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Value-oriented Equity Investment Ideas for Sophisticated Investors

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Investing In The Tradition of


Graham, Buffett, Klarman
Year VIII, Volume VIII
August 2015

THE

Top Ideas In This Report


Barrick Gold

(NYSE: CLD) .. 56

POSCO

20 Companies Profiled by The Manual of Ideas Research Team


Proprietary Selection of Top Three Candidates for Investment

(NYSE: PKX) .. 92

Also Inside
Editorial Commentary 3
Interview with YCG Investments .. 11
Screening Deep Value Equities 21
Gianluca Ferrari on Exor .. 31
Analyzing 20 Deep Value Ideas .. 36
Toby Carlisle on Movado 116
10 Essential Value Screens 119

About The Manual of Ideas


Our goal is to bring you investment
ideas that are compelling on the
basis of value versus price. In our
quest for value, we analyze the top
holdings of top fund managers. We
also use a proprietary methodology
to identify stocks that are not widely
followed by institutional investors.
Our research team has extensive
experience in industry and security
analysis, equity valuation, and
investment management. We bring a
buy side mindset to the idea
generation process, cutting across
industries and market capitalization
ranges in our search for compelling
equity investment opportunities.

SSUE

Screening for Deep Value Bargains

(NYSE: ABX) .. 40

Cloud Peak Energy

DEEP

VALUE I

When asked how he became so


successful, Buffett answered:
We read hundreds and hundreds
of annual reports every year.

Exclusive Interview with YCG Investments


In Depth: Gianluca Ferrari on Exor, Toby Carlisle on Movado
10 Essential Screens for Value Investors

Deep value candidates analyzed in this issue include


Avon (AVP), Barrick Gold (ABX), Benchmark Electronics (BHE),
Callaway Golf (ELY), Cliffs Natural Resources (CLF), Cloud Peak (CLD),
Encana (ECA), Kelly Services (KELYA), Kulicke and Soffa (KLIC),
Lands End (LE), LeapFrog (LF), Movado (MOV), Murphy USA (MUSA),
Oppenheimer (OPY), POSCO (PKX), RealNetworks (RNWK),
ScanSource (SCSC), Sears Hometown and Outlet (SHOS),
Tech Data (TECD), and Vale (VALE).

Inside:

Become recognized as a value


investing thought leader by
New Exclusive Content
sharing
your wisdom with the
In-Depth
Analysis:
in the MOI Members Area
global value investing community.
Toby
Carlisle
(log in at www.manualofideas.com
Email john@manualofideas.com.
or email support@manualofideas.com) on Movado
Arik Ahitov on Investing in SmallMid-Caps
Withand
compliments

of
The Manual
of Summit
Ideas 2015
Three Presentations from Wide-Moat
Investing

Meetup Group, Curated Content, and More


REPLAY at ValueConferences.com
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Value-oriented Equity Investment Ideas for Sophisticated Investors

In-Depth Analysis: Toby Carlisle on Movado


Cheap, Safe, Potential Compounder, Buying Back Stock
Its no secret why Movado Group, Inc. (MOV) is in the bargain bin. Investors
fear that the beast of 1 Infinite Loop, CupertinoApple, Inc. has done for
watches what it did for Walkmans (the iPod), desktop PCs (the iMac), music
(iTunes), laptops (the Macbook), and cell phones (the iPhone), not to mention
tablets (the iPad), and whatever the AppleTV replaced (the VCR?). With a string
of category- and competitor-killing hits like that, its no wonder that the stocks
of watchmakers are in the dumps. But when branded consumer goods producers
get beaten up I like to take a very close look. Nothing compounds like assetlight consumer brands. And if you can get them at a deep undervaluation, the
risk:reward proposition becomes truly asymmetric, as I believe it is for MOV
now. Lets take a look at the company.

Nothing compounds
like asset-light consumer
brands. And if you can
get them at a deep
undervaluation, the riskreward proposition
becomes truly
asymmetric, as I believe
it is for MOV now.

