Value Ideas Blog
Banque Privée Edmond de Rothschild

Intro

The overall banking business model is simple. Banks receive money from clients which are depositors and the capital markets and lend to other clients which are borrowers, therefore banks make a profit from the interest spread. If a bank borrows money from a depositor at 4 percent and lends it out at 6 percent, the bank has earned a 2 percent spread, which is called net interest income. Furthermore banks also earn money from basic fees, assets under management (AUM) and other services, which is usually referred to as income from fees and commissions or simply noninterest income. If we combine net interest income and noninterest income we end up with the net revenues of a bank or its top line. A further point which is less obvious is that consumers are actually paying for the liquidity services as well.

The center of banking is, due to my experience of working for a bank, one thing: risk management. Banks have to deal with three different types of risk: credit, liquidity also known as “Fristentransformation”, and the interest rate environment. Borrowers and lenders pay banks through interest or fees because they are unwilling to manage the risk on their own, or because banks can do it more cheaply. There are only a few other business in the world where you can take money from people and effectively charge them to take it off their hands. That’s the banking and insurance business model in a nutshell.

But there are many banks, asset managers and insurers out there, most of them in the same country and the same business segment and after all, financial products and services tend to be generic. Despite this fact most of the banks and the finance industry earn some decent returns for themselves and their investors, which is a first sign of a potential moat.

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This will be the final summary of our Vetropack series. Here are links to the first two parts: http://frenzel-herzing.com/investment-analysis-vetropack-holding/ http://frenzel-herzing.com/vetropack-analysis-part-2/   We want to start by giving you the most recent numbers (http://www.vetropack.com/htm/presse_detail_3.htm?id=159). The revenue growth was in line with our expectations, just as the decrease in EBIT matched our prediction quite closely. As we have said before, we estimated an average 2.5% revenue growth in the short term. We need to add that all calculations have been done in reporting currency, which is CHF. Most profits occur in EUR though, as one of our great readers has remarked in a comment previously. But it is even more important how the cash is pooled. The CFO has told us that the cash pool that is used for investment is also kept in EUR. So we converted our DCF model. We have made the following assumptions, using the most current numbers:
  • Revenue growth of 2.5% in the short term, 2% in the long term
  • 10.1% CAPEX / revenue
  • 0.63 operating expenses / revenue
  • 0.17 average cost / revenue
  • 0.09 average depreciation, amortization / revenue
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The book: ” The Art of Investing – How the wold’s best Investors beat the market” written by John Heins and Whitney Tilson, who also publish the Valueinvestorinsight, is a collection of value investing quotes by more or less famous investors. Overall, the book is well written and easy to read, but the price of the book is around 25 Euro which, in my mind, is quiet expensive for a collection of quotes. According to the authors the best investors can articulate in a clear and focused way what they’re looking for, why they’re looking for it and where they’re trying to find it. They have a well-defined and consistently applied process for research and analysis. Furthermore value investors understand the micro factors, such as a company’s competitive advantages and only act when they are able to draw a conclusion which incorporate a margin of safety. Because I stick with the quote of Richard Pzena, here are the best quotes of the book:   Charlie Munger: “All sensible investing is value investing”   Zeke Ashton: “I’ve heard it said many times that value investing is not as much about doing smart things as it is about not doing dumb things”   Lee Atzil: “The first thing is by making sure the potential downside is a small fraction of the upside. That means we avoid stocks that are cheap on an equity-value basis primarily because there’s a mountain of debt. The second important way to have a margin of safety is to have more than one way to win, through earnings growth multiples expansion or free options in the business.”   Seth Klarman: “People should be highly sceptical of anyone’s including their own, ability to predict the future, and instead pursue strategies that can survive whatever may occur.”   read more
Here are some new valuable thoughts and articles that should be worth checking out: One last thought I want to share is that, as I have learned myself, it will always pay off to put a little extra effort into everything you do, even if it is an uncomfortable thing to do. Whenever I am confronted with a spreadsheet with hundreds of numbers and multiplicators and I ask myself whether I really see through all of this, two Einstein quote comes to my mind:  
 Do not worry about your difficulties in mathematics; I can assure you that mine are still greater. It’s not that I’m so smart, it’s just I stay with problems longer.
 

Have a great weekend.

