SNC-Lavalin: Buy A Highway, Get The E&C For Cheap

This is my most recent research piece on SNC-Lavalin Group published on Seeking Alpha: SNC-Lavalin: Buy A Highway, Get The E&C For Cheap.

Unfortunately the publication of my article corresponded with a significant press release from SNC and a public statement from the CDPQ . On the news the stock went from $25 to $21 per share. That’s my timing for you.

Of course nobody wants to see bad news but I believe this is the news that we were looking for. I see the recent announcements as positives.  It’s like a doctor telling you that you are getting brain surgery to remove a tumor. It’s not good news but that’s what needed. Short-term pain for a better future.

In the article I said that I wouldn’t be surprised that the new CEO takes the quarter as an opportunity to ditch guidance and dump more bad news and that’s exactly what happened. SNC took a $1.9b impairment charge link to its oil and gas division, Kentz. They already took a $1.2b impairment charge back in February. SNC bought Kentz for $2.1b back in 2014. The CDPQ, the largest shareholder with 19.9%, publicly came out against the deterioration of SNC performance. Back in the spring the CDPQ said they will “be a rock” for SNC, I guess they are losing patience like everyone else.

SNC is facing many headwinds, operationally, financially, politically, reputationally…let’s quickly address them:

  • SNC has been having operational issues. SNC some good assets and bad assets. The recent restructure announced will have SNC focus on its strong points. SNC is still in business. They are still winning contracts. SNC is walking away from Turnkey lump sump projects, the key source of its problems. Exit: O&G, mining, and construction which are its least profitable activities.They will focus on design, nuclear, engineering services “EDPM”.  They will be less risky and more cash-flow predictable. More details on the new strategy is expected in the fall. The future SNC might look like more of a WSP Global or Stantec.
  • Finance: SNC took on a lot of debt for its WS Atkins acquisition of $3.6b in 2017. Despite paying a big price for Atkins, it’s one of the strong points of SNC today. To deal with the debt SNC is selling part of their private highway, cut the dividend, and is engaged on a cost cutting program. Once the sale is completed SNC debt’s level should be back to their historical norm of low debt. SNC also has $13.87 (post-H407 sale) of net assets in their Capital Investment Portfolio.
  • Politics: Unfortunately SNC was in the middle of a political scandal for the Trudeau’s Liberal government. SNC was also a victim of a diplomatic spat between Saudi Arabia and Canada. There’s not much in SNC’s control at the moment. Hopefully after the election the government will finally find a solution to SNC’s legal problems.
  • Reputation: SNC didn’t murder anybody but you would think they did. Their reputation is not good. It’s affecting employee morale and departures. The public perception of the company is toxic. SNC is managing a PR crisis. SNC, a 100+ year old company, has its brand; a once valued intangible asset is now in the garbage bin. You can change a reputation. Merck’s Vioxx is responsible for the death of 38,000 people and the company is still around. With SNC it will take time. I don’t expect anything before the Canadian Federal election in October. Plus they have to Libya bribery court case they have to deal with. It will take a lot of time, a string of good news/quarters, and communications to deal its reputation.

With the recent announcements, SNC has a market cap of $3.6 billion, the same price they bought WS Atkins in 2017. Atkins is one of the most respected planning and project management firm in the world. The stock is cheap and very attractive for a competitor looking to expand. The CDPQ has ~20% and RBC recently built a 16.6%. I understand this is a difficult stock to hold or even buy. It’s not supposed to be easy. I believe SNC will eventually emerged a better company.

I suggest to read the article for a more in-depth analysis.
Advertisements

GameStop – Hard Reality Ahead

I’ve been following the retailer GameStop (GME) on and off for a couple years now. It’s trading at $4.80 a share with a market cap of $490m. The stock has been in free fall for a couple years now.  It did stabilize for a bit last year when they were shopping the company around but they ended up not doing anything.

GameStop

They recently slashed the dividend that had a yield of over 10%. The move will save them $157 million a year. When you see a juicy 10% dividend yield, it usually means that it’s too good to be truth. The large majority of times it means that the company is not healthy and I’m not surprised they cut it. They have a failing business with $468m in debt plus $550m in operating leases.