MOV designs and markets watches wholesale, and retail through the companys
outlet stores. Its portfolio of brands includes Coach Watches, Concord, Ebel,
ESQ Movado, Scuderia Ferrari Watches, HUGO BOSS Watches, Juicy Couture
Watches, Lacoste Watches, Movado and Tommy Hilfiger Watches. Based in
Paramus, New Jersey, it has operations in the United States, Europe, the
Americas, Asia and the Middle East.
MOV has a market capitalization of $593 million at its $24.61 share price at the
time of writing. It has $159 million in net cash on its balance sheet, and
generated operating earnings over the last twelve months of $70 million. That
puts it on an acquirers multiple of 6.2x. The acquirers multiple is a variation of
the more familiar enterprise multiple, the valuation ratio used by activists and
private equity firms to find attractive takeover candidates.
It examines several financial statement items that other multiples like the priceto-earnings ratio do not, including debt, preferred stock, and minority interests;
and interest, tax, depreciation, amortization.
It is calculated as follows:
Enterprise Value / Operating Earnings
where enterprise value is the market capitalization plus total debt, minority
interests, and any preferred stock less cash and equivalents; and
where operating earnings is a measure comparable to earnings before
interest and taxes (EBIT), but constructed from the top of the income statement
down (EBIT is constructed from the bottom up). Calculating operating earnings
from the top down standardizes the metric, making a comparison across
companies, industries and sectors possible, and, by excluding special items
earnings that a company does not expect to recur in future yearsensures that
these earnings are related only to operations.
It is based on the investment strategy described in my book Deep Value: Why
Activist Investors and Other Contrarians Battle for Control of Losing
Corporations (Wiley Finance, 2014). The Acquirers Multiple website has a free
list of the cheapest stocks in the largest 1000 US exchange-traded stocks and
ADRs. (MOV is on the paid All Investable Screener.)
MOV stands up on other value metrics too. It trades on a PE of 13.2x, and has
generated a free cash flow / enterprise value yield of 9 percent over the last

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August 2015 Page 116 of 130

Value-oriented Equity Investment Ideas for Sophisticated Investors

twelve months. It pays a small dividend, yielding 1.7 percent at prevailing


prices.
So we know MOV is unusually cheap, and we know why, but, as Laurence
Oliviers evil Szell asks over and over again of Dustin Hoffmans character,
Babe, in 1976s Marathon Man, Is it safe? There are a number of statistical
tools we can apply to drill MOVs teeth, and well get to those shortly, but its
squeaky clean, cash-rich balance makes for an attractive starting point. Its
Altman Z-Scorea measure of the likelihood that a company will end up in
bankruptcy within 2 yearsof 5.86 indicates that it is far from financially
distressed (greater than 2.6 is considered safe). MOVs Piotroski F-Score is 5
out of a possible 9, which is about average for a stable company. (It misses on 4
dimensions but remains strong on each: Its return on assets slipped year-on-year,
but it still generated 8.35 percent on assets; its gross margins fell, but remain
very healthy at 52 percent; its current ratio slipped, but remains very high at
5.4x; and its asset turnover slipped, but still sits at about 1x, down from 1.1x last
year). MOVs Beneish M-Score of -2.67 also indicates that its not an earnings
manipulator (anything greater than -2.22 is good news). From a statistical
perspective, its not close to financial distress (in fact its financially strong), and
theres no indication of earnings manipulation. Oh, its very safe.
Short interest spiked in May to 10.84 percent of the float, but has fallen each
month since to its most recent 9.61 percent on July 15. Its close to its historical
peak, and short money tends to be smart moneyits certainly been the right bet
since MOVs ~$47 stock price peak in November 2013but the fact that short
interest is now declining may indicate that the shorts have got what they want,
and are ready to move on.

An issue for MOV is


that management dont
own much stock.
Collectively they hold
around 3 percent of the
company, most of which
has come from option
grants.

2008-2015 by BeyondProxy LLC. All rights reserved.

