Happy Days are Here Again

I love the smell of Napalm in the Morning

Gudovac's price targets remain more or less similar to those of 9-12 months ago. price in paretheses is the current price.

Owners might just observe good prices in the near term future.

The price that follows is Gudovac's buy target. In Green are the Stocks that are close to a buy target.

Red indicates stocks that are have a very long way to drop before Gudovac believes they represent good value.

ABB ($16) buy at $5

AA ($11) - $9

ALS - 30 Euros

AMSC ($28)- $5

CSX ($49)- $44

DOW ($25) - $12

EMR ($46)- $34

GE ($16) - $6

RBC ($57) - $31

CSX - Example of Premier Operating Managers

Gudovac would like to devote one article highlighting the premier operating managers at CSX.  Premier operating managers are able to pro-actively change their business ahead of external traumas.  CSX's latest quarterly results were good. Gudovac reviewed these results from a financial perspective a few days ago. 

This article will show how pro-active managers can protect their Owners. Sell side blather about strategy, global trends, and cool-neat-stuff  adds zero value if managers can't execute. 

CSX managers can execute.  

The information we'll use to illustrate the subject are slides from CSX's 3Q presentation.  We'll first start with the context and then move to the specific actions managers pro-actively undertook.

The economic environment for CSX is terrible. Volume is down 15% overall. It is down in every market.   The Coal market is one example. 

Coal shipments are approximately 20% of CSX's business by revenue.  Management tracks Coal stockpiles (aka inventory) at Utilties closely.  Coal inventory is at near record highs. Management doesn't sugarcoat this bad news.  Utilities are not going to increase demand their for Coal.  

The quarterly conference call made it clear that Utilities were shipping the absolute minimum required under their long term purchase agreements. 

Management sums up the prognosis for 4Q in the slide shown on the right.  We might think of this slide as the brown shoots slide. Management considers the outlook 60%  unfavourable and 30% favourable.   Management presented this harsh verdict clearly.

So, management recognizes the external economic environment is bad and not going to get better. What have they done about it ? The next series of slides describe that actions CSX management have implemented to protect Owners. 

First, management slashed capacity by slightly more than the 15% decline in volume.   Capacity has been slashed by 13% of employees 'furloughed', 17% of locomotives stored, and a  mind boggling 32% of freight cars stored.

These managers don't sit around  creating fantasies of how things-are-going-to-get-better-real-soon. They aren't grasping at feel good stories coming from corrupt Political Appointees. These managers slash capacity and costs by staggering amounts at the first hint of trouble.  

The results of their actions are shown in the Cost Cutting chart on the left.  Every single Manager on Earth should have their cost structure broken down into the same components as CSX shows: Short-Term Variable Costs, Long-Term Variable Costs, and Fixed/Indirect Costs.   

CSX managers have slashed short term variable costs by 40% which is to be expected. However, they also slashed LT variable costs and Fxd/Indirect by 16% ! Fixed Costs are the most difficult to cut. CSX cut fixed costs by more than the decline in volume. 

The results from the cost cutting are shown in the Productivity Metrics chart.  Productivity remains high in the face of reduced volume. This productivity growth indicates that Managers have been able to slash costs without too much disruption.  

Operating Managers know how difficult it is to cut costs without disrupting the workforce. CSX managers have executed well in this respect. 

The net result of  Management's efforts is increased margins.  

Repeat - increased margins in the face of 15% decline in volume.  

'nuff said. 

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Don't Get Massacred !

Gudovac1941@gmail.com

Gudovac on his Methodology and General Investment Thoughts 

Shanthi Gears (SHNT - Bombay) - 40% gain in 30 days

Readers may have noted that Gudovac rarely recommends buying an Enterprise at Mr. Market;s price.  

One Enterprise Gudovac recommended buying was Shanthi Gears. On August 11, He suggested that its then price of 37 Rs per common was good value.  

Today, Shanthi closed above 52 Rs.