I’m looking at it for a shorting point of view. Shorting is very risky even though GameStop gives you the vibe that it’s the next Blockbusters. People are playing videogames more than ever. It’s just they are not buying their games at GameStop like they used too.

GME might survive, in a different form. They have a collectible business that is growing but very small. Somebody might take them private. They just announced a Dutch Auction buyback. Maybe its a zero. They have enough cash to pay their bills for a while. They have Net Operating Losses (NOL) which could be attractive to another retailer. Shorting is a hard game to play. Plus betting on a retailer going to zero is not a game I’m comfortable with. That’s why I don’t short.

They operate 5,800 stores in 14 countries. I don’t know what’s going with ThinkGeek.com. They bought the company in 2015 for $140m and I know they took some impairment charges on the brand name.

The reality is that the long-term outlook of their core business doesn’t look good. They are in the wrong line of business at the wrong time. Sure the next generation of consoles (PS5 and Xbox) might give them a short-term boost (or hurt them because people are delaying their game purchase), but the hard reality is that all the games are going over the cloud. It’s much more convenient and more profitable. They are cutting out the middle men by going directly to the consumer (digital delivery). This is a pattern we have seen with music, video, and now video games. It’s just taking longer for video games because of the more demanding hardware/software/Internet requirements. We have the technology today. When was the last time you bought a music CD or a DVD? Video games are going the same way.

A hobby retailer that seems to be doing well is Games Workshop (GAW.l), which is the company behind Warhammer. Maybe GameStop with their collectibles and reach can emulate the good side of that business. But it would have to be on a smaller scale on cheap rent real estate. That’s probably not what investor want to hear.

Ironically, GameStop was once a streaming video game innovator. It bought Spawn Labs in 2011 to create a kind of Netflix for video games. But it was too early: The technology wasn’t quite ready, and GameStop shut down Spawn Labs in 2014.

The competing landscape is also changing. Google is getting into gaming with Stadia, a cloud gaming streaming service. Apple is getting in the business too. Nintendo is pushing their games on the mobile. And Sony and Microsoft are working on the next generation of console.

I don’t know what happened in the board room when they were looking to sell the company around. Maybe the offer wasn’t good enough (I bet it looks great in hindsight now). The business of selling new and used console is a dying one. The business would be good in the hands of independent retailer or a private owner that has the patience to work things out.

Keeping Your Dividend Edge

Keeping Your Dividend Edge
Available here.

Before I get to the book I want to share a little story. Something positive actually happened on Twitter. It turns out that Twitter doesn’t have to be carnage pit filled with trolls. There’s a nice guy on it and his name is Todd Wenning (@ToddWenning).

A while back I read Harriman’s New Book of Investing Rules. The book is 500 pages of wisdom by some great investors.  There are some well-known names and less familiar names like Todd. The investors profiled range in style and strategies. One of the articles in the book was written by Todd Wenning (@ToddWenning). I really enjoyed Todd’s piece and I reached out to him on Twitter to let him know. 

ToddWenning Book Twitter

Todd was a man of his tweet. I did received his book, Keeping Your Dividend Edge, and I was more than happy to read it. See, something positive came out of Twitter.

I like Todd’s philosophy on investing and dividends. His thinking really resonated with me. Invest like you are buying a business. Study the business, study the fundamentals, figure out the competitive advantage, and can you make a reasonable assumption that the company will be able to maintain its success for a decade or more to come. Focus on the long-term and get paid in growing dividends and capital appreciation.

Todd’s book is about dividend investing. It’s a short read with approximately 120 pages. There’s nothing wrong with a small read. It’s actually refreshing. The book doesn’t waste your time. It’s delivers on content. It goes straight to the point. It’s concise and clear. Just the plain blue cover signals no b.s., no hype.

You will become a better investor if you read this book and actually apply it’s principles. You will. Todd didn’t reinvent the wheel here. Dividend investing has been a staple strategy. But what Todd did is to remind us of the art of dividend investing.

I feel that dividend investing is a lost art. Or investing for income in general. Most income investors are doing it wrong. It’s like health. Everybody wants to be fit and healthy but they are doing it wrong by buying into trends and taking short-cuts. I feel it’s the same with income/dividend investing. People are approaching it the wrong way.

