Eagle Materials Write-Up

Eagle Materials (EXP) is an interesting angle on my sense that there may or may not be some houses built in the future.  It's certainly not pretty to look at right now and its a cyclical business.  I think it's pretty cheap and well positioned to take advantage of weakness.  I even put a picture in this write-up, so I'm really pulling out all the stop for you, dear reader.  I'd be interested in hearing your thoughts on commodity producers.  Is Eagle just the tallest midget and gets permanently impaired if I'm wrong?  They seem to be in a position that if things get worse, others will suffer a lot sooner than they do and as a 2nd or 3rd level thinker, the "market" corrects itself as a result and Eagle is fine.  The basic case is that Eagle is still profitable and everyone else isn't.  Is that self-serving and wishful thinking?  I don't believe this is a particularly great business, but I think it's cheap and nobody seems to like it, so I'm naturally drawn to it.  For thought.
Exp Write Up

Some thoughts on competition and being a middleman

It’s not too hard to classify a lot of companies as distributors with a broad enough definition.  Most businesses are middlemen of some sort, a medium through which a product is delivered to a customer.  They are a a specific part of the value chain that is about execution, logistics, and working capital.  Their profits are less what they sell then how they sell it.  I think the key distinction for investors is whether or not the middleman can be removed from the equation, and very often they can and will be.  There are several cheap middlemen right now, although I assume there have always been cheap middlemen as a result of change and competition that I'm too young to remember.

Some distributors I looked at a while back were the tobacco leaf merchants.  Not much has happened with either business in the past several months besides some depressed results due to lower volume in an oversupplied market.  Universal is cheap on straightforward measures like P/E and P/B, while Alliance is cheap because Baupost owns it and the share price has dropped a lot (that’s sarcasm).  I tried to figure out Universal since it looks safer and ~80% of its inventory is committed to customers, so they won't wake up tomorrow with completely obsolete and worthless assets.

At 8x earnings, there is downside risk to profit compression minimizing.  I think they still have a role in the tobacco leaf, but things change.  The encroachment of cigarette companies on their turf highlights the issue with distributors.  A company like Altria only wants to deal with a few suppliers, so compressing the thousands of relationships with farmers, it becomes one relationship through Universal - this is worth a couple basis points of margin.  There are the hidden costs of employees tasked with all the purchasing and financing of small tobacco farmers, as well as tying up capital in the entire process.   Some companies want to remain asset light and just focus on the highest return portion of the value chain.

On one hand, Universal deals with thousands of suppliers, but ultimately supplies only several variations of the same product to a few people (several grades of several leaf types, maybe 100 actual SKUs, although management would probably say it's more complicated than that).  The issue with this stock is that the future is uncertain.  The seems to be an inherent structure of the tobacco leaf industry that creates space for a middleman to exploit, but many cigarette manufacturers are chipping away at it.  It has existed for decades, but now there are things like the internet.  Universal probably has a strong position in Mozambique over the next decade, where they deal with thousands of small farmers who they have taught to cultivate tobacco.  The cow paths have already been trodden in more developed countries like the US and Brazil, so the barrier to a British American or Japan Tobacco setting up their own operation is a lot lower.  They can and they have.  This is the ongoing concern.  It could certainly stabilize for several years, but I simply don’t comprehend how it gets better.  

I’m not interested in the merits of the investment as much as what it reveals about the pitfall of being in such a position as a businessman.  My impression is that the business can’t get any better over the long term.  The supply and demand imbalance in tobacco inventories will change, but there doesn’t seem to be much growth since overall volume is declining in most markets.  One of the justifications I’ve seen for Baupost’s position in Alliance was that a merger in 2005 would create margin expansion (note that I don’t know Baupost’s actual justifications), as there would only be 2 major tobacco leaf merchants left.  That simply hasn’t been what has unfolded.  Quite the opposite.  The customers are now trying to circumvent the middlemen.  A sidenote is that this is the type of inversion Charlie Munger references.  The factual basis for margin expansion is actually the same as that for margin compression, just looked at from the inverse (customer to supplier rather than supplier to customer).

Customers aren’t the only agents interested in cutting out the middleman.  Nate, over at Oddball Stocks, posted about ADDvantage Technology Group and why it was cheap the other week (sidenote: also a blog worth adding to your RSS feed if you haven’t already).  Like Universal, ADDvantage trades at a low P/E multiple.  They are a distributor of cable industry hardware.  They recently revisited their relationship with Cisco and got the short end of the stick it would seem. Neither the customers or suppliers are minnows, but ADDvantage is.  Both ends of the spectrum probably have their own sales and procurement teams that deal with each other.  Cisco was clearly the party with more power in renegotiating their contract with ADDvantage.  I think being weak is a losing business proposition in the long term, but who am I to make such bold pronouncements?

ADDvantage's “competitive advantage” is being “on hand, on demand”.  I’m no expert, but I think translated into English, they are just some other company’s off balance sheet working capital.  This is one definition of a distributor at the negative extreme.  It doesn’t do much justice to the logistical feats involved or the possible purchasing power a distributor can achieve through economies of scale.   Perhaps I’m oversimplifying, but the key distinction between a distributor that might make a good investment and one that won’t is whether or not they are a provider of working capital or a provider of a service.  In reality it is a combination of both, but it is safer to focus on those that provide a service.

Geoff Gannon mentioned a very interesting distributor name Bunzl in an article a while back.  Bunzl distributes a bunch of products like plastic bags to supermarkets.  Supermarkets sell food.  They are themselves middlemen in a sense, but let’s focus on Bunzl.  Bunzl basically thinks of itself as providing a service.  They are tasked with all the nonsense that goes along with a supermarket having the proper plastic bags in the produce department and the proper plastic bags at the deli counter.  In their materials, Bunzl references the “hidden costs” of purchasing supplies for a business as their business.

Supermarkets don’t want to worry about this.  They’d need to hire someone to find these products, make sure they stay in stock, and likely end up with less pricing power vis a vis suppliers.  Bunzl’s products don’t arrive on the same truck as the Cheerios, nor is it entirely logical for them to do so.  Supermarkets or food manufacturers don’t specialize in these products and likely have no interest in doing so.  This is as much a function of working capital (which I think is negligible in the grand scheme) as it is the hidden costs of taking on the responsibilities of handling the task and its incongruity with the functions of any other participant in the value chain.  There is as much a service being provided as a product by Bunzl and they basically focus on a high numbers of SKUs with low values.  Owens & Minor, which I wrote about a long time ago, does a similar thing for hospitals.  The medium is the message, where as for Universal, they are mostly just the medium. 