Since August 11th, Readers would have earned a 40% return on their investment. Not bad for 30 days work. 

Economics - Owners Victory ?

Background:

Gudovac is often focused on questions of owner-agent interests.  Management forget they are hired hands. Board of Directors forget who they represent. Owners forget to whom should accrue the profits of a Enterprise. 

The self-dealing and morally corrupt Manager became established as the norm sometime during the post WWII boom.  Gudovac isn't sure exactly when it became normal for Managers to loot their company at the expense of Owners. However, today's Managers engage in routine corruption with nary a thought. Today's CEOs spend owner's funds on personnel PR agents and make-up artists with nary a thought. Today's Boards backdate stock options which are easily in the money if Managers generate a mere 2% annual return. 

Gudovac is aware that Management corruption is as old as corporations. However, it is his observation that the boom years of 1982 - 2002 provided a climate for Managers corruption to flower.  Owners easily overlooked Management corruption as long as equity prices rose 12% CAGR. 

The Good Corporate Governance movement attempts to rein in the worst excesses of corrupt Managers to little effect. Private Equity has only made corruption worse. Owners need to be aware that Private Equity is run by Managers not by Owners.   Owners such as the all-powerful CALPERS are unable to restrain corrupt Managers .  Even the SEC enables Management corruption.  

Gudovac has no illusions about legislative remedies to redress the weakness of Owners.  Legislation is easily neutered. Gudovac believes the only method to eliminate management corruption is by forceful & continued effort by Owners. 

However, perhaps the Courts can be a force for Owners to realize it is possible to regain control of the companies they own.  

The latest ruling in the Southern District Court in New York may just be the catalyst Owners need. 

Return of Owner's Rights ?

Owners can't be certain that the Wicked Witch of management hubris is dead.

But, Federal Judge Rakoff's order clearly rejects the insider dealing and looting commonplace today.   Rakoff's pithy quote summarizes the situation in stark terms: 

Rakoff signals that he wants charges filed against everyone. He wants to understand why charges haven't been filed against the BoA lawyers who drafted the merger documents.  Rakoff recognizes that corporate lawyers are the great enablers of management looting. He realizes that lawyers believe they can hide behind attorney-client privilege. He makes it clear that lawyers are not immune from prosecution. 

Rakoff's order is a forceful condemnation of the SEC.  Readers should note that the SEC was asking for the Judge to approve a multi-million dollar fine. The SEC thought this would be a proforma approval process. Rakoff does not precisely accuse the SEC of collusion with BoA, but he comes close enough in this statement: 

Raskoff wants full disclosure from BoA. He wants the SEC to fill its adversarial role and prosecute the BoA Managers who 'lied' to their shareholders.  Owners should read the complete Order - it is worth the effort. 

For readers who wish to learn more about Raskoff, the wikipedia entry with list of notable cases is a good start.  Raskoff was the Judge for the WorldCom trial.  He is an expert on white collar crime. A perfect Judge to sit on the Southern District Court.  Raskof also teaches at Columbia Law School. 

Owners should heed Raskoff's call to arms. Owners should no longer accept self-serving corrupt managers. 

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Don't Get Massacred !

Gudovac1941

Methodology Thoughts and Observations

Mr. Market and other thoughts

Gudovac has escaped the City for a bit. He thought it might be reasonable to provide a bit more background on ownership of Enterprises during the interlude.  

A large minority of Readers seem to immediately grasp the Ownership approach presented in these pages. However, another large minority of Readers appear to be positively offended by the Approach. This group of Readers sends angry notes describing Gudovac as some sort of evil magician. They suggest base motives. It is to this group of Readers that this explanation  is written. 

Gudovac hopes this provides some clarity on why he might price a company at $5 when Mr. Market merrily prices it at $30. 

Mr. Market

Who is Mr. Market ? Mr. Market is a figure created by Columbia University Professor Benjamin Graham. Graham used the figure of a high strung business partner to illustrate the short term lunacy of stock prices.  At the bottom of page 204 begins Professor Graham's illuminating description of Mr. Market first written in 1949.  Read it. 