Investors are turned off by blue chips dividend payers because of the low ~2% yield so they chase high-yield stocks. We live in a world where investors are buying bonds for capital gains. The world has turned upside down. The most probable cause is the 10-year plus of ultra low interest rates is distorting financial markets. It’s been a tough stretch for savers in need of yield. Another cause is buybacks as the preferred way to return money to investors.

You can’t just invest for the dividend. If you don’t do your homework it could led to trouble. Dividends should be part of a grander strategy. A good strategy should include dividends as a part of total performance. It’s a key component of long-term share price movements. You can’t guarantee a dividend because a company doesn’t have to pay one, but with the right analysis you can have pretty good idea if they will pay one and raise it over time. If you aim for let’s say a conservative 6% to 7% annual return (S&P Index has returned 10%+ in the last ten years). With a 3% yield you have accomplished half your returns. One aspect of dividends I like is that it’s a tangible returns. It’s a real return. It’s real cash that you receive. And I like cash because it allows me to allocate more capital.

Dividend investing is about patience. Focus on the long-term. Focus on the business. Focus on the fundamentals. Focus on the cash flow because that’s where dividends are from. Dividends need to come from cash produced by the company (not accounting earnings).

Dividends are not a magic pill. A company can’t guarantee a dividend because unlike a bond, there’s no obligation to pay. Dividends can be cut. We have seen blue chips like GE, Pfizer, and more recently Vodafone slash their dividends. A company might take on too much debt and get in trouble. The share price of the company you invested in can languish, or worse disappear. Taxes could be an issue if not handle properly. Todd’s book has a whole chapter on avoiding dividend cuts. Usually the main reason is the lack of sustainable free cash flow.  If a company can’t covert a dividend with free cash flow, they need to fund the payouts with cash on hand, debt, or asset sales. Expect trouble if that happens.

The holy-grail of dividend investing success is the compounding effect. The combination of the increased in value of your stock (capital gain), dividends, and growing dividends reinvested that creates bigger dividends, that gets reinvested can turn your investment into a snowball what creates wealth.

In case it wasn’t clear by now Todd makes the case for smart dividend investing. In case you need to read it again, if you want success in the stock market you need a long-term patient approach. Dividends helps you focus on the business. It helps you focus on the fundamentals of the business. It helps you forget about the daily gyrations of the stock market. I have no clue what the stock market is going to do, so it would be more profitable to forget it and concentrate on trying to find the right stock to buy. Dividends also help you take hit. If you have an investment that is down 15% (because it happens) and the business is sound, you have your dividends coming in and an opportunity to buy the business 15% cheaper.

Long-term thinking, patience, and persistence are qualities which should pertain to investors. Dividends delivers on these fronts. Keeping Your Dividend Edge deserved a place on your investing book shelf.

Enjoy!

Brian

The Extra 2%: How Wall Street Strategies Took a Major League Baseball Team from Worst to First

The Extra 2%I enjoyed reading The Extra 2%: How Wall Street Strategies Took a Major League Baseball Team from Worst to First by financial journalist and sportswriter Jonah Keri (@jonahkeri)Keri has a podcast and is also the author of a book on the Expos. He’s active on Twitter and a great guy to follow.

The Extra 2%  is a mix of many interests of mine like sports, finance, and business. With the NHL and the NBA finished for the year, it’s time for summer sports and summer reading. Baseball holds a special place. Maybe it’s because I played it when I was a kid. Maybe it’s because of the 1994 Expos and their possible come back. Or maybe I played too much Ken Griffey jr. the video game. Or maybe it’s because baseball is such a different sport from all the other major sports. There’s no clock; you go home after 27 outs. Or the real reason is probably because it’s so goddamn much fun to hit a ball with a bat.

The book documents the turnaround of the Tampa Bay Rays by three financial wiz kids from possibly one of the worst run franchises to a team that’s making the mighty Red Sox and Yankees sweat. And that’s with a tiny fraction of their budget. If the Rays considers spending $8 million on a closer, it’s a huge decision with many implications. If the Red Sox or Yankees spend $8m on a closer and it doesn’t work out, it’s a rounding error.