One thing I’ve been spending a lot of time thinking about is competition.  Competition is really real.  Don’t think any company in your portfolio doesn’t have a target on their back.  Andy Grove, friend of the blog and founder of Intel, summed up his business philosophy with “only the paranoid survive.”  A company’s existence is not the result of divine providence.  It has to fight as much as it has to hope that it doesn’t get taken out of the equation.  Think about phone books, which found themselves completely usurped by a superior medium called the internet (great article on Yellow Media, a Canadian Dex One or Idearc, h/t Can Turtles Fly?). 

My point is that being a middleman is a tricky business to pull off over an extended period of time.  You have to fight for your right to profit.  It helps to have some type of asymmetry in suppliers and customers, creating a space for a middleman to compress the numbers of suppliers an end user has to deal with or the number or vice versa.  To the extent that the asymmetric relationship isn’t the primary focus of the business - Bunzl and supermarkets – there is probably a competitive advantage.  The dynamics differ slightly due to the economics of the healthcare industry (end user doesn’t always pay and the general mess), but Owens & Minor, a business I mentioned briefly a long time ago, fits the bill as well.

An interesting area where middlemen compress the number of customers a supplier has to deal with is Gamestop and Netflix.  Both are at the opposite ends of the problem.  One is stuck in the retail era and the other seems to have moved to fast with the digital era.  Both allow content producers to develop relationships with a small number of distributors who reach a large number of customers.   Gamestop is often spoken of as a value investment, where as Netflix was anything but until recently.

I don’t want to delve into the details too much.  I think a bunch of people have delved into the details about both companies already.  It’s useless.  Everyone wants their lunch money and they have little leverage.  How could you own these businesses for more than 2-3 years if you know for a fact that the business environment in 5 years won’t look anything like it does today (I assume the share price in 2-3 years will try to reflect what the business will look like in another 2-3 years).  Ownership versus access.   I don’t think anyone can “solve” riddles like that in a way that isn’t delusional.  They are certainly worth something, but it's hard to know with any accuracy.

There is such a fine line in judging what a business will look like in the future and just engaging in mental masturbation akin to the mere seconds between having gone all in with a shitty hand and then getting your bluff called.  That’s competition.  Nobody is opening up their wallet for the world to pluck dollar bills out.  This one of the many ways to interpret a Buffett quote (sure plenty others have said it too), “If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.”  I don’t see how people underestimate competition.  Gamestop isn’t flatfooted, because they are having a go at the online business.  They are not entitled to this though.  The brick and mortar position can't be extrapolated into the digital business.

There is going to be an inherent bias in your interpretation of this event:

“If you purchase your copy of Deus Ex: Human Revolution at a retail store, you're supposed to receive a code that allows you to play the game for free using the online gaming service OnLive. It's a neat giveaway, and it certainly gives gamers an incentive to try the service, but a leaked memo seems to show GameStop's fear of digital delivery: employees are allegedly being asked to open every game and remove the coupon.”

Is Gamestop desperate or being a fierce competitor?  I don’t have a position either way, but I’m negatively predisposed to middlemen that can be pushed out of business.  The used game business is a feedback loop that is about to be interrupted by digital platforms.  Gamestop is in no way entitled to this platform and it is even cheaper than a retail presence (Gamestop doesn’t sign long leases, so I wouldn’t worry about them following the traditional path of discarded retailers in getting saddled with a bunch of operating leases, i.e. most retailers that pop up on an NCAV screen).  It would be stupid not to think that plenty of businesses have their eye on this future medium of online distribution.

One is that Electronic Arts (EA) is pushing its own digital distribution business quite hard.  They are failing due to customer service.  Look at all the threads on reddit about Origin (the name of the platform) – resoundingly negative, but it has somehow found some traction. Now a game producer like EA would love nothing more than to just have direct access to their customers.  They can sell expansion packs and tons of other add-ons direct to consumers.  By owning the middleman/distribution medium (web portal), they get a larger slice of the profits, a potential increase profits, and only have to invest a small relative amount in an online presence versus brick and mortar - the relative scalability is immense.  This could lead to a pretty high ROIC if they decide to exercise a monopoly on the digital distribution of their own games.  Even though the feedback is awful, EA is in a great position to give preference to its in house distribution platform over Gamestop’s.  The same applies for other online game stores like Steam (privately held).

Netflix is a middleman that just lights a fire under me.  I’m very extreme in my moderation over this business.  I’m quite adamant that it’s a complete and utter crapshoot to even accurately figure out what this business is worth in a year (accuracy versus precision is one of those simple concepts that people need to think about when investing, myself included).  We know Netflix underpaid for inputs (content) in the past, so the profit margin they achieved is clearly unsustainable.  Starz thought it was found money when they first signed a Netflix contract a few years back.  Nobody is making that mistake anymore.  Even if this is an implicit acceptance that Netflix is here to stay, it is also implicit that studios intend to fully exercise their leverage.

Netflix is a classic middleman.  They bridge the gap between content creators and content consumers.  What is appealing in a very shallow sense is that Netflix’s overhead is comparatively lower than a cable company’s.  This was a similar advantage to satellite TV relative to literal cable companies, although satellites require more upfront capital.  Netflix – or anyone for that matter (my point) – can design a nice website, a little algorithm to predict what movies you like, rent server space from a cloud provider, and pipe content through a “platform.” Amazon - if they do it correctly - is well positioned with in house capacity to accomplish all of that.  And they have your credit card information and a willingness to destroy their own existing markets to create new ones.  I wouldn't want to own Amazon, but I wouldn't want to be in their way.

Netflix is on the verge of reporting a net loss in coming quarters.  They say they are investing in the future.  This is silliness.  The content producers just put them in their place.  I wrote about how I think quality content will always find an outlet regardless of the medium the other week.  As Netflix has to raise its prices to cover its content costs, that lowers the barrier to entry.  It’s much easier to undercut a $20/month plan than it is an $8/month one.  A company like Starz is not interested in devaluing its content with an $8/month random access offering, but the more premium the pricing gets the more premium content will make itself available through an online platform.  High pricing also makes it harder to compete with more entrenched cable companies, as the product becomes a substitution and not a separate good.

