AMERICAN NATIONAL INSURANCE
American National Insurance Company,
based in Galveston, Texas, is one of the largest life insurers in the
United States with over 3.4 million policyholders and $12 billion in
assets. The company's products and services include life insurance,
annuities, health insurance, personal lines, property and casualty
insurance, credit insurance, pension plan services, mutual funds and real
estate management.
We believe American National is
undervalued at its current price of around $82 a share. At this level the
shares trade at a 28 % discount to its September 30, 2003 tangible book
value of $113.85 a share. As a measure of comparison, the average life
insurance company trades at a 20 % premium to book value. Also, American
National pays an annual dividend of $2.96 per share, which represents a
yield of 3.6%. This is a relatively good yield considering most money
market funds in the U.S. pay only 1% or less. Furthermore, investors can
take comfort in the fact that American National has not missed a dividend
payment since it first began paying dividends in 1911.
One reason for American National's
discounted stock price could be the low return on equity it has earned
over the last few years. American National had earnings of $2.45 and $0.64
per share in 2002 and 2001. This represents a return on equity of just
2.2% and 0.6% respectively. Another reason could be the controlling
ownership by the Moody family. The family refuses to repurchase shares and
has publicly stated that the company is not for sale. Finally, American
National is not officially followed by any Wall Street analysts and,
moreover, the company does very little to promote itself to investors. In
effect, American National Insurance Company has yet to be discovered by
Wall Street. This is a very positive contrary indicator.
Most recently, American National posted a strong third quarter performance
for the period ending September 30 2003. Earnings were $1.66 per share
compared to $1.19 per share in the same period last year, an increase of
39 %. If the company can continue to improve earnings, we believe the
discount between its share price and book value could begin to narrow. In
addition, given that the company is largely under-followed by the
investment community, interest in the company from new investors could
provide a positive catalyst for the stock. Finally, although the Moody
family states that the company is not for sale, investors should not rule
out "a change of heart" due to a premium price, family issues,
etc. If the company was put up for sale we believe that the sum of the
component parts would be worth considerably more than the current stock
price.
CANFOR CORPORATION
Based in British Columbia, Canfor
Corporation is an integrated forest products company that produces lumber,
bleached kraft pulp, specialty kraft pulp and plywood. The Company has
woodlands operations and production facilities in B.C., Alberta and
Quebec. Canfor also has a lumber remanufacturing plant in Washington
State. The Company distributes its products in Canada, the United States,
the Far East and Europe from marketing offices worldwide.
On November 25, 2003 Canfor announced
an agreement to purchase all of the shares of Slocan Forest Products.
Slocan is also based in British Columbia and owns several sawmills, a
plywood plant, an OSB plant and a lumber remanufacturing and laminated
beam facility. Canfor offered 1.3147 shares in exchange for each Slocan
share in a transaction valued at approximately $630 million. Although the
offer represented a 41% premium based on the previous day's closing
prices, the deal was transacted at an attractive price relative to
Canfor's market valuation.
The strategic benefits of the purchase
are quite clear; the combined Company will be the second largest lumber
producer in North America, next to Weyerhaeuser. According to the press
release, capacity will increase to over 5.2 billion board feet of lumber,
1.2 million tonnes of pulp, 950 million square feet of plywood and OSB and
150,000 tonnes of kraft paper. It is expected that annual sales will be in
excess of $3 billion and total assets will be greater than $3 billion.
Management expects to benefit not only from economies of scale, but also
annual synergies in the order of $60 million. We believe that this
transaction could just be the start of a round of consolidation in the
forestry industry in Canada.
The takeout offer highlights our
investment thesis on the sector. It is an out of favour and significantly
undervalued industry in need of a catalyst. In this case, an astute
acquisition surfaced value for shareholders. If and when a resolution of
the softwood lumber dispute with the U.S. is reached, a significant
negative overhang would be removed and valuations should improve further.
Canfor has publicly stated that it will not support the proposed
settlement as it stands, since it believes that the quota allocation
unfairly penalizes the Company. Further, the fact that Canfor, like other
Canadian producers, would be entitled to only 52% of the duties paid is
probably more than a little galling to those involved. However, we believe
that Canfor would support a negotiated settlement if the terms were more
favourable. Because the industry is still cheap, we are optimistic that
patient investors will be rewarded.
CPAC INCORPORATED
CPAC Inc. is a diversified operating
company that manages holdings in two industries: Cleaning and Personal
Care which operates under the Fuller Brands segment, and Imaging which
operates under the CPAC Imaging Markets segment. The Fuller Brands segment
develops, manufactures, and markets over 2,700 branded and private label
products for commercial cleaning, household cleaning, and personal care.