It’s the classic David vs Goliath story. The only difference in this story is that the large majority of fans are cheering for the two Goliaths. Since the Rays can’t compete on financial ground, they need to find another way to win games. They have to find an edge else where. They have to do things differently. They have to be creative. This is a good follow up book on Michael Lewis’ Moneyball. It’s a similar play. Both the A’s and the Rays are a small payroll team that was willing to discard old baseball wisdom. If you dare going against 100 years of conventional wisdom, you better make sure you are right.

The book is a great case study. Stuart Sternberg, Matt Silverman and Andrew Friedman accomplished so much in so little time. They turned a perennial loser into a contender. They are lessons to learned. The title, the extra 2%, reminds of something Anthony Robbins said (I think it was him). He said something like if you only try to improve 1%, it can make a huge difference in the long run. You might not noticed it at first, but that 1% will add up. Just think of what happened to a golf ball when it you hit it a couple degrees off. It matters.

In a way, the book could have been published now. Stuart Sternberg is still the owner. The Rays are still fighting the mighty Red Sox and Yankees. The Rays are still hustling for a division title. They are still a low budget team. They still don’t have anybody watching them. And they still don’t have stadium deal. Also I should mention that Mark Cuban, owner of the Dallas Mavericks, wrote the forewords.

I don’t really care about the Rays but I pay attention to them from a distance, that is their stadium saga. Rumors in Montreal is that if the Rays can’t get a stadium, Montreal is waiting in the wings to welcome them. Montreal first need to built a stadium and there’s a team of investors working on that. Despite the success of the Rays, Tropicana Field is empty. Tropicana Field is awful and the Rays have a lease until 2027. Is Montreal going to wait another 9 years for a team?

I don’t blame the fans in Tampa or surround areas. I think it’s a Florida problem in general. Most major sports franchise in Florida are not major hits. It’s a college state (and Nascar). Floridians love their college sports. People in Tampa are baseball fans, but they are Cubs fan, Red Sox fans, and Yankees fans. Most Floridians are from there and cheers for their former home club.

To conclude, it would be interest to hear an update from Jonah on the Tampa Bay situation.

Tampa Bays Rays Season results
Regular season results. Source Baseball-Reference.

Jeff Bezos Explains Why Amazon Makes No Profit

In this 9 minutes video, Jeff Bezos is brilliant in his response to the question “Why Amazon Makes No Profit ?” In the video JBezos explains his business(es), shares great insights, and throws in a couple in Buffett and Graham quotes.

  • Subjects: Free cash flow (FCF), profits, Return on invested capital (ROIC), what drives the stock price, customer obsession, operational excellence, long-term thinking etc…

If you have read it, read the Amazon 1997 Shareholder letters.  Back then Bezos laid out the vision and his multi-year thinking process.

2019 Berkshire Hathaway Shareholder Meeting Notes

Here’s 78 pages of notes from the 2019 BRK Shareholder Meeting last weekend.

2019 Berkshire Hathaway Shareholder Meeting Notes

I didn’t type these notes. They were sent to me. The raw text is from CNBC.com and the personal responsible for the notes compiled them for their own reading. I though the notes were excellent and asked for permission to share.

Buffett.cnbc.com/annual-meetings is a great Buffett archived that you should check out.

Here’s the full CNBC interview with Buffett, Munger, and Gates.

Charlie Munger, Unplugged

Charlie Munger spoke to WSJ reporters Nicole Friedman and Jason Zweig for six hours over dinner in his Los Angeles home on April 23. He covered a wide array of subjects. Here is an edited transcript from that conversation and a follow-up telephone discussion.

Reposted from The Wall-Street Journal
By Jason Zweig and Nicole Friedman

Q: What do you make of the world-wide fan club that you and Warren Buffett have attracted?

A: Well, the world is very peculiar. And these people that like me are mostly nerds in China or India. It’s a very deep attachment. They’re so passionately interested in improving themselves. Some of them just want to get rich in some easy way, but mostly they’re trying to improve themselves.