At the Liberty Media Annual Shareholders Meeting (decent listen overall, Malone is a sharp guy – no Buffett, but he is more intelligent than your average CEO), John Malone had this to say (an individual I discussed this topic with pointed me in the direction of this quote):

"The sequential distribution of movies has to go through various organisms in order to optimize value. Taking [your content] and dumping it in at wholesale on random-access basis [Netflix] really undermines long-term perceived value. As a content investor or owner, that's the biggest problem we have with the Netflix approach."

We know that Netflix will pay a full price for its content, but Netflix does not exist by divine providence and nobody is clamoring to put their content on their site.  They have to compete with more than just other online viewing platforms.  It is still a very nascent business.  As Malone states, content producers want as much competition as possible for their content, but they aren’t interested in giving it away to anyone.  When Universal or Alliance were possibly trying to expand their margins due to fewer middlemen, the cigarette companies went out in the field and procured their own leaf needs in areas where the merchants had established a presence.  Netflix is not entitled to anything.  Their profits are tolerable up to the point where someone else with power in the equation decides that they want a bigger piece of the action.  Netflix isn't the only game in town, and it isn't a game anyone has to play unless they are comfortable doing so.  The only "power" Netflix has is its hope that spending a lot of money will result in them making a lot of money.  The only leverage they have to offer is money.

Perhaps this post is a ramble and/or could be broken down into several posts - a stink piece rather than a think piece.  Middlemen are fascinating.  There are plenty of high return middlemen that have been fantastic investments – Fastenal, Autozone, TJMaxx, W.W. Grainger, Henry Schein and tons of others that require a flexible definition.  I doubt my ability to identify the good ones before everyone else does, but talking about bad ones is a nice way to learn some lessons that would otherwise be taught through losses.  It’s also very important to note the effects of competition over time and where things have gone wrong.  

I could of course be terribly misinformed about this all, so I'd be interested in any thoughts, comments, or examples you have to share.

Xenith Bankshares Update

The other day, Xenith released a lot of details on the figures related to its recent assumption of VBB and its purchase of Paragon’s Richmond loans and deposits.  My rough guestimates outlined in my write up the other month were accurate and a shade below reality.  While the proforma balance sheet puts Xenith very close to break even, it will be interesting to see what progress has been made organically over the past quarter as well.

The details on the Paragon acquisition are positive.  Xenith is getting $23m in non-interest bearing deposits from Paragon, which is great.  Only $4m/78m in deposits are time deposits.  Almost all the loans associated with Paragon are C&I or CRE lending.  There are no credit metrics on the loan portfolio, but the lack of construction or development loans is one signal that the loan portfolio is solid, as is Xenith only acquiring performing loans.  The combination of C&I lending and non-interest deposits indicates that Xenith actually purchased a decent commercial lending franchise that has profitable relationships.

Not only is Xenith acquiring an already profitable division, it can be incorporated into an existing infrastructure.  Xenith’s cost calculated as the difference between the loan adjustment and core deposit intangible is $647k.  The assets and liabilities earned that much in the first six months of 2011.  This deal arose because Paragon wanted to leave the Richmond and focus on its North Carolina operations.  There was nothing fundamentally wrong with Paragon's Richmond related balance sheet and Xenith got a good deal.  They also took out what appears to have been a successful competitor.

The Virginia Business Bank (VBB) transaction doesn’t extend Xenith’s franchise, but it contributes $5.7m of equity to Xenith.  Xenith got a pretty steep discount on VBB’s assets and the opportunity to take out a competitor for good.  VBB’s deposits are almost exclusively jumbo time deposits.  These will likely prove very transient, but the pro forma loan to deposit ratio is 83%.  Xenith has some flexibility to secure additional deposits to cover the gap between VBB’s assets and liabilities if it emerges.

VBB’s loan portfolio is mostly C&I and CRE lending.  The acquisition is being done with a built in $9.4m discount to the performing loans.  This is not part of the initial gain recognized for assuming more assets than liabilities in the initial transactions of $5.7m.  I don’t think it’s intellectually honest to think this way, but if you drop this $9.4m fully taxed through the income statement right now, TBV goes from $57m to $63m - it isn't going to happen like that. The discount will likely just accrete through interest income, which will somewhat mask any projected improvement in NIMs from the failed bank.  Xenith is also not profitable currently, so clearly immediately recognizing the gain would be offset by some losses.  I’m less concerned about when the bank becomes profitable only because it’s current losses stem from being a de novo bank and not from lax lending standards coming to roost.  This reserve certainly lowers the hurdle even more. 

Xenith issued preferred shares worth $8.3m to a government program for funding small businesses.  Xenith is paying a 1% dividend, which is really a 1.53% yield since preferred dividends are taken out of aftertax earnings and I consider this a liability akin to a deposit.  It’s a longer-term source of funding than the time deposits and its cheaper than debt.  Initially I thought this issuance stemmed from Xenith encountering more loan demand than it could satisfy out of deposits, although this was sadly Panglossian.  Now I believe that it is related to the need to maintain liquidity that might be hampered by a failure to rollover enough of VBB’s time deposits.  This isn’t a static situation though and Xenith has shown discipline in restraining lending until deposits allow it.  It isn't severe since Xenith also has plenty of cash to match any time deposits that don't get rolled over.  The weighted average interest was 1.03% though, so Xenith won't exactly have to break the bank in offering a rate that will keep the deposit at the bank.

Xenith earned a 4.35% net interest margin in the last quarter on $263m of interest earning assets.  Now they have pro forma interest earning assets of $356m in addition to the $74m in cash now on the balance sheet (clearly excessive amount).  Annualized noninterest expenses are $14m based on the past 6 months and a 4.35% NIM would result in $15.5m in net interest income.  This is contingent on a lot of things, so I wouldn't bank on this number, but clearly the threshold of profitability is very close to being crossed.

Xenith has done a great job at executing so far, but there is clearly a ways to go towards full profitability.  They have wide NIMs, attracted quality deposits since late 2009, and taken advantage of some great opportunities.  They are only halfway there.  Proforma tangible book value and assets are $57m and $461m respectively, which results in a 12.3% leverage ratio.  If Xenith grows over the next 2 years to have a 9% leverage ratio, its assets will be $633m, a 37% increase in assets.  If the bank achieves a 1% ROA, which I believe is achievable, it would earn $6.3m.  I’m less enamored by that than the fact that at 55% of TBV, a lot can go wrong before I lose money. 