A modern real life Mr. Market is of course the most amusing Jim Cramer of Mad Money. It is unclear if Jim Cramer television character is a deliberate or accidental embodiment of Professor Graham's fictional character - Mr. Market.  

Owner's Time and Speculator's Time

Gudovac writes for Owners. Owners think very differently about time than Speculators. Owners measure time in terms of Business Cycles - from bottom to peak to bottom again.  This is a multi-decade time horizon.  The Business Cycle just ending began in the early 1980's. 

Not much happens in the course of a single day in the life of an Owner.   

This contrasts sharply with the day of a Speculator. Speculator's days are filled with minute-by-minute action. Gudovac has described the Owners method of investment as similar to that of a Hunter carefully stalking his prey. Perhaps the Speculator's method is analogous to that of the Hummingbird quickly leaping from flower to flower hoping for some nectar.  

Good Company Bad Price

Owners should be clear that there are many good companies which sell at a bad price.  

Management

American corporations seem to have developed a breed of managers who forget they are hired hands.  

The Sell Side and The Buy Side

Owners should be crystal clear that an entire industry exists to separate them from their money.  The vast majority of the financial industry is a far reaching apparatus of selling, selling, and more selling.  Owners should watch this clip from the film Boiler Room for a behind the scenes glimpse of the sell side in action. 

The sell side is Abby Joseph Cohen, it is CNBC, it is the Money Honey, it is Barrons, it is Wall Street Week, it is mutual funds, it is wealth managers, and it is your stockbroker.  The sell side is out there pushing, pumping, and trying to close the sale. The sell side is in-your-face every minute of every day. The sell side is what retail investors (aka Dumb Money) believe to be Wall Street.   It isn't. 

Wall Street is also the Buy Side. 

The Buy Side is the sub-set of the financial industry that doesn't need or want mass media around.  The Buy Side has capital to deploy.  Why would it broadcast how, where, and at what price it intends to deploy its capital ?  The Buy Side are Owners.

How to Determine a Price ? 

Price is a simple mechanical exercise. Owners provide capital - Managers use that capital to generate profits - Owners allocate a share of the profits to themselves and a share of the profits to the Enterprise. 

At some point, every worthwhile Enterprise will pay Owners a share of its profits.  The size of the Owner's share determines price. If an Enterprise shows no sign of ever returning profits to Owners no matter what the story - well, then they can't be priced very high can they ? 

Very bright people get PhD's & Nobel Prizes in the subtle aspects of pricing.  These aspects relate to growth rates, dividend payout ratios, share buybacks, capitalization, and discount rates. However, Owners should never get mired in the theory at the expense of the big picture.

All Owners need to ask is - When &  How much will this Enterprise pay me back ?

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Don't Get Massacred !

Gudovac1941@gmail.com

Please note - This article was written on of those thoroughly modern devices - the iPhone. Gudovac, being a old fuddy duffy, is not yet versed with this machine. Gudovac thanks his Readers, in advance for their tolerance of any grammar and spelling errors.

Buying an Indian Company - Good, Bad, Profitable

A general note to US and European owners who are used to slick Management presentations from their multinationals. Indian industrial managers don't produce perfect power points with stunning coordinated graphics. Indian managers don't have carefully orchestrated conference calls with canned puff-ball questions from sell side analysts.  Instead, Owners get reports that have been scanned on dusty copiers by harried assistants. 

Successful Indian industrial managers are simply too busy engaged in running their ever expanding Enterprises and generating massive profits. 

When Owners start seeing slick power point presentations from Indian Industrial Companies is the time for Owners to be concerned. Slick power point presentations from Industrial Managers will be the first sign of reduced opportunities in Indian. 

