Investing Ideas

The news
On April 22 CNBC reported that Warren Buffett is going to Europe to look at businesses. Buffett told CNBC

“My goal is to get on the radar screen of large family-owned companies in Europe, that for one reason or another, need an ownership change, but want the business to be run as it was under the family.”

In the US Berkshire Hathaway has a reputation of buying companies to hold for life. Berkshire Hathaway will always retain ownership of its subsidiaries and unless a company is in an industry where they will keep making losses in perpetuity the company will not be shut down. Berkshire lets a company run the way the founder used to run it. For this reason a lot of owners of private companies in the US have entrusted their lifes work to Berkshire. Since the founders are more interested in the welfare of their employees, the happiness of their customers and preserving their legacy they will typically sell only to Berkshire Hathaway and will do so at a fair price or even a discount to what they would get in the market. After the purchase of ISCAR metalworking, a company based in Israel, Buffett has realized there are wonderful companies all over the world that he could buy if Berkshire Hathaway and its culture was better known outside the US.

The search
I went through the Forbes Billionares list and selected these companies based on the following criteria

1. Company is based in Europe - Obvious since Buffett is visiting Europe
2. Company is not listed or is majority owned - Buffett is looking for family owned businesses
3. The current owner is older than 70 - Someone who wants to preserve his life work.
4. Net worth of the owner is greater than 2.5 Billion - This makes the business large enough to be interesting for Berkshire.
5. Excluded companies which only own investments and/or real estate holdings.
6. Excluded industries which Buffett has said he sees no future in or does not understand, eg:Newspapers, Publishing, Biotechnology

The age of 70 and net worth of 3 Billion are somewhat random numbers I pulled out of my hat to narrow the search. There could be smaller companies or companies run by younger individuals who might be on Buffetts radar.

The Candidates
The companies based on my criteria are listed below. The companies in bold are the ones I feel Warren Buffett might be most interested in.

• Ikea a Furniture Retailer owned by Ingvar Kampard (81)
• Aldi a grocery Retailer owned by Karl Albrecht (88) and Theo Albrecht(85)
• L’Oreal the world’s largest Beauty Products company owned by Lilane Bettencourt(85)
• Tetra Laval a packaging business owned by Birgit Rausing & family(84)
• Ferrero SpA a Food business owned by Michele Ferrero & family(81)
• Dassault an Aviation business owned by Serge Dassault & family(82)
• Bertelsmann a Media business owned by Reinhard Mohn & family(86)
• Wurth Group a Fastners business owned by Reinhold Wurth(72)
• Corticeira Amorim the worlds largest cork company owned by Americo Amorim(73)
• Tengelmann Group a retail trade business owned by Erivan Haub & family (76)
• Deichmann-Schuhe GmbH a shoe retailer owned by Heinz-Horst Deichmann
• Helm AG a Chemicals company owned by Hermann Schnabel(86)

Disclosure : I own shares of Berkshire Hathaway

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ETNs involve substantial risks and are not for everyone. Read the prospectus and consult you financial adviser and tax consultant before investing in them.

Last month Morgan Stanley launched two new ETN’s(Exchange Traded Notes) offering exposure to the Chinese Renminbi and Indian Rupee . The notes charge 0.55% in annual fees. ETN’s are Debt securities not Stocks or ETF’s. The site is http://www.marketvectorsetns.com/index_ETN.cfm.

CNY tracks the performance of the S&P Chinese Renminbi Total Return Index (ticker:SPCBCNY). SPCBCNY seeks to track the performance of rolling investments in short-term forward contracts in China’s currency, the Renminbi. Prospectus for Chinese Renminbi CNY.

INR tracks the performance of the S&P Indian Rupee Total Return Index (ticker:SPCBINR). SPCBINR seeks to track the performance of rolling investments in short-term forward contracts in India’s currency, the rupee. Prospectus for Indian Rupee INR.