Xenith has proven they can grow the balance sheet already and their overall strategy is clearly focused on taking business from lenders currently providing subpar lending relationships to businesses.  My confidence in management’s ability to execute this strategy well in the future stems from their historical record of already having done so and the presence of what I believe is a long term large shareholder.  I haven’t seen anyone else talk about Xenith and management isn’t too chatty, so somewhat fortuitously I don’t believe I have an excessive bias in my assessment. 

As it pertains to Xenith and my write up on State Bank & Trust (STBZ), these FDIC assisted transactions are very interesting.  I need to rewrite my STBZ write up since it’s admittedly not the pinnacle of clarity, but they have since participated in 2 more FDIC assisted transactions, which I will try to post about this week.  STBZ is well positioned regardless of the economy.  If the economy worsens, they have the capital to assume more failed banks.  If it improves, they will be well positioned to grow their balance sheet to a normalized size.

Some resources on FDIC assisted transactions that are useful (an offshoot of my post on scuttlebutt):

1.     3 Grant Thornton white papers on: 1) accounting and tax considerations of acquiring a whole bank 2) accounting for FDIC assisted acquisitions of loans and ASC 310-30 and 3) what you need to know about FDIC-assisted transactions:

http://www.grantthornton.com/portal/site/gtcom/menuitem.91c078ed5c0ef4ca80cd8710033841ca/?vgnextoid=391c35d703776210VgnVCM1000003a8314acRCRD

2.      FBR Capital Markets primer on FDIC assisted transactions:

http://www.slideshare.net/equidebt/primer-on-fdic-assisted-transactions-by-fbr

3.     Powerpoint on opportunities in failed bank acquisitions:

http://www.austinassociates.com/publications/2010AOBA.pdf

Rock stock rubble and some aggregate scuttlebutt

There were some interesting suggestions in the comment section of my post on scuttlebutt.  There are certain 10-Ks I’ve read and thought that there was enough information to understand the company.  Certainly that isn’t the case with analyzing a healthcare company where the basic economic landscape is changing.   On the other hand, certain industries are not very susceptible to change and so older information can still be news to me.

One source of scuttlebutt I mentioned was the Sequoia Fund Investor Day Transcripts.  They give straightforward and detailed answers on their holdings and industries.   One of the industries they discuss is aggregates.  It is just rocks that go into every type of construction project: roads, homes, offices, etc.  Boring industry.  I probably read most of these transcripts over a year ago, but a lot has stuck in my head (it really is cumulative).  I recently wrote about how the housing related industries being really beaten up in the most recent sell off and that there were probably some real gems in the rubble.

Sequoia used to have positions in Martin Marietta Materials (MLM) and Vulcan Materials Company (VMC).  They took the MLM position in the 3^rd quarter and the Vulcan position in the 4^th quarter of 2007.  They had come off their peaks, but were still quite high.  The stocks have been on a steady slide ever since and are lower than in March 2009.  While the outcome hasn’t been great, the process was rock solid.  At the 2008 Investor Day they had this to say about their purchases and the industry:

     “It's not part of a greater strategy. It's based on the economics of the companies themselves. I'll talk a little bit about the quarry operators — Martin Marietta and Vulcan. First of all, Martin Marietta and Vulcan produce aggregate. It's used in infrastructure; it's used in nonresidential and residential construction projects, as railroad ballast — anything you need rock for, it's used.

     The great thing about this business is that it's simple — there's no risk of technological obsolescence. It's hard to find substitutes at $10 per ton, which is about the cost of rock these days. For Martin Marietta, they have over 50 years of reserves in the ground beneath their feet and Vulcan has 43.

     Let me give you an example of why we like these businesses. The key is really in their pricing power. The weight of rock is very high relative to its cost to transport, and that leads to the markets' being very local in nature.

     Truck transportation — which is the most common form of transportation for rock and also the most expensive — can reach as high as 30 cents per ton per mile. That means that if you have a job 30 miles away from my quarry, by the time you deliver that rock to your job, you've more or less doubled its cost.

     By the same token, if you have a job next door to my quarry and the nearest competitor is 30 miles away, I can double my price before you have an economic incentive to go somewhere else. Ideally, I would have quarries blanketing a growing metropolitan area. So for any job in that area I would be more likely to have a quarry that is closest to that job and I could price according to my transportation advantage.

     If you draw a circle with a 30-mile radius around a typical Martin Marietta quarry, that circle will contain a competitor's quarry only about as frequently as it does another Martin Marietta quarry. Vulcan's quarries fall into a similar competitive pattern. Other large aggregate companies face local competitors significantly more often than both. If you increase the radius of that circle — just to give you simple metrics — but if you increase the radius to 50 miles, Martin will have on average only three competitors within that 50 mile radius, and a typical US quarry will have five. And that's impressive since Martin Marietta has only 197 — as of the end of 2007 — producing locations out of thousands of producing locations in the US.

     It also helps to be in growing markets. Both Martin Marietta and Vulcan established footprints in growing metropolitan areas through acquisitions over the years. Between 1995 and 2002, Martin acquired 62 companies. Vulcan has also been an active acquirer. Notably, they acquired Florida Rock for $4.2 billion in 2007. They are still integrating it.

     So why does being in a growing market help? Well, population growth helps in two ways. First, it spurs demand for rock. Second, it raises the barriers to entry because quarries are unwelcome in populated areas. Nobody wants explosions shaking the walls of their house. Nobody wants oversized trucks clogging their roadways.

     So it's extraordinarily difficult, these days, to obtain a permit for a new green field quarry in a growing metropolitan area in America. The barriers are very, very high. That difficulty in permitting means that Martin and Vulcan both know who their competition is and where their competition is for a very long time into the future — say at least the next five years.

It also means that their competitors in that area understand that permitted rock in a growing area is an increasingly scarce resource, and they will price accordingly.

     Finally, with population growth, commercial and residential construction will cover potentially competitive quarry sites over the course of time due to sprawl. So your transportation advantage in those markets grows over time.

     The bottom line is that in difficult times, which we are in today, we're seeing precipitous declines in volumes in the rock business. But even in this environment, these firms have still shown an ability to raise prices. Martin Marietta just raised their expected price increase for 2008 to six to eight percent. Vulcan is expecting eight percent in 2008.

     Just to give you an idea of the market dynamics, in 2007 Martin Marietta produced 182 million tons of rock. That's the lowest level of production they've had since the year 2000. But they earned $6.06 per share in 2007 versus $2.39 in 2000. So even in a difficult environment, if the pricing power hypothesis holds and if these companies can raise prices on the order of six to seven percent per year over the course of a cycle, we'll do well.”