An issue for MOV is that management dont own much stock. Collectively they
hold around 3 percent of the company, most of which has come from option
grants. The largest holder is Vice Chairman Cote with 1.77 percent, and he is a
net seller. CEO Grinbergs stock has a market value of $2.48 million. While that
is nice sum, in context with his $2.5 million in compensation this year, it isnt
material. I believe that when managers have a significant holding in their own
stock (material relative to their own net worth and income) they tend to be
focused on the price of stock relative to its intrinsic value. A Henry Singletontype managerone that thinks like an ownerwould use some of MOVs huge
cash hoard to buy back the stock while its cheap. Doing so increases the
intrinsic value of each share remaining outstanding, and allows shareholder who
want to sell to get out of a relatively illiquid stock. Shareholders who believe in
the company get a tax efficient boost to the value of the shares they hold. To
managements credit, and despite their small holdings, MOV has a substantial
$100 million buyback authorization in place. (The board increased an existing
share repurchase authorization to $100 million on November 25, 2014.) In the
first quarter that resulted in net repurchases of around $22 million at an average
price of $25.87a small premium to the current market price. At this pace,
MOV will buy back the full $100 million before the end of the yeara material
sum relative to its ~$600 million market cap, equating to about 15 percent of the
outstanding stock at current pricesand be left with more than $100 million in
cash and equivalents, excluding whatever they earn between now and December
31. With any luck, theyll complete the buy back and re-authorize another the
same size.

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August 2015 Page 117 of 130

Value-oriented Equity Investment Ideas for Sophisticated Investors

the company is
undertaking a material
buyback that will
significantly boost per
share intrinsic value.

MOV possesses many of the qualities I like in a stock. At $24.61, it trades on an


acquirers multiple of 6.2x, which is very cheap. With $160 million in net cash
on the balance sheet, its cash rich, and liquid, and it passes all of the safety
screens with flying colors. While management dont hold a lot of stock, the
company is undertaking a material buyback that will significantly boost per
share intrinsic value. Thats usually enough for me to take a position. I know
many investors need to dig into the business, which is something Ive
conspicuously not done here. How the watch business will fare against the
category-killing beast from 1 Infinite Loop is anyones guess. My sense is that
watches are different from other tech gadgets because they serve as jewelry too.
I own almost all of the other Apple gadgets I listed at the start of the article, but
the watch doesnt appeal to me at all, while high-end watches do. (Ive talked
about it previously, but not in detail: Ten years ago I bought a swiss watch from
the auction of the deceased and bankrupt estate of flamboyant Australian
corporate raider, stock market operator, and insider trader Rene Rivkin. I paid
less than the value of the gold content in the watch. When I had it appraised 5
years later I discovered that, despite the gold price trebling in the interim, I had
somehow managed to overpay. Whats worse is that its a really garish watch
Ive worn five times, wearing a dinner suit each time because nothing else seems
appropriate. Shows how little I know about watches). I digress. I wont pay up
for compounders, but Ill buy them cheap. And MOV is a very cheap stock, with
the potential to continue its historical compounding. Most importantly,
management is proactively embracing the opportunity to exploit the discount in
the stock by buying it, if not for their own accounts, at least for the companys. I
am doing the same. Long MOV.
Tobias Carlisle is a founder of the website acquirersmultiple.com. He is best
known as the author of the website Greenbackd, the books Deep Value: Why
Activists Investors and Other Contrarians Battle for Control of Losing
Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioners
Guide to Automating Intelligent Investment and Eliminating Behavioral Errors
(2012, Wiley Finance). He has extensive experience in investment management,
business valuation, public company corporate governance, and corporate law.
Prior to founding the forerunner to Carbon Beach in 2010, Tobias was an
analyst at an activist hedge fund, general counsel of a company listed on the
Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer
specializing in mergers and acquisitions he has advised on transactions across a
variety of industries in the United States, the United Kingdom, China, Australia,
Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam. He is a
graduate of the University of Queensland in Australia with degrees in Law
(2001) and Business (Management) (1999).
Toby is a ValueConferences instructor and spoke at Deep Value Summit 2013.

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