Value Library

The following is an excerpt from the ABC Perspective - January 1999 - Pg. 3

In keeping with our front-page discussion of investment discipline, we have highlighted a few of our favoured, undervalued holdings in the portfolio. These Canadian and United States common stocks are all fundamentally cheap, out of favour and offer excellent long-term value.

Beamscope Canada Inc. (BSP TSE) - $7.50 BSP is a distributor of video games, home/office computers and software, through retailers such as Zellers, Canadian Tire, Costco and Wal-Mart. BSP’s share price declined from a 1998 peak of $15 due to concerns about weak consumer spending and a possible recession. BSP has capable management, trades below its $8.08 book value and has a P/E ratio of about 8 times 1998 earnings.

First Marathon Inc. (FMS.a TSE) - $19.00 FMS is the only remaining publicly traded investment brokerage firm in Canada. Operations include institutional equity trading, underwriting and clearing for other brokers. FMS has no debt, provides a 2.8% dividend yield and is trading close to its $15.25 book value. FMS is fundamentally very cheap compared to transaction prices for recent takeovers, such as Midland Walwyn, which sold for over 3 times its book value.

Hudson’s Bay Company (HBC TSE) - $17.50 HBC is Canada’s oldest national department store. It is comprised of the traditional Bay department stores and the discount Zellers chain. Due to recession fears, warm winter weather and intensive competition, the share price has fallen from a summer high of $35. HBC yields 4.1%, trades at a big discount to a book value of $27.83 and has about $5 per share in hidden real estate.

Scott’s Restaurants Inc. (SRG TSE) - $7.00 SRG operates 370 KFC fast food franchises across Canada and over 50 other fast-food outlets at 15 highway service centres. With a P/E multiple of 12 times 1998 earnings, the company has no debt, $70 million in cash ($2.50 per share) and a book value of $7.04. It has a net asset value of over $9 including at least $0.50 per share of hidden real estate value and is currently repurchasing shares under a normal course issuer bid.

Strongco Inc. (SQP TSE) - $6.00 SQP is a multi-line heavy equipment distributor in the business of selling and leasing equipment in Canada and the United States. An opportunistic consolidator of small competitors, SQP’s growth has been fueled by acquisitions and new equipment lines. SQP is off from a peak price of $17 due to concerns of a somewhat leveraged balance sheet and a slowdown in the economy. Strongco has an experienced, pro-active management team, a P/E ratio of under 7 times 1998 earnings and a book value of $8.75.

Ampco-Pittsburgh Corporation (AP NYSE) - $11.50 AP is a Pittsburgh, Pennsylvania small capitalization steel manufacturer of steel rolls, heat exchange coils, pumps and screws used primarily in construction, defense and power generation. AP has a book value of $14.70, virtually no debt, a P/E ratio of 8.5 times 1998 earnings, a $0.40 dividend providing a yield of 3.5% and has declined from a 12 month high of $19.

Phillips-Van Heusen (PVH NYSE) - $7.00 PVH is an apparel and shoe manufacturer and a distributor of Van Heusen, Izod, Gant, Bass and other lines. It is currently restructuring its operations. PVH has a book value of $8.85, a P/E ratio of 8.5 times 1998 earnings, a 2% dividend yield and is down from a 12 month high of $15.

Wellman Inc. (WLM NYSE) - $10.00 WLM is a manufacturer and marketer of Fortrel polyester textile fibres and polyethylene resin (PET). Due to lower product selling prices, WLM has declined from over $25. WLM has a book value of over $21, a P/E ratio of 10 times 1998 earnings, a 3.6% dividend yield and a somewhat high 0.9:1 debt/equity ratio due to its recently completed capital expansion. WLM has no controlling shareholder and could be an attractive acquisition target.