So that was quite long, so I will summarize:

1.     Zero technological risk due to simplicity and low cost creating no economic incentive for innovation

2.     Huge pricing power because the weight of transportation costs can really crush competitors. 

3.     Digging big holes creates a moat.  Nobody wants new quarries near them, but being near “them” is what gives a quarry its competitive advantage.  This is called reflexivity.

4.     Capacity has little to no effect on the pricing power of business, so even in a bad time, prices still rise. 

I’m no expert, but these all make sense.  I don’t care if there are no economies of scale.  I don’t care if it is tarred with the label of being a commodity.  That is exactly what I want to know about an industry that I simply don’t have the resources to figure out on my own.  Even if I did have the resources, I still wouldn’t really know how to even begin researching that.  This type of information hits the nail on the head in regards to what I want to know about a business or industry, but is rarely available in perfectly packaged nuggets like this.

Sequoia doesn’t own Vulcan or Martin Marietta anymore due to pessimism and a lack of comfort with capital allocation.  Vulcan has a lot of debt, Martin Marietta has a good amount, and both had to issue shares recently to pay down debt.  This contrasts to their buying back of shares in the go-go years.  Maybe one of these is forgivable, but combined it doesn’t paint a pretty picture. 

Martin Marietta was doing dandy.  They bought back ~10% of their shares in 2007.  They were drowning in cash.  Vulcan had the same problem.    They bought back a bunch of shares in 2006, but in the past 4 years have increased the share count 30%.  Vulcan also acquired a business for $4bn in 2007.  They issued about 15m shares for that, which is fine since their share price was high too.  In 2009, they had to issue an additional 15m shares to lower their debt load.  Vulcan had $300m in LT debt in 2006, but in 2010 they had $2,428m.  Even with pricing power, entering a weak patch of demand is not the time to take on debt, especially in that magnitude.

In one way this reflects how good the business truly is, because it seems like the people there certainly aren’t behind the financial performance.  These are great assets that probably will earn plenty of money.  It’s not the equivalent situation, but it is similar to trusting Steve Ballmer with Microsoft’s cash flow.  The aggregate companies are much more limited in the boundaries of expansion. MLM has a history of  dividends while Vulcan just cut theirs.  They aren't looking to expand into any ancillary industries, which is a positive sign.  They could be doing better, but they could be doing a lot worse.  If the value is clearly there and the price is low enough, the businesses don't fall into the "too difficult to know what they do with the cash" pile.  I'd echo Sequoia's concern about the capital structure as a reason to take pause before jumping in.

Cemex is probably my favorite example of stupidity in the broader cement industry and example of idiots running a company one day.  I owned this stock in a fake portfolio circa late 2006-early 2007 when there was that mini crash in May 2006 from the interest rate cut.  Then the market marched steadily higher.  I thought I was pure brilliance, as do all 16 year olds witnessing positive outcomes. 

Cemex was touted in all these lists in Forbes, Fortune, Businessweek, etc as a future dominant company that started in a developing country.  There was – likely still is – this red herring argument about how all these emerging giants were going to give incumbents a run for their money (Embraer, Tata, and some others that I can’t recall).  Well, Cemex just gave the incumbents their money. 

Cemex purchased Rinker pretty much at the peak in 2007.  Compounding management’s tone deafness was funding the acquisition with tons of debt.  This was their largest acquisition ever.  Their second largest was done in 2005.  Hindsight is 20/20, but this was dumb.  They thought they were really smart and savvy so they just used a bunch of debt to fund both and figured future cash flow would take of it.  Like the 16 year old who purchased Cemex in a fake portfolio, management felt pretty good basing their confidence in themselves on the outcome and not the process.

Management was/is able to protect its moat in Mexico, which allows it to produce cement cheaply and sell it dearly.  This doesn't make their debt fueled acquisitions any smarter though.  This all sounds like Monday morning quarterbacking, but if you look at the sheer amount of debt they used, it’s just insane.  For a cyclical, commodity product, it’s just silly.  If I had some spare change, I’d bet that the lead banker on that deal who got the advisory fee and the debt issuance commission is retired on his submarine equipped yacht laughing at the world.  S/he might be the only one laughing who has been involved with this business for the past 2-3 years.

This mentality isn’t a phenomenon limited to newcomers on the global business scene.  Walmart thought they were cute going into Germany and got a Clausewitz inspired lesson on competition - Aldi's and German frugality simply were interested in the fact that Walmart had cornered rural America retial.  It happens to everyone.  Tesco is finding out the same in their foray into US markets.  It’s easy to confuse past success with future guaranteed success, but it’s worth pointing out when it simply isn’t so.

I’m interested in the industry because the premise put forth by Sequoia seems simple and easy to understand, while the stocks have been beaten down a lot recently.  I’m reluctant to stomach the debt loads when infrastructure or new construction can easily be deferred.  While it would bode well for the future of the business, it would need to overcome the present hurdles of interest payments.  Luckily, both businesses are quite profitable even in this depressed environment.  I don’t have a position in MLM or VMC, but I’m interested in digging deeper.

Fortune Brands Home & Security (FBHS) Write-Up

This is my write-up on FBHS.  I put it on scribd if you don't like that blogger formats my info cubes not being entirely surrounded by lines.

Fortune Brands Home & Security is a stock that dovetails well into trying to identify good companies in the housing rubble and the attention I like pay to spinoffs.  FBHS was recently spun out of Fortune Brands and was the smaller division spun out of the larger spirits business.  I don’t really think there is one of those narratives about it being an orphan stock or other spinoff goodies, because its just cheap and at a cyclical low.  FBHS has 4 divisions that produce goods that are incorporated into home in one degree or another: doors & windows, cabinets, plumbing, and security.  While some divisions are currently suffering, some divisions are generating consistent cash flow.  The diverse product lines, modest leverage, and positive cash flow create an interesting angle to play a recovering housing market without worrying over timing.

Fortune Brands originally was a roll up of diverse businesses undertaken by American Tobacco.  Within Fortune Brands was a roll up of housing related businesses.  They are not commodity businesses, but they are not fantastic franchises.  The business has grown nicely over time and there has been a real shakeout in the industry with plant closures and downsizing.  Due to the point in the housing cycle, there is a nice opportunity for the business to expand margins dramatically and grow sales from this point in time.

