Value Library
The following is an
excerpt from the ABC Perspective - October 2003 - Pg. 4-5
ABC Value Favourites
In spite of a challenging economic and
equity investment environment we are continuing to hunt for significantly
undervalued "deep-value" stocks. While it is at times a tedious
analytical process we wish to highlight four current ABC Value Favourites.
The commonality of each selection is that they all trade below book and
net asset values and are generally not closely followed/favoured by
security analysts.
LAURENTIAN BANK
Founded in 1846, Laurentian Bank of
Canada is the seventh largest Canadian Schedule I Bank, with assets of
over $18 billion. Laurentian offers products and services to meet the
banking and financial needs of individuals and small to medium-sized
businesses. The Bank's publicly traded subsidiary, B2B Trust (TSX: BBT),
provides wholesale financial products, such as investment loans and
related services over the Internet.
Raymond McManus, the recently appointed
CEO, has begun to articulate his vision for the future. As he stated in a
recent news release, "given the uncertain economic and interest rate
environment, the Bank has adopted more conservative growth and
profitability objectives". In keeping with this strategy, Laurentian
Bank divested 57 branches in Ontario and Western Canada for a premium of
approximately $112.5 million. Closure of the deal is expected by
late-October. Laurentian received almost twice book value for these
branches, which seems to be an excellent price for the assets.
Going forward, management is expected
to refocus its efforts on its core Quebec market, a region where
Laurentian has traditionally had success as a niche player. A
reinvigorated marketing campaign should allow the Bank to strengthen its
competitive position and connect with the retail customer. Outside of
Quebec, Laurentian Bank has several banking arrangements with various
third parties, including a potentially rewarding agreement to provide
credit to customers of Canadian Tire. Although the strategic repositioning
will not be an overnight success story, we support management's efforts to
"get back to business" in order to improve profitability over
the long run.
LOEWS CORPORATION
Loews Corporation is a New York
City-based holding company whose subsidiaries engage in a number of
different businesses. Loews largest holdings include: majority stakes in
CNA Financial Corp, a property, casualty and life insurance company;
Lorillard, the largest producer and distributor of menthol cigarettes in
the U.S and Diamond Offshore Drilling which is engaged principally in the
contract drilling of offshore oil and gas wells. Loews also has a number
of wholly owned subsidiaries including Loews Hotels, Texas Gas
Transmission, and Bulova, a maker of clocks and watches.
Loews shares trade at a 36% discount to
its NAV, which we estimate is around $67 a share. We have based this
figure on the current share prices of its publicly traded subsidiaries and
the book value of its remaining businesses. We believe the shares of Loews
two largest public subsidiaries, CNA Financial and Lorillard, are also
undervalued. Shares of CNA Financial currently trade at roughly half their
book value of $42.72 per share and less than 8 times next year's earnings
of $2.86 per share. Shares of Carolina Group, the tracking stock for
Lorillard have a dividend yield over 9% and trade at 7.5 times 2004
earnings of $3.17 per share. In other words, if Loews were to be taken
private, we feel it would be worth even more than its NAV of $67.
Finally some food for thought.
Barron's, the highly respected weekly financial newspaper featured Loews
in its December 30th, 2002 edition. In the article, author Andrew Bary
referred to Loews as a "poor man's Berkshire Hathaway".
Berkshire Hathaway is of course the holding company of famed value
investor Warren Buffett. Incidentally, Barron's arrived at the same
conclusion as us that Loews' shares trade at a deep discount to their
asset value.
MORGUARD CORPORATION
Morguard Corporation (TSX:
MRC) is an integrated real estate company comprised of four
operating divisions. The Company has a 50% interest in
Morguard REIT (TSX: MRT.UN), a publicly traded real estate
investment trust that holds retail, office and industrial
properties across Canada. Morguard Residential, a wholly owned
division, develops, manages and sells multi-unit residential
properties primarily in the Greater Toronto Area. Morguard
Investments, another wholly owned division, acts as a real
estate advisor and manager for Canadian pension funds and
institutional investors. Finally, Morguard has an 80% stake in
Revenue Properties Company (TSX: RPC), which owns, develops
and manages a portfolio of shopping centres, office properties
and apartment buildings.
Morguard, formerly known as
Acktion Corporation, has completed the consolidation of its
divisions under the Morguard banner. This has created an
integrated real estate company, involved in the ownership,
development and management of both residential and commercial
real estate properties. Morguard's portfolio of assets is
diversified both geographically and by product in order to
mitigate softness in any one particular market. For example,
although vacancies in the commercial portfolio increased from
6.5% to 8.3% in the second quarter of 2003, residential
vacancies declined from 3.9% to 2.3%. As the rental markets
recover, management has positioned the Company to maximize
cash flow and grow shareholders' value.
Our investment thesis is
based on the Company's significant discount to its net asset
value (NAV), in addition to the attractive financial multiples
and dividend yield discussed above. Essentially, the NAV is
calculated by adding the Company's capitalized net operating
income, the value of the properties under development or held
for sale and the investment portfolio at market prices less
net debt.
Following this methodology,
we believe that Morguard's NAV is above $30 per share,
implying a discount of more than 30%. In contrast, most REITs
in Canada currently trade at or above their NAV. Management
seems to agree that the shares are undervalued and have filed
a normal course issuer bid for 700,444 common shares or 5% of
the total outstanding. We expect that if the valuation
discount doesn't narrow, the Company will continue to
repurchase shares at anti-dilutive price levels, which
benefits all existing shareholders.
PRIME HOSPITALITY
Prime Hospitality Corp. (PDQ)
is an owner, manager and franchisor of hotels. It currently
operates 245 hotels, containing 31,426 rooms located in 33
states. Prime controls two hotel brands, AmeriSuites, which
are upscale all-suites hotels, and Wellesley Inns &
Suites, which are mid-price limited service hotels. The
company also operates a portfolio of upscale, full-service
hotels under franchise agreements with national hotel chains.
One of the most attractive
features of our investment in PDQ is that management has what
we refer to as "skin in the game". Significant share
ownership is the best way to align management and shareholder
interests and CEO, A.F. Petrocelli, controls over 3.5 million
shares or 7.9% of the outstanding total. Given that such a
large amount of Mr. Petrocelli's personal wealth is invested
in PDQ, a large incentive exists for him to improve the
company's share price from its current level. We believe the
easiest way to accomplish this would be for Petrocelli to sell
the company outright, preferably at or above its net asset
value.
We believe that PDQ shares
are undervalued at its current price. With ownership of 16,000
rooms and an enterprise value of $640 million, investors are
currently valuing PDQ shares at only $40k a room. This
compares with a book value of $60k per room, or $15.20 a share
and a replacement cost of $65k-$70k per room. It should also
be noted that PDQ has recently sold hotels from its portfolio
for between $80k-$85k a room. We believe that eventually PDQ's
share price will reflect the underlying value of its assets.
It is encouraging that an economic recovery in the U.S.
appears to be under way. This should result in an increase in
business travel, and ultimately higher occupancy rates at
PDQ's hotels.
Irwin A. Michael, CFA
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