiwis haven't embraced the giant "one stop" store format that has made Walmart so successful, however it appears that this style of shopping just wont fly here, or the company have the model wrong. This puts the decision made in the Appeal Court earlier this year, in The Commerce Commissions favour against Foodstuffs and Woolworths Australia buying The Warehouse, in jeopardy when it goes before The Supreme Court, probably sometime in 2009.

The Commission's case was apparently won on the basis of "potential competition" in the grocery market that the extra format stores "might provide in the future" and therefore a possible buyout of the company was nixed.

A decision to cut the format loose by The Warehouse in October would clearly remove that "potential competition" stumbling block from a Woolworths appeal to the Supreme Court and clear the way for a gobble up of the big red Kiwi retailing icon.

Short term investors should place their bets soon while the share price is low and long term investors should be hoping that there is a bidding war between the two possible suitors so their pockets are sufficiently full come bargaining time.

Either way the October decision will be eagerly awaited.

Disclosure: I own WHS shares

The Warehouse @ Share Investor

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c Share Investor 2008

Thursday, September 11, 2008

The case for The Warehouse without a buyer

The Warehouse Group Ltd [WHS.NZ]has been embroiled in several takeover attempts over the last 18 months or so.

The company has been at the center of bids from Woolworths Australia, Foodstuffs, the New Zealand grocers cooperative and the majority owner and founder of the company, Stephan Tindal.

Of course we all know all this takeover activity is on hold while Woolworths take the battle to The Supreme Court.

In the meantime the capital value of the company has halved and the retail sector, including The Warehouse, has been hit by a recession.

What investors have to ask themselves is, what is the company worth and what are its prospects for the long term if the status quo remains and the company is not merged or bought by a new owner.

Without a doubt, The Warehouse is the major player in the New Zealand retailing sector. It is the largest non food retailer, only Foodstuffs and Woolworths are larger, and it is dominant in most areas of retailing including: clothing, books and CDs, gardening and a whole host of other non grocery items.

The company has an enviable position as a company with great logistic capabilities and "on time' delivery of stock, important in the low margin area in which they operate and their geographical spread across the country, in some of the best malls and stand alone shopping districts, solidifies their logistical capabilities.

The name the Warehouse is also a great brand, well known, backed by frequent advertising and often the first choice for consumers when they think about buying any non grocery item.

A good history of trading also makes the company a good long term prospect in the future.

Interestingly, when you look at the historical trading activity of the company in terms of sales when compared to today and in the light of the current share price the figures are curious.

If I pick a date the earliest I can find, Jan 3 2003, the share price for The Warehouse closed at NZ$7.10 for that day.

Revenues for the full year 2003 (PDF) were slightly over NZ 2 billion dollars, approx 1.5 billion if you strip out Australian sales- the figure relevant for my comparison because The Warehouse OZ no longer exists.

A closing price of just $3.23 on 9 Sep 2008 and the most recent half year sales to January 27 2008 of $852 million (PDF)-estimated $1650 million for full year 2008 show a big drop in share price to sales from 2003 to 2008.

Net profit for full year 2003 was $82.1 million and after-tax earnings for the year ending July 27 2008 are expected to be between $84 million and $88 million, in the toughest retail environment in New Zealand for a generation.

Profit and sales will presumably increase as the retail sector inevitably improves.

The significance then of the difference in what the market puts as the capital value of the company today when compared to 2003 is obvious. It has been unduly marked down, as many listed New Zealand retailers have.

Sales are up and so is profit from 2003 but the market has given up.

Even without the prospect of The Warehouse being bought on the horizon, the capital value of the company is way below that of what it should be, the facts and figure comparisons reflect that.

The fact that 3 different suitors are interested in buying the company means that they can see the value in the company as well. All the advantages that The Warehouse hold in New Zealand retail are the reasons why others want a piece of The Warehouse action.

Long term investors in New Zealand retail stocks would do well to consider buying shares in the Warehouse to capitalise on the current low share price and tough retailing conditions.

In my opinion it will be one of the better performers long-term amongst our listed retailers.

The Warehouse full year result to July 27 2008 is due out 12 September.

Disclosure: I own WHS shares in the Share Investor Portfolio

The Warehouse Group @ Share Investor

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Discuss WHS @ Share Investor Forum - Register free

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Buy Toughen Up: What I've Learned About Surviving Tough Times

Toughen Up: What I've Learned About Surviving Tough Times

Toughen Up - Fishpond.co.nz

c Share Investor 2008

Tuesday, September 9, 2008

US TREASURY PRESS RELEASE: Fannie Mae and Freddie Mac

Share Investor Forum-Discuss this topic

The following information is a press release from the US treasury less than 30 minutes ago.

It defines effectively that the US Government(taxpayer) is taking control of Fannie and Freddie.

It means that half of all US mortgages are now State managed and backed.

It also means that the private housing market in the US has collapsed-the taxpayer bailing out the company doesn't mean it hasn't, whatever US Government officials are telling Americans, and the rest of the world for that matter.

