Investing Ideas

Markel (MKL) in the business of specialty insurance business. They usually have very little to no competition and can charge high rates because they provide insurance solutions to niche markets. Markel has a history of making an underwriting profit (ie. They take in more money in premiums than they pay out in claims) and is extremely disciplined about underwriting insurance. Markel’s invesment portfolio is run by Tom Gaynor who is a great value investor and has had market beating performance for years. In my opinion Markel is already at a fair value and it might get cheaper. Warren Buffett has mentioned that insurance rates are falling, in the short term this has put downward pressure on all Insurers. Share of Insurance companies also usually drop going into Hurricane season. There may be a chance to buy this great company at a wonderful price.

Valuation
In this October 2000 Businessweek article Bruce Berkowitz of Fairholme mentioned how he valued Markel.

“Look, the key concept for insurance companies is to take a look at the investments per share. And you can find companies where the investments per share are significantly higher than the stock price. Markel has roughly $400 per share of investments. If they can break even on their underwriting and only make a 5% after-tax investment return, that’s $20 per share. Not bad for a company at $140 per share. So the trick is to have that investment leverage and at the same time break even or make an underwriting profit.”

Any underwriting profit that Markel makes is a bonus.

What are the current numbers ?
Markel has $7,122,257,000 in Investments and $612,056,000 in cash. With 9,947,000 shares outstanding that works out to $777.55 per share in Cash and Investments

Per share cash and investments: $775
5% after-tax investment returns: $38.87
Current share price: $406

Berkowitz bought Markel at 7 times what the investment returns would be. To buy Markel now at the same valuation of 7 times that Berkowitz paid in 2000. You would need to buy the shares at $272. Markel’s visibility has increased a great deal in the last few years with a lot of people comparing it to Berkshire Hathaway. See my article of the next Berkshire Hathaway’s which included Markel. A chance to buy Markel at a valuation of 7 looks extremely unlikely but I feel that any valuation under $390 which is 10x estimated after-tax investment return seems a decent price for Markel. The shares have dropped from last years peak of $554 down to $406, I have my fingers crossed for.

Disclosure : I do not own shares of Markel. I do plan to buy at these levels and I hope to buy a lot more if the shares go lower.

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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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First lets get a few things out of the way.

1. Sears Holdings is a Holding Company and not a Retailer. The current holdings just happen to be 3 retailers.

2. Same store sales. There is no point in increasing sales if it leads to decreasing profits. Would you rather sell 10 items of clothing with $10 profit per item or would you sell 15 items of clothing with $6 profit per item? The fewer sales give a $100 profit v/s $90 profit from the higher sales. An increase in sales does not mean increase in profits and what counts is PROFITS.

Now that we have that out of the way lets value Sears Holdings

Sears Valuation

Sears Canada - Sears owns 70% of Sears Canada which is worth $2 Billion
Brands - DieHard, Kenmore,Craftsman could be sold in a Bond valued at $1.8 billion.
Lands End - Sears paid $1.9 Billion for Lands End in 2002
Home services
Real Estate - Sears is a 115 year old company. Some of its real estate was purchased before Walmart even existed. The real estate is carried on their books at the price they paid for it 10, 20 and possibly in some cases 50 or more years ago. It currently owns about 110 Million square feet of real estate. A lot of this real estate is in prime locations around the US.

• Sears Mall stores 518 with Avg Sqft of 134,000
• Sears Essentials/Grand 20 with Avg Sqft of 113,000
• Kmart Discount 139 with Avg Sqft of 93,000
• Kmart Supercentres 34 with Avg Sqft of 165,000
• Sears HQ - 2 Million Sqft + 200 Acres of land
• Warehouse and Distribution Centres - 15 Million Sqft

Total = 107.2 Million Sqft * 160 (S&P/GRA Commercial Real Estate Indices) = 17.1 Billion

This gives Sears Holdings a minimum Valuation of 22.8 Billion the company is selling for 14 Billion.
Liquidation Value of SHLD in my opinion is $164+/share.

Additional value that could not be calculated due to lack of sufficient data

• Sears Speciality - Unknown size of stores so counted as zero
• Sears also has extremely favorable leases on a lot of its other stores. They control about 150Million sqft of leased properties usually at below market rates. It could sell its leases or sublease these stores. But detailed data on the lease agreements is unavailable so this has also been counted as zero.
• Valuation for HomeServices and the actual Sears business is also counted as zero

Who else is investing in Sears?
Eddie Lampert - ESL investments
Bruce Berkowitz - Fairholme
Bill Ackman - Pershing Square
Bill Miller - Legg Mason Value

Full Disclosure : I own shares of Sears Holdings and am planning to buy more.

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So i am back with my favourite company. On August 23rd 2006 I calculated that the value of Berkshire Hathaway shares should be at least $120,000. Fast forward to August 23, 2007 and BRK-A closed at $118,800. Not too bad

Market Cap of Berkshire Hathaway = 212 Billion
Value of Individual Berkshire Parts = 246 Billion (Based on the Interim 3nd quarter report. Numbers used are 9 Months Net Profits *(4/3) for full year estimate values)

Recently Buffett has been making a few deals after nearly 1 year of inactivity. The 2 Billion of TXU bonds earning 11.2% and 11.8%. Buying 60% of Marmon for 4.5 Billion. Starting a Muni Bond Insurer. Purcasing ING’s Reinsurance business. All this point to Buffet finding ways to invest Berkshire’s cash hoard. The credit turmoil will create good buying opportunities for Berkshire. Finally at the next Annual meeting Buffet should have a couple of Investment managers lined up to take care of Investments going forward. All of this will add significant value to the shares in 2008.

The A shares of Berkshire Hathaway should sell for $163,000+ and the B Shares for $5400+.
** Investment gains or losses are recognized upon the sales of investments or as otherwise required under GAAP. The timing of realized gains or losses from sales can have a material effect on periodic earnings. However, such gains or losses usually have little, if any, impact on total shareholders’ equity because most equity and fixed maturity investments are carried at fair value, with the unrealized gain or loss included as a component of accumulated other comprehensive income. - From the Report

Disclosure: I own Shares of Berkshire Hathaway

Note: I originally wrote this article late last year after the 3Q Earnings were released but i never published it. It’s a little late since Berkshire will be releasing FY07 earnings soon and Annual Report is due in a month.

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