I have been bearish on the dollar (read my article Kaching in on the dollars decline). The dollar has declined substantially compared to the Yen, Euro, Australian Dollar, Canadian Dollar, Brazilian Real and a host of other currencies. It hasn’t declined as much against the Chinese and Indian currencies. Indian and Chinese governments have restrictions on currency transactions which prevents most individuals from investing directly in these currencies. China and India get a lot of their trade surplus from exporting goods and services to the US. To keep their cost advantage they maintain their currencies at a rate that benefits exports. While exports have been great and have benefited their economies it has also increased inflation.

A lot of commodities are priced in US dollars and as the dollar has been declining in value the last few years and the value of the Renminbi and Rupee has also declined along with the dollar. The Renminbi and Rupee have dropped in relation to non US currencies and commodities. Unless the US dollar increases in value China and India will have to loosen up or completely drop their peg to the dollar and allow their currencies to appreciate. This is the only way they can fight against commodity inflation. A couple of years ago China started linking the Renminbi to a basket of currencies instead of just the US dollar but the currency hasn’t been allowed to appreciated much. The US and other countries which have growing trade deficits with China are pushing for an increase in the value of the Chinese currency. China itself knows that it will need to reprice the Renminbi be it would prefer to do it slowly, this is probably why Jim Rogers has been a Renminbi bull for quite sometime.

Disclosure : I do not own the ETN’s CNY/INR, I am not invested in Morgan stanley.

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Motorola peaked in 2000 at at about $60 per share, recently the shares traded as low as $9 giving it a market cap of just 20 Billion.

Value Trap?
Its easy to look at Motorola’s revenue and earnings and say that the company has performed badly. Motorola’s revenue dropped from 42.8 Billion to 36.6 Billion. Net earnings dropped from 3.6 Billion to a loss of 50 Million. Mobile Devices sales have dropped 33 percent. The company has not had a hit phone like its amazing Razr for quite a while. The handset business has fickle customers, people with no loyalty to a particular brand. Research and Development expenses are high and ongoing because a lot of people want a new, cool and better phone every couple of years (some change phones every year or less). Motorola has competition at the high end from Apple’s iphone and RIMMs Blackberry and at the low end there are more handset manufacturers than ever before.

Value Investment?
While the handset business has issues, thats not all Motorola does. It has two other business segments Home and Mobility networks and Enterprise Mobility Solutions. Click here to see the wide range of Motorola products and services. Since the company reports as a single entity most people miss how well the other segments are performing. This is why activist investor Carl Icahn has been pushing for Motorola to split the company. He wants them to either sell or spin-off the under performing handset division and Motorola has agreed. So lets value the company as two separate businesses? the handset business aka Mobile devices and everything else. While Motorola has been losing market share in the handset business but at the same time it Enterprise Mobility Solutions business is growing very rapidly.

Motorola’s business segments data from Motorola Q4 2007 Earnings Press Release and Financial Tables
1. Mobile devices. - For the full year 2007, sales were $19.0 billion, a 33 percent decrease compared to 2006, and the segment incurred an operating loss of $1.2 billion, compared to operating earnings of $2.7 billion in 2006.

2. Home and Mobility networks. -For the full year 2007, sales were $10.0 billion, a 9 percent increase compared to 2006, and the segment generated operating earnings of $709 million, compared to $787 million in 2006.

3. Enterprise Mobility Solutions. - For the full year 2007, sales were $7.7 billion, a 43 percent increase compared to 2006, and the segment generated operating earnings of $1.2 billion, compared to $958 million in 2006.

The Home and Mobility networks and Enterprise Mobility Solutions segments combined had operating earnings of 1.9 Billion, this gives Motorola an earnings yield of 9.5%. In my opinion at an earnings yield of 9.5% just these two segments of Motorola’s business are worth as much as the whole company. In addition Motorola has more Cash and Short Term Investments than debt and it has $3.8 Billion remaining under its current share repurchase authorization. Any value that can be extracted from the handset division is gravy. With Icahn winning seats on Motorola’s board I expect a lot of investor friendly changes in the coming months.

Full Disclosure: I own shares of Motorola which I bought at a higher price. I may buy some more.

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