An awful lot of graduates of great engineering schools are investors. I wouldn’t call a man who uses computer science to sift vast amounts of data for correlation, and then starts trading the correlation and if it works, keeps going, and if it doesn’t, stops, I wouldn’t call him an investor. It’s really, what he is is a trader. And those correlations are very peculiar…. Of course, the more people that try and trade that one correlation, once they find it, the less well it works.

Q: If you were just starting out as an investor, what approach would you take?

A: Well, the original [Benjamin] Graham approach of looking for cases where you’re getting more than you’re paying for is correct. All good investing involves getting a better investment than you’re paying for. And you’re just looking for it in different places, just as a fisherman can fish in one place or another. But he’s always looking for more value than [he’s] paying for. That will never go out of style. I mean, that is just basic and fundamental.

Some people look at it in stocks where the earnings are going up all the time, some look at consumer goods, some look at bankruptcies, some look at distressed debt. There are different ways to hunt, just like different places to fish. And that’s investing.

And knowing that, of course, one of the tricks is knowing where to fish. Li Lu [of Himalaya Capital Management LLC in Seattle] has made an absolute fortune as an investor using Graham’s training to look for deeper values. But if he had done it any place other than China and Korea, his record wouldn’t be as good. He fished where the fish were. There were a lot of wonderful, strong companies at very cheap prices over there.

Let me give you an example. One guy in Korea, he cornered the sauce market. And when I say cornered, he had like 95% of all the sauce in Korea. And he couldn’t stand anybody else  ever selling any sauce. So he could have made two or three times as much if he wanted to by raising the prices.

Li Lu figured that out. It’s called Ottogi. And of course we’ve made 20 for 1. There was nothing like that in the United States. Continue reading “Charlie Munger, Unplugged”

Berkshire Hathaway, Buffett, Munger, Gates Post-AGM Interviews

Here are the videos from the CNBC Monday morning post-BRK AGM.

Continue reading “Berkshire Hathaway, Buffett, Munger, Gates Post-AGM Interviews”

Economic Transformation

Below are some of my favorite slides from the Fairfax India presentation.

Below is the Bangalore airport. Fairfax India owns 54% of the private airport.

Bangalore Airport 2008

Bangalore Airport 2018

Meerut Highway 2014Meerut Highway 2018

The following picture is not from the Fairfax presentation but capture the same idea:

A-Tale-of-Two-Economies-Singapore-And-Cuba

Fairfax AGM and YYX Toronto Value Symposium

This post is a little overdue. Better later than never I guess. With the Berkshire Hathaway AGM this weekend, I told myself to get this post done.

Three weeks ago I was in Toronto for the Fairfax Financial AGM (FFH), the Fairfax Africa AGM (FAH.U), and the Fairfax India AGM (FIH.U). That’s the “official” reason. But more importantly and more interestingly are the associated events surround the Fairfax AGM. It’s very similar to what you would find in Omaha for the Berkshire Hathaway AGM, except on a smaller scale. It’s my second time to the Fairfax AGM and I would argue that I prefer that one to the Berkshire AGM. I’m certainly not implying that Fairfax is a better company than BRK because it’s not. I just prefer the Fairfax AGM better but when I think of it, I don’t.

The reality is that I don’t care about Fairfax and its AGM. The reason I go to Toronto is to reconnect with fellow minded investors and the associated events. There are value investing conferences, dinners, and other events like that. Even if the Fairfax AGM didn’t exist I would go only for these events.  While I was there I presented at the YYX Toronto Value Symposium, attended The Ben Graham Dinner, and attended the Premier Fairfax Financial Shareholder’s Dinner. There are other events as well such as The Ben Graham Centre’s Value Investing Conference but it conflicted with the the YYX Toronto Value.

Basically you are surrounded by like minded investors and you talk stocks for 2-3 days.

Can We Stop With The “Warren Buffett” Label?