A visit to the Head office of a Indian Industrial Enterprise involves receiving a Victorian Era salute,  complete with foot stamp, from the car park attendant. The choice will be to ride in a beaten up tiny elevator or take the stairs.  Peeling paint; the ubiquitous Ganeesh shrine; supplicants waiting in the lobby; a walk into a insanely hectic 1950's style open office; and finally into the Big Man's office.  The Big Man will have an office roughly the size of a junior salesman at a US multinational.  Shabby furniture, reams of paper, and a endless stream of clerical staff asking for signatures complete the picture.  

This is precisely the situation a prudent Owner's desires. Owner's should expect their hired Management to devote every last penny to productive resources.   

Gudovac is appalled when he visits US or European Enterprises with exquisite furniture and carefully selected artwork.  Money spent on Management's furniture and artwork is money that comes straight out of the Owner's pocket.  Such excess is sign that Management has too much capital and not enough opportunities.  Gudovac applies a hefty discount on such Enterprises. 

Please note, Gudovac has also seen Indian enterprises who mimic their Silicon Valley counterparts with lavish campuses and elaborate atriums. Fortunately this illness hasn't yet infected Indian Industrial Enterprises. 

Finally in examining Indian Enterprises of any scale outsiders are immediately struck by a rich tapestry of familial and clan connections.  The intricate subtleties of the Indian clan system is beyond the deep understanding of Gudovac. Gudovac suspects even most Indians can't fathom every nuance of their clan structure. However, it is the wise Owner who recognizes that these powerful bonds exist and drive many business decisions. However, no owner should immediately conclude a clan inspired business decision is by definition a poor decision.Gudovac has seen enough business decisions driven by college rowing buddies to recognize that bone headed decisions are made in every  cultural system.  

In sum, Owners need to look beyond the smooth stories they are used to hearing from Multinationals. Owners need to ask one question of any Enterprise - Will the Managers I hire work in my interests ?  - this is true for India as well as for Indiana. 

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Don't Get Massacred !

Gudovac1941

Methodology - thoughts and observations

Readers will note a rather tough approach to these valuations. They might ask themselves if these valuations are unreasonable and harsh. They might aks themselves if waiting for the prices to reach the values calculated by Gudovac1941 will cause investors to Miss-A-Major-Opportunity. 

Finally, they might ask themselves what other alternatives exist ?

In reply to these questions, this writer can only state that:

First: one must think in terms of market cycles lasting a few years. During time of excessive pricing, one must simply accumulate capital and wait. Imagine a hunter stalking prey. Good hunters don't crash through the underbrush. Good hunters are able to sit quitely for long periods waiting for the perfect opportunity.

Second: one must also examine alternatives to the straightforward long equity investment. Modern markets provide multiple avenues for investing against an enterprise.

Third: Gudovac1941 has bought many companies at the valuations calculated in these pages. There are many ways one can invest one's capital. The capital markets are just one vehicle of many.

Fourth: Be discerning when gathering information. The vast majority of information on investments is generated by the sell side. The sell side of investment is siren call that one should ignore.

The root of anyone's valuation should be at what cost would I want to own this enterprise ?

Gudovac1941 does not spend much effort in examing macro-economic trends. Great management teams are able to navigare through a variety of macro-economic environments profitably. Certainly, macro economic trends, effect long term valuation significantly. However, these trends are not too difficult to discern. There are numerous sources of macro-economic trend information. Again - be careful to determine is the source is from the sell-side. If the source is on the sell side, then ignore.

Gudovac1941 spends much effort slogging through the details of these enterprises' reports, conference calls, and numbers. 

However, the greatest single factor which drives valuations (in his mind) is whether management serves the stockholder's interests ?

One can develop the most highly nuanced CAPM with a refined multi-varient WACC - but miss the most salient question: to whom do the economic rents acrue - owners or managers ? 

Gudovac having hired (and fired) his share of operating managers over the last few decades has seen his share of self-serving looting by operating managers.

Gudovac is positive that the silly market levels of the past 15 years are behind us. He hopes for further steep declines in the equity prices over the near future. 

In sum - Don't get Massacred.

Gudovac1941@gmail.com