It is important that investors re-assess their investments at this juncture and structure them according to the risk and current economic climate in view of this latest news.

WASHINGTON (Sun Sep 7, 2008 12:57pm EDT) The following is the full text of a statement released on Sunday by Treasury Henry Paulson on mortgage finance companies Fannie Mae and Freddie Mac: Good morning. I'm joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency,

FHFA. In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action.

Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure. Based on what we have learned about these institutions over the last four weeks including what we learned about their capital requirements and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.

The four steps we are announcing today are the result of detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve. We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection. Throughout this process we have been in close communication with the GSEs themselves. I have also consulted with Members of Congress from both parties and I appreciate their support as FHFA, the Federal Reserve and the Treasury have moved to address this difficult issue.

Before I turn to Jim to discuss the action he is taking today, let me make clear that these two institutions are unique. They operate solely in the mortgage market and are therefore more exposed than other financial institutions to the housing correction. Their statutory capital requirements are thin and poorly defined as compared to other institutions. Nothing about our actions today in any way reflects a changed view of the housing correction or of the strength of other U.S. financial institutions. I support the Director's decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs. I appreciate the productive cooperation we have received from the boards and the management of both GSEs. I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction.

GSE managements and their Boards are responsible for neither. New CEOs supported by new non-executive Chairmen have taken over management of the enterprises, and we hope and expect that the vast majority of key professionals will remain in their jobs. I am particularly pleased that the departing CEOs, Dan Mudd and Dick Syron, have agreed to stay on for a period to help with the transition. I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.

Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability. To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size. Treasury has taken three additional steps to complement FHFA's decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities.

Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and clarity to GSE debt holders senior and subordinated and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities. This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.

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c Share Investor 2008

Monday, September 8, 2008

Lets drink to Delegats

The good result from Delegats Group Ltd [DGL.NZ] last week got me thinking about a new future star of the NZX.

I'm not sure if it will be Delegats, they are but one major Kiwi wine maker, but the New Zealand wine industry is going to play a much bigger part in our economy as time goes on and industry players will want to get their hands on funds with which to expand their businesses.

Consolidation of a number of smaller Kiwi players to get economies of scale to compete with much larger international wine labels will also need to occur.

Some of the funds needed to expand these businesses will be obtained from borrowing money from banks and some could raise funds by listing on the NZX.

If we look at Delegats they seem to have approached their model of business in a most appropriate way.

While reasonably large in terms of cases sold, at $165.3 million or 1.4 million cases, by New Zealand standards, that figure pales into a rose' compared to international wine makers outputs.

Delegats have been clever though. They realise wine volume on an international scale will never be achievable from New Zealand, so they have gone for the "upper end" and have their own niche in the branded market, with their Oyster Bay label.

Apparently a good quality wine-maker(I cant tell the diff between a Carafe of house red Lafoot from a Ch√Ęteau Lafite) Delegat's Oyster Bay holds the number one New Zealand wine category position in the large export markets of Britain, Australia and Canada.

In a world where good wine makers are a dime a dozen Delegat's brands will do them well as they grow and allow them to sell their product at a premium price.

In 2008 the New Zealand wine industry had record export sales of $800m, a 14 per cent increase over 2007 and the industry as a whole expects to grow to $1 billion within the next few years.

Delegats were able to increase their exports by 20%, with the premium end of their sales probably responsible for that increase.

While there are obvious threats to agricultural businesses like wine growers-bad weather equals a bad year-the good management at Delagats, headed by Managing Director Jim Delegat seem to have planned well for inclement weather.

The mad hatters who are pushing the "climate change" industry and its associated taxes are also a growing threat to our Kiwi wine makers.

Delegats have a wide geographical spread of wineries, in North Islands Hawkes Bay, where a massive push into premium wines is in play, and where this writer is from, and Marlborough, a longer established wine region.

The Hawkes Bay and Marlborough regions hold the most promise, in my uneducated opinion, for a good future winery business to need more capital for expansion, buying more vineyards and establishing a brand for export and indeed local consumption.

There are however a number of wine regions in New Zealand, from mainland Auckland, through Gisbourne, down through Nelson and Marlborough, Canterbury and Central Otago and even Waiheke Island, with 26 vineyards on a very small Island in Auckland's Hauraki Gulf, is fast establishing their own unique viticulture community in a micro climate a few degrees warmer than Auckland itself.

The long established family winemakers, Nobilo, Delegats, Villa Maria and Vidals have tended to expand their businesses through profits and some vineyards and winemakers have been gobbled up by multinational drinks conglomerates looking for a brand or business in this new world of wine making down here in the South Pacific.

Stockmarket investors should keep a look out for the opportunities to invest in this sector of our economy, through future IPOs and capital raising's.

A part share in a good start up winery, in a good area, with a good vintner that you know well would be a good long term investment.

Even Delegats might be worth a punt.