Summary

1.    FBHS is a mixture of cyclical and noncyclical businesses tied to housing.  The plumbing and security segments are steadily profitable, while cabinets and door & windows are steadily cash flow positive but exposed to more competitive pressures in a weak market.  None of these are capital intensive and the businesses have not ground to a complete halt due to remodeling and repair. 

2.    The combined value of purchased businesses from 1999-present cost $2.3bn and in 1999 the business produced ~$300m in EBIT.  At the right point in the cycle, FBHS and its stable of businesses will be worth substantially more.  The business is cash flow positive and has ample interest coverage and ability to pay down debt.  Even in the current depressed state, the plumbing business alone is today worth ~$8/share, 65% of the current share price despite amounting to <30% of revenue.

3.    Superior operational performance relative to peers.  The company has already done its restructuring and is well positioned to hit the ground running in a recovery.

Valuation

The current valuation in a static view is probably in the vicinity of fair.  There are 155 million shares outstanding for $12 each, for a $1,860m market cap.  The $520m in debt creates an enterprise value of $2,380m.  Against $187m in 2010 EBIT and ~$90m in 2010 net income, this is far from a stunning value at 13x EV/EBIT and 26.5x earnings.  Free cash flow falls somewhere in between net income and EBIT since capex spending is mostly discretionary.

What can this business earn in a “normalized” environment or in an upswing in the housing cycle?  I put forth my opinion on housing in a previous post.  To summarize, this too shall pass.  We know we are at in the vicinity of a cyclical low in housing.  Ergo, there will a cyclical upswing sometime in the future.  Jim the Realtor is seeing a revival in his part of the San Diego housing market.  The recent 30-40% slide in housing stocks since ~July has many stocks trading at March 2009 lows or lower in some cases.  FBHS was spun off in October so it didn’t visibly suffer this decline in market price, but the business certainly isn’t exposed to a loved sector of the market.

This management presentation touts some recovery scenarios for FBHS.   It’s a decent start.  To what extent are they just pitching the stock with excessive optimism to fool a fool such as myself?  Please refer to slide 32.  It outlines various recovery scenarios based on housing starts and the growth in repair and remodeling.  Their “steady state” is 1,500,000 housing starts and 4-6% growth in remodeling and repair.  Their expectation is to reaching 15% EBIT margins on $5,000m in revenue in this scenario.  Moving down to $4,000m in sales in a mild recovery of 1,000,000 housing starts and 2-4% R&R growth, they expect 13.5% EBIT margins.  The flat scenario with 600,000 housing starts and 0% growth in R&R, they figure $3,000m in revenue with 10% EBIT margins.

They are in vaguely honest with what this company can achieve, although they aren’t achieving 10% EBIT margins on >$3,000m in revenue right now.  I looked at operating margins going from 1988-2010 and the average was 13.45%, not including standalone SG&A.  If you ignore the past decade of mega boom and mega bust, average operating margins from 1988-1999 were 15.36%.  You can even discount normalized margins to the 10-11% range to account for stand-alone expenses and increasing leverage of home centers over time, but the business has been consistent over long stretches of time.

The extremes can illuminate driving forces, and when I looked at American Woodmark, the home centers (HD, Lowe’s) were clearly capturing all the pricing from demand growth during 2002-2006.  What does this mean for FBHS?  When I first started thinking about the effect of HD and Lowe’s on margins for housing related companies, I was worried.  It was clearly an issue at AMWD.  FBHS seems to be in a stronger position based on sustaining margins and abstractly based on its diverse product lines and distribution channels.  Operating margins from 2002-2006 fluctuated between a range of 14.81% and 16.60%. 

I was originally reluctant to use margins from the 1990s since home centers were not as dominant and manufacturers would have had more leverage over mom and pops (please correct this assumption if it is wrong, I was toting around my Batman lunchbox and wearing overalls during the 90s).  I think the 1990s may offer a better depiction of margins since there wasn’t a bubble mentality.  While it certainly doesn’t capture the entire competitive landscape, FBHS was able to maintain its historical margins from the 90s into the housing bubble.  There is currently heavy promotional discounting in the cabinet segment, although this is an industry wide phenomenon that will likely prove transient.

Historical sales figures are only of moderate use since the business lines have expanded over time.  Below is a table detailing acquisitions made by FBHS:

Company	Year	Cost ($m)
Simonton Windows (SBR)	2006	$599.8
Sentinel Doors	2004	30.9
Dudley	2004
Therma-Tru	2003	924
Capital Cabinet	2003	123.7
American Lock	2003
Omega	2002	538
NHB	1999	103.6
Total		$ 2,320

In 1999, the company did $1,872m in revenue and $300m in operating income.  In 2006 the company did $4,694m in revenue and $695 in operating income.  The parent company was very acquisitive over this period.  The total amount spent on acquisitions between 1999-2006 cost about as much as the current enterprise value and doesn’t even include a takeover value for the businesses that prior to 1999 were generating $300m in operating income. 

If you factor in the $848m impairment taken in 2008 as reflecting fair value of the acquired assets (now worth $1,472m), the implication is the value of the pre-1999 business is $908m, 3x EBIT or ~8-9x earnings figuring $520m in debt @ 10% rates and 35% tax rates.  I’m not sure how valuing an asset at a time of absolute pessimism reflects fair value and the same applies in a time of absolute optimism. 

FBHS acquired a window company for $600m at the top of the housing bubble and paid $924m (>2x revenue) for a door manufacturer in 2003, which combined accounted for $753.3m of $848m impairment charge in 2008.  Granted that looks dumb, but the normalized incremental sales growth that would have resulted is obscured.  My point is that conceptually, revenue will not revert to the mean in an absolute sense.  Slide 16 of the aforementioned presentation claims revenue has had a CAGR revenue growth rate of 4% organic and 9% total (9% is accurate, 1989-2010 had 9.24% CAGR per my data).  Broadly, growth could outpace GDP since new housing construction creates a broader base of housing stock that gets repaired and remodeled.

I don’t know what revenue will look like exactly, but if they generate $4bn in revenue sometime in the next few years with 10% EBIT margins, 10% interest rates on $520m in debt, and a 35% tax rate, we’re looking at $226m in net income against a $1.9bn market cap.  My expert guess is it will trade at more than 9x earnings when this occurs and that I’m low balling margins, revenue, and interest expenses.  Management’s bullish scenario for a recovery to 1,500,000 housing starts is to do $5bn in revenue with 15% EBIT margins.  I’m not particularly confident in management’s ability to achieve this as I am for the economy’s ability to achieve this simply through improving.  Even if you figure 12% EBIT margins sometime in the next several years on $5bn in revenue with some of the debt repaid, it currently trades at a mid single digit PE multiple.