This post originates by a comment of reader S., who has mentioned the book “the Outsiders, Eight unconventional CEOs”. Actually the book review was  my first blog post which I ever had accomplished, and MMI was so kind to publish it in his outstanding blog. As this book is really worth reading here is the old post again with some extensions which I have learnt in the year after having read the book. Especially I could recommend the links at the end of the post which will help you to achieve a deeper understanding of “Outsider thinking”. Perhaps William N. Thorndike Jr. itself is an outsider, he is the founder and managing general partner of Housatonic Partners a private equity firm. After Motley Fool Housatonic Partners has returned around 25% in the last 20 years, the approach of Thorndike is to spend 30% of his research time on the CEO and management of a company,   So first of all, let’s start with the book review and the wrap up of the idea. read more
VALUE ESSENTIALS: MARGIN OF SAFETY (SETH KLARMAN)   This post is essentially going to cover the most important points of the well-known “Margin of Safety” by Seth Klarman. It might be just as useful for people new to the topic as to those who have read it several times and would like a short summary.   The first chapters basically explain how institutional investors can cause market inefficiency or, in other words, says why value investing works. To keep the length of this post appropriate and not to go into every detail (we do still recommend reading the book!), we would like to jump to the overview of value investing that Klarman gives. Three elements are crucial:   The bottom-up strategy separates the value investor from others; the investment focus should lie on specific investment opportunities. Know a few companies really well instead of knowing little about very many. In the best case, you can focus on just one company at a time, by trying to buy a bargain and to wait.   Focus on absolute instead of relative performance. You cannot beat the market every year. In fact, most of the time you are going to be wrong. But every investment that has been valuated correctly has the potential to help you beat the market in the long-term, which are you are very likely to do. It is necessary to tolerate long periods of underperformance. Cash reserves are crucial when no bargain is available. If the portfolio is fully invested and an opportunity comes along, get rid of companies closest to being fully valued.   read more
Once again, we share our most useful lecture with you, this week you might want to take some more time than usual:   An outstanding student investment newsletter from the Columbia Business School: http://www8.gsb.columbia.edu/valueinvesting/sites/valueinvesting/files/Graham%20%26%20Doddsville%20-%20Issue%2020%20-%20Winter%202014.pdf   An exponentially growing company in a very competitive field: http://moatology.com/2014/02/20/optimizerx-a-little-company-in-the-sweet-spot-of-a-massive-industry/   And, as we like to do, we give you two great quotes:  
Really good investment opportunities aren’t going to come along too often and won’t last too long, so you’ve got to be ready to act. Have a prepared mind. ― Charlie Munger You will become way less concerned with what other people think of you when you realize how seldom they do ― David Foster Wallace, Infinite Jest
  Finally, we do not want to miss out on making an announcement for those of you who are around: We are going to have a presentation on value investing, margins and moats at the European Business School in Oestrich coming up on Monday. Feel free to join if you have the chance! https://www.facebook.com/events/530086467089189/?ref_dashboard_filter=upcoming
Today I would like to present you a long post and the work of the team from the European Business School for the German CFA Research Challenge Final. The team members are Vincenzo La Banca, Yun Du, Attila Menyhàrt, Jan Werst and me.   We were one of four teams which reach it to the Final round, unfortunately we did not win (perhaps this was due to our low price target of around 63€ per Kabel Deutschland share (ca. 40% lower), but we still think that this price is much more reasonable than the takeover price of 87€ per share and it is not the first time taht vodafone paid to much for a german company(Mannesmann AG)). At the Moment the Valuation of Kabel Deutschland is at a staggering 51x Equity Value/FreeCashflow. Foodballfield   But let us now go into the details: read more

So, is there “a puff left” now?

In order to answer this question we need to take closer look into the structure of 3U Holding (3U). As the name suggests, 3U Holding holds a series of stakes in other companies. Benefits of this approach include synergies in terms of purchasing, facilities, legal, accounting and business administration, plus the possibility to add up profits and losses, and so save taxes. However, as blog readers have already commented rightly, the overhead costs for management and shared central functions are significant, i.e. roughly 3.5 million per year (0.10  Euro per share per year). read more
Today we want to take a look at 3U Holding (ISN: DE0005167902, Symbol: UUU). It’s a small cap enterprise that caught our attention. The book value at the end of Q3/13 was about three times the current shares price, i.e. 1.29 EUR (by our calculations) vs. 0.42 EUR on Jan 10, 2014! In the chart below you can see that the company is today 80% equity financed, up from 36% in the year 2006. So, let’s take a closer look to find out if this is an investing opportunity from a value investing point of view or a potential value trap… (This is the first part of the analysis, keep in mind that you should do your own research and that this is not a selling or buying advice)    Equity development   read more