CPAC Imaging manufactures, packages, and distributes branded and private
label chemicals for the colour photographic, health care, and graphic arts
markets.
CPAC is under-followed by Wall Street
analysts and has failed to capture the attention of investors. In fact,
there is not one American brokerage firm that officially covers the
company. Probably the main concern that investors have is that they feel
CPAC's products and marketing efforts are outdated. For example, over
thirty percent of sales from CPAC's Fuller Brands Consumer division are
conducted via door-to-door sales and CPAC's Imaging division, which sells
chemicals and equipment to photo finishing centers, are now competing with
new digital photography.
However, while many perceive CPAC to be
a "buggy whip" type company, management believes there are
growth opportunities that exist outside of traditional channels. For
example, The Fuller Brands division has experienced early success with
selling its home care products via QVC, a home shopping channel that has
over 82 million viewers in the U.S. In addition, Internet sales have
experienced double-digit increases, with sales breaking $1 million for the
first time in 2003. On the photo imaging side, the company sees big
potential in China, a nation where only 20% of the population owns a
camera. Also, CPAC has gained exposure in the growing disposable camera
market via its 40% stake in German manufacturer Tura AG.
CPAC shares have fallen from a peak of
$15.25 in September 1995 to just $6 today. At this level, we believe CPAC
represents an attractive opportunity. Consider the fundamentals. CPAC
trades at a 26% discount to its 2003-year end book value of $9.35 per
share and the balance sheet is solid. It has only $7.2 million in
long-term debt, of which $6 million is comprised of an Industrial Revenue
Bond. The bond matures in 2009 and carries an interest rate of only 2%. In
addition, CPAC owns both the land and buildings on many of its properties.
The company consistently generates free cash flow and its $0.28 annual
dividend provides shareholders with a yield of over 4%.
Finally, another point to consider is
that since 1995 the company has repurchased 2.4 million or over 32% of its
outstanding shares. Given that the share price has been languishing below
book value for some time now, we would not be surprised if at some point,
management decides to take the company private.
NORSKE SKOG CANADA LIMITED
Norske Skog Canada Limited, known as
NorskeCanada, produces groundwood specialty papers, including newsprint,
containerboard and pulp. Originally known as Fletcher Challenge Canada,
the predecessor company was acquired in July 2000 by Norske Skogindustrier
of Norway who then renamed the subsidiary Norske Skog Canada. In August
2001, NorskeCanada acquired Pacifica Papers and created the corporate
entity that we see today.
NorskeCanada, a deep cyclical, came
under pressure as printers and publishers faced an extremely difficult
environment in 2002 and 2003. A slowdown in advertising spending created
excess capacity across the industry, depressed prices and forced the
Company to take downtime. NorskeCanada reported a net loss of $0.64 per
share in 2002 and a net loss of $0.35 per share in the first nine months
of 2003. However, the Company is generating cash and recorded $47.5
million of EBITDA in the first nine months of the year. With the economic
recovery well underway, we believe that it is only a matter of time before
commodity prices improve and NorskeCanada returns to profitability.
Several key factors gave us the
confidence to invest in NorskeCanada despite the difficulties of the past
few years. First, NorskeCanada traded at, and still trades at, a discount
to its book value of $5.12. At $4.00, the Company was priced at only 0.8
times book value. The stock eventually bottomed at 0.6 times book value in
mid November 2003, a level that has traditionally provided strong price
support.
Next, we looked at historic levels of
EBITDA to gauge the Company's upside given an economic recovery. When the
stock bottomed in mid November, NorskeCanada traded at an enterprise value
of less than 5 times 2000 EBITDA of $304.4 million, which has typically
been the low for the stock. Looking forward, EBITDA could improve
significantly from the level last seen in 2000. Management has stated that
of the $115 million in synergies achieved from the Pacifica Papers
acquisition in 2001, $110 million was related to EBITDA improvements.
Using an enterprise value to projected EBITDA multiple of only 5 times,
the stock offered an attractive potential return.
Finally, we checked the Company's
financial flexibility in case the recovery is delayed. As at September 30,
2003 NorskeCanada's net debt to capitalization was 45%. The Company had
$10.2 million of cash on hand and could access almost all of a $350
million operating loan. Because the first senior debt repayment is not due
until March 2009, we were satisfied that the Company could meet its
obligations comfortably. Putting all of these pieces together, we believed
that the stock had bottomed for the cycle and it was time to purchase
shares for our funds.
Irwin A. Michael, CFA