It’s not that easy though, because the business has to survive and it has to be capable of holding off competition for at least the next several years.  The $520m in debt is broken down into a $350m term loan, $150m revolver, and $20m industrial bonds.  In the first half of 2011, operating income at the FBHS segment of Fortune was $70m.  Even if interest rates were actually 10% like I treat them, there is 3x coverage based on annualized EBIT.  Using FCF as a metric for debt repayment ability, the business could be debt free within 3-4 years.  The actual debt terms are:

“Interest on the Term Loan and the Revolver will accrue at the Adjusted LIBO Rate (as defined in the Credit Agreement) for the interest period plus a margin of between 1.0% and 2.0%, depending on the Company's leverage ratio as of its most recently ended fiscal quarter. The maturity date for the Revolver is the earlier of the fifth anniversary of the funding date and December 15, 2016. The maturity date of the Term Loan is the fifth anniversary of the funding date. The Term Loan must be repaid in installments on each anniversary of the funding date. The amount of the required amortization is five percent (5%) of the initial principal amount of the Term Loan on the first anniversary of the funding date, ten percent (10%) of the initial principal amount of the Term Loan on each of the second, third, and fourth anniversaries of the funding date and the remaining principal amount of the Term Loan on the final maturity date of the Term Loan.”

So LIBOR plus 200 is an interest rate of 2.38% as of 10/12/11 (I assume 3 month LIBOR).  On $520m in debt, that is just $12m in interest annually.  I use $50m because I’m lazy, figure why not, and assume managements can always find ways to spend money they don’t need to.  So actual interest cover (EBIT/Interest) is 10x+, which is a nice cushion considering EBIT is very low.  Repayment rates are also much below annual cash flow and the business can generate FCF well in excess of the $350m necessary to pay back the principal on the term loan.

If you look at each segment of the business, you can see that some of the product lines are less cyclical than others (not previously disclosed until Form 10 for spin, but I suspect the superior performance of plumbing and security have been fairly constant over the years).

Sales	2010	2009	2008
Cabinets	1,188.8	1,125.7	1,552.2
Plumbing	923.8	835.0	967.2
Windows & Doors	600.7	550.8	668.4
Security	520.2	495.3	571.3
Operating Income
Cabinets	28.0	(25.1)	114.3
Plumbing	132.5	114.2	166.0
Windows & Doors	17.6	(37.5)	(797.0)
Security	53.0	40.7	(33.5)
Corporate	(44.5)	(42.9)	(32.4)

The plumbing and security segments held up well (write down in security segment included in operating income).  Margins in the plumbing business remained robust.  This is probably the jewel of the company since replacing a faucet is a necessity if it breaks as well as something that can be replaced without redoing an entire bathroom or kitchen.  If you carve it out and assume the other divisions cover interest and corporate expenses, the plumbing business alone could be worth $1.3bn assuming 35% taxes and 15x 2010 earnings ($86m). 

On the downside, the company has discretion in capital expenditures has produced free cash flow even through the recession.  I recalculated earnings based on EBIT since historical results include related party interest, which is just one way to transfer earnings to the parent, and just used a flat $50m interest expense and 35% tax rate.  In 2010, FCF was $137m based on that calculation.  From 1999-2003, capital expenditures outpaced D&A charges, but in every other year going back to 1989 the opposite was the case.  Historical Fortune Brands filings do not break out the details for capital expenditures beyond their allocation to a segment.  There is a high probability that the higher capital expenditures during 1999-2003 were related to growth and not maintenance.

Qualitative

One of the biggest issues in the housing sector is customer concentration.  The home centers category is basically Home Depot and Lowe’s.  There is potential that this figure is understated since the international channel is basically Canada (12 of 17 points) where Home Depot and Lowe’s have a presence.  Not selling to them would be like Coke or P&G products not being sold in Walmart.  As demonstrated with American Woodmark’s results, Home Depot and Lowe’s are very capable of throwing their weight around.  Below is the breakdown of FBHS’s revenue by channel:

Channel	Percentage of 2010 Sales
Wholesale	31%
Home Centers	26%
International	17%
Dealers	14%
Mass Merchant and Other Retail	8%
Builder Direct	4%

Home Centers do not dominate sales, although they are major customers.  There has been promotional activity in cabinets in the past year mentioned by FBHS and AMWD.  Historically, FBHS has maintained their operating margins in a normalized environment where as AMWD saw compression throughout the housing expansion due to excessive dependence on two customers.

The plumbing and security segments are not as dependent on housing starts as the doors & windows and cabinets segments.  In the context of a weak economy as well, plumbing and security are less likely to be deferred.  Anyone could last several years with ugly or worn out cabinets or doors, where as most people use their faucets or lock things up daily.  Total revenue dropped 36% from peak to through (2006-2009), where as housing starts fell 65% during the same period and a broader recession occurred.  Is the business steady?  No.  But it is not exclusively dependent on new home construction and therefore is capable of generating profits even if housing doesn’t return immediately upon purchase.

In the Form 10, FBHS reveals what percentage of sales by division comes from Home Depot and Lowe’s.  The cabinet, plumbing, and window & door segments got 24%, 30%, and 22% of their sales, respectively, in 2010 from Lowe’s and Home Depot combined.  The smallest division, security, doesn’t have a number attached to it for how much revenue is generated from Lowe’s or Home Depot.  So I think that the home center share of 26% is probably accurate.

The long-term growth rate of the business, both organically and through acquisitions, has been positive 4% and 9% CAGR respectively.  Going back through Fortune 10-Ks, increased sales in the division that is now FBHS were consistent.  In many years, at least part of this growth is attributed to line extensions and new products.  While it may require additional manufacturing lines or other additional capital goods, bending metal pipes in more modern designs or updating the materials or finishes used in cabinets, doors, or windows don’t not require massive spending. 

In 2010, Master Lock and Moen each got more than 25% of their sales from international markets.  Both are portions of the security and plumbing divisions respectively, although meaningful portions.  Moen has show rooms in China, South America and recently opened one up in India.  Moen is probably trying to appeal to class conscious Chinese.  I’m not particularly opinionated about the subject of business expansion into China.  Faucet technology isn’t the source of competitive advantage, although that makes it all the easier to knock off. 

There are numerous embryonic expansion plans for different areas around the world.  Perhaps this will be paid more attention, as an incremental $50m in revenue is a lot more meaningful to a company the size of FBHS than it was as a division of a conglomerate. 