Related Links

Full 2008 profit report 336 kb PDF (requires registration to download)
Delegats Group
Nobilo Wines
Vidal Wines

Discuss Delegats @ Share Investor Forum

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c Share Investor 2008

Tuesday, September 2, 2008

Why did you buy that stock? [Fletcher Building Ltd]

As the series Why did you buy that stock? comes to an end-unless I add a new company to the Share Investor Portfolio- the last company in the portfolio I will look at is blue chip darling Fletcher Building Ltd [FBU.NZ]

I have a small holding of 1000 shares which I bought for NZ$9.75 in November 2006 and it has provided me with a gross dividend income of approximately $1400 in total. FBU shares last traded at $7.20 as I write this.

Why did you buy that stock?

Why did you buy that stock? [Freightways Ltd]
Why did you buy that stock? [Kiwi Income Property Trust]

Why did you buy that stock? [Hallenstein Glasson]
Why did you buy that stock? [Briscoe Group]
Why did you buy that stock? [Fisher & Paykel Healthcare]

Why did you buy that stock? [Pumpkin Patch Ltd]
Why did you buy that stock? [Ryman Healthcare]
Why did you buy that stock? [Michael Hill International]
Why did you buy that stock? [Mainfreight]

Why did you buy that stock? [The Warehouse Group]
Why did you buy that stock? [Goodman Fielder]Why did you buy that stock? [Auckland Airport]
Why did you buy that stock? [Sky City Entertainment]

OK Darren, you are not usually too concerned about these temporary market driven figures so whats up?

Well I'm trying to make a point actually.

The fact that I have "lost" $1150 approx since my purchase doesn't concern me. It is a temporary thing and it is due to a number of factors.

Most NZX stocks have been punished by weak overseas markets and fallout from the Sub prime mess and Fletchers is no exception.

Building stocks like Fletchers are also cyclical and the company is facing the bottom of a domestic building slump, in Australasia and in the United States-their products are getting harder to shift.

All these things will inevitably change for the better, and if you are a long term investor don't sell. If you are a short termer, you might as well just bugger off now because this piece ain't for you.

The main impetus for me to invest in Fletcher Building was its pedigree for good management.

The company has existed in one form or another for more than 100 years and has grown from humble beginnings, to today developing into a very large multinational building supplier and manufacturer, retailer and commercial and residential builder in its own right.

Throughout that time it has been well manged and the current CEO Jonathon ling has done a good job so far, with the notable exception of buying the over priced Formica Corporation last year-we can all make mistakes.

As I pointed out above the building sector is highly cyclical and clearly good management is very important. So far Jonathon and his team have managed to weather the current economic storm well.

The previous CEO managed to structure the company in such a way as to diversify the company's revenue streams, so as to make the cyclical ups and downs less, well ,up and down.

Ling looks set to continue this in the future.

More revenue has come from markets outside New Zealand and Australia, with an increase in sales in Asia and America.

Good forward planning has also given Fletcher Building a good backlog of commercial building work in New Zealand and this has clearly offset the downturn in the domestic housing market, in which Fletcher's is the biggest player.

To go back to the price of the share again, when I bought at $9.75, the 60c odd per share in gross dividends represented an approximate 6 % return, which was a better return than the cash rate at the time and of course buying shares in a company that will grow profit means there is going to be a higher capital value for that company eventually.

So value for money and good returns was a compelling tick of the box for me to plunk down my hard earned.

Warren Buffett
rears his bald, Coke bottle glasses adorned head again in the last column in this series.

The reason is because Fletcher Building, in my not so humble opinion, has a "economic moat" in some of the sectors in which it operates, it is:

  • New Zealand's sole manufacturer of gypsum plasterboard;
  • a major participant in the New Zealand steel industry;
  • a major producer of aggregate, cement and concrete products in Australasia;
  • the world's largest manufacturer of decorative surfaces and high pressure laminates;
  • a distributor of a wide range of building materials in New Zealand;
  • a substantial construction contractor in New Zealand and the South Pacific Islands;
  • a major builder of residential homes in New Zealand;
  • a major producer of insulation products in Australasia; and
  • the world’s largest producer of steel roof tiles.

An economic moat, as coined by Warren Buffett, is an advantage in business, through dominance in the market and/or strong brands that gives the business a competitive edge, that is very difficult to compete against.

Fletcher Building have that competitive edge, they have strong brands and are dominant in the manufacture and distribution of several building materials and have a large enough and efficient enough infrastructure and well managed employees to be able to construct, commercially or domestically.

These sorts of business advantages are especially important in this heavily cyclical industry and management have clearly understood this.

Fletcher Building's strong brands are well known by consumers and the construction industry alike and even Formica Corporation will end up being a positive contribution once the fat has been liposuctioned from the company hierarchy.

So brands and a big competitive advantage were big ticks for me.

I am not adding any more new companies to the Share Investor portfolio currently or adding additional shares to those companies that I already hold, but I would be buying more Fletcher Building now if I was.

It is a great long term company and is therefore is a blue chip for a very good reason.

Fletcher Building @ Share Investor

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Fletcher's got game

Related Reading

Fletcher Building History - Auckland University

 Click here for full Media Release - FBU 2008 Annual Results

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c Share Investor 2008