Prem Watsa has been labeled the “Warren Buffett of the North” in the past and I doubt the moniker still holds. Sure they are some similarities. They both run massive conglomerates with insurance powerhouses that invest the float in a bunch of businesses. And the similarities stops there. Fairfax’s returns in the mid-80s and 90s were decent, but have been frustratingly subpar for a long time while Berkshire Hathaway has been outperforming the S&P left and right. People listen to every word coming out of Warren Buffett’s mouth. Every investment article has a Buffett quote. I can’t recall a Prem Watsa quote. I read Fairfax’s shareholder letter. It’s fine if you want to learn more about Fairfax’s businesses but it’s not the source of investment wisdom you would find in a Warren Buffett letter. This post is not a Prem Watsa rant. I might sound overly negative but by labelling Prem “The Buffett of the North”, you are comparing him to the best investor of all time and that’s impossible standard to live up to.

So can we stop with the “next Warren Buffett” moniker. And not just on Prem. The “Warren Buffett” label is like a curse. Look what happened to Bill Ackman and Eddie Lampert. These magazine covers didn’t aged well.

Eddie Lampert and Bill Ackman
Eddie “The Next Warren Buffett” Lampert and Bill “Back Buffett” Ackman

Prem is Prem and that’s perfectly fine. Nobody else in the world is Warren Buffett. The expectations that come with the label, to put it mildly, are unreasonably high. Buffett has something like 50+ years of over-performance. In today’s hyper-speed era, we don’t have time for a 10-year, or even a 5-year performance table. Now crank you a couple years of decent returns you too can get the “Buffett Crown”. It’s dangerous because investors now expect you to repeat your past performance.

I have three messages: 1) Stop calling an investor on a good run “the next Buffett” and 2) the next time someone’s being lauded as the next Warren Buffett run the other way. History is not on your side. And 3) Warren Buffett is still alive and you can invest with him.

Fairfax’s Investment Portfolio

Fairfax mentions that could have earned a 15% return on equity if their stock portfolio achieved a 7% return and their insurance operations produced a combined ratio of 95%. The insurances companies produced a 97.3% combined ratio and only 3.1% on the stock portolio. Book value was down 1.5% in 2018.

Below is part of Fairfax’s investment portfolio. They have a $39 billion investment portfolio.

Fairfax stock portfolio
Source: Fairfax 2018 Shareholder Letter

I don’t know about this investment portfolio. Part of the uncertainty is that I’m not familiar with some of the companies. The hope is that it will pay out in the long term. It’s definitely different, than let’s say what BRK does with its float. One thing however is that you can’t accused Prem of being an closet indexer.

Blackberry (BB) seems to be turning things around but can Fairfax recuperate the losses from their six year old investment? Blackberry is a good company but the acquisition at the time was terrible timing at a bad price. FFH owns 95 million shares at a net cost of $12.30 per share. I believe Seaspan (SSW), under the leadership of David Sokol, will do fine in the long-term.

I find Prem’s action hard to understand. The macro predictions, shorting the index, the stock portfolio, the underperformance…

“Your Chairman continues to learn – slowly!!” – Prem Watsa

YYX Toronto Value Symposium

This is one of my favorite event to attend. I attended and presented at the YYX Toronto Value Symposium.  The event structure is similar to a ValueX conference. You have about 30 people, around 10 people present an investing idea for 15 minutes followed by quick a Q&A. If I have to estimate, half the room were Americans and Canadians.

I think this event delivers a lot of value. You leave with a bunch ideas that you can further research. Most of the stocks pitched are companies I never heard of. Stuff under the radar, not followed, misunderstood etc…If you are an investor, you know how long it takes to find and analyze ideas.

A big thanks to James East for organizing such a great event.

Fairfax India & Africa

Two different funds in two different region. I attended both presentations and they both look promising. Both fund AGM are interesting, better than the parent AGM. They are more detail oriented. You get a walk through of the investments process and the results. I think the best investment they made is the Bangalore Airport in the India fund. That investment has produced great results and I believe it will delivery even better results in the future. The company is not public yet, so if you want exposure you have to buy the India fund or try to get Siemens to sell you their stake.

I’m not an investor in neither fund at the moment. I’m a little uneasy with the structure, the fees, and some of the investments. I also need to do further homework.

Conclusion

I wish I could spend more time talking about the events and companies involved. I could write about this all day but my time is scarce.

To concluce, the Fairfax AGM is not really about Prem or Fairfax. It’s about a bunch of value investors getting together, trying to learn and find new ideas.