Moen has a good reputation, which I believe is a driving factor in purchases of plumbing products.  Here and here on Consumerist.com, the online presence for Consumer Reports, are very positive reviews for customer service.  I consider this to a relatively reputable unbiased site for consumer feedback.  The manufacture of a quality product with some pricing power is borne out by steady operating margins and sales in the plumbing division, but support in the form of customer service is comforting.  People want products that they know (or at least think) will last several years, minimized a 10% price differential or competition from private label options. 

The two major cabinet manufacturers in the US are Masco and FBHS.  FBHS claims to have the #1 position in kitchen & bath cabinetry with $1,189m in 2010 revenue vs. Masco’s $1,464m in 2010 revenue from its “cabinets and related products” segment which also includes storage and home entertainment cabinets.  FBHS also claims to have the #1 faucet brand in the US, although plumbing revenue lags Masco (Delta, among other brands).  While Masco’s revenue is greater, FBHS has performed much better with operating margins and maintain sales:

FBHS					Masco
Sales	2010	2009	2008		Sales	2010	2009	2008
Cabinets	1,188.8	1,125.7	1,552.2		Cabinets	1,464	1,674	2,276
Plumbing	923.8	835.0	967.2		Plumbing	2,692	2,564	3,002
Operating Income					Operating Income
Cabinets	28.0	(25.1)	114.3		Cabinets	(250.0)	(64.0)	4.0
Operating Margin	2.36%	-2.23%	7.36%		Operating Margin	-17.08%	-3.82%	0.18%
Plumbing	132.5	114.2	166.0		Plumbing	331.0	237.0	110.0
Operating Margin	14.34%	13.68%	17.16%		Operating Margin	12.30%	9.24%	3.66%

Other competitors in the plumbing field include Pfister, which is hidden within a segment of Stanley Black & Decker, and American Standard, which is currently owned by private equity.  What is interesting about the cabinet numbers is they are not driven by major write-downs, but restructuring at both companies.  In 2008, Masco’s cabinet division took a $59m impairment charge in the cabinet division, but was still profitable.  Masco’s cabinet division negative operating income in 2009 is just reflective of poor performance.  In 2010, they had several charges in the cabinet division related to closing plants, product lines, and integrating some divisions totaling $171m pretax, so the division had negative cash flow.  They closed down a product line that generated $200m in sales in 2009, which indicates how poorly the business is doing.  They expect another $35m in charges in 2011 related to restructurings started in 2010.

The FBHS cabinet division has somehow spectacularly outperformed, at least in part due to restructuring starting in 2006.  From 2006-2010, total restructuring charges at FBHS amounted to $166m spread over all divisions, reducing manufacturing plants and employees by 40%.  This pales in comparison to the havoc going on at Masco, and is at least a relatively (literal sense) reassuring sign about management at FBHS.  Masco is retreating from product lines while FBHS is plowing ahead.  FBHS has also had much more consistent profitability with its plumbing division.

FBHS took its asset impairment bath in 2008 for $848m, but this was related to doors & windows and security.  The bulk was related to a $924m acquisition in 2003 and a $600m acquisition in 2006 (dumb & wow that’s dumb, to be confused with doors & windows).   My point is that operationally, FBHS has performed quite well versus peers and considering its business environment.  As for acquisitions, the risk from overpaying for acquisitions is quite distant considering the current state of the housing market and surrounding pessimism.

I focus on cabinets because there is a lot of easily comparable data on a pure play (AMWD) and 2 companies that break out the divisions (FBHS, MAS).  Cabinetry seems like a fairly commoditized product, so results are more reflective on how well the business is being run (you’ll never be able to tell me Hershey or Coke have smart management, just that they are not stupid). I don’t doubt there is a certain preference for high quality products among those who can afford it, but I don’t think I could have told you a cabinet brand before I began researching the sector.  FBHS has the Omega brand, which is purportedly higher end, but they have several lines of cabinets for every budget.  Based on 2008-2010 declines in cabinet revenues of 23%, 35%, and 32% for FBHS, MAS, and AMWD respectively, FBHS is offering the most competitive product in terms of a combination of qualitative appeal and manufacturing costs.

I’m not sure I have value to add on the subject of the windows & doors or security division.  The security division makes locks that I remember using on my gym locker.  It has produced steady cash flow since 2008 (limit of disclosure on segment information).  This business should continue to hum along with minimal capital expenditures, as basic lock technology isn’t changing.  Management states there are opportunities to leverage the brand names into other security related products.

FBHS claims to have the #1 position in fiberglass doors, which maintain temperature better than alternatives.  It is likely driven by a mix of new construction and remodeling with a weighting towards new construction.  The business received a boost in 2010 from energy credits.  The segment I refer to as windows & doors is really called “Advanced Material Window & Door Systems.”  Advanced material sounds nice and energy efficient.   I don’t have an opinion either way if this constitutes a competitive advantage, except that the division is focused on product lines that will remain relevant opposed to less insulated window & door systems.  Plenty of door manufacturers can retool product lines to make advanced material doors. 

Possibilities

This business should just continue to hum along and do fine.  In this order from the Form 10, the company states their opportunities are to: invest in profitable organic growth initiatives, add-on acquisitions, or share repurchases.  I’d be thrilled to see the company pay down debt and repurchase shares.  Organic growth initiatives make sense since they do have international opportunities that will receive more attention as a standalone company. 

As I said above, the risk of some really boneheaded acquisitions is limited due to the depressed market for housing related businesses.  That doesn’t mean it won’t happen.  The way it would become stupid would be if the company started taking on debt.  Debt is cheap though, so it might make sense.  Based on their past acquisition history, they are bad at timing the market cycle.  I think a reasonably priced acquisition in today’s market would make management look very smart a few years out.  Many of the business lines FBHS produces are in already consolidated industries.

Management is really just saying what people probably want to hear.  I can’t say that just because share repurchases are mentioned that management is genuinely thinking of executing a repurchase.  That being said, the share price would have to be dramatically higher before a share repurchase looks uneconomic.

Management instituted a poison pill past 15% ownership for the first year.  Usually I don’t care for such actions.  Bill Ackman, who has been very positive for public shareholders with past investments, still holds a stake.  It remains to be seen if he sells, although the business looks cheap right now.  Pershing Square owns more than 10% and I believe typical poison pills are designed at the 10% level, so I don’t think the 15% threshold offers any insight.