Asmus Puhl Finance Blog

Last week Markel Corporation (NYSE: MKL), one of the two companies this blog follows intensely, reported its earnings of FY and Q4 2009.

As we all know, 2009 was a challenging year:

With the American economy still in recession mode, the insurance market was crowded and very price competitive.

But Markel is a very disciplined insurance company: they try to serve well their clients but their primary goal always remains profitability!

In this challenging environment Markel was able to increase book value / share to an astonishing all time high of $282.55 !

The combined ratio fell from 99% in FY 2008 to 95%, another sign of strength of this well managed company.

The compounded average growth rate of their equity investment return of the last five years was 11%!

Not bad in these difficult times, isn’t it?

Last Friday the stock traded at $ 342.95 . This translates into a price/book ratio of 1.2

Seems rather cheap historically: in the past Markel normally traded at a price/book ratio of 2.

Do your own due diligence but perhaps it’s a good idea to snap up some shares: Markel is widely seen as the “next Berkshire Hathaway”!

Yesterday Colfax (NYSE: CFX) filed a form 4 with the SEC that the company granted its new President and CEO Clay H.  Kiefaber 102′124 options based on the equal amount of common shares of the company’s stock with an expiration date in exactly one year.

The most interesting point is the exercise price of this option grant:

The closing price of CFX stock at $ 12.27 on Jan 11^th !

The press release of his nomination cites that when Kiefaber was Group President of Masco  Corp. operating income and cash flow increased significantly:

Seems that he intents to do the same at Colfax this year!

I think this is a positive move for shareholders even if the time frame of this option grant is short:

The threshold of $ 12.27 is not artificially low and only one year in order to enhance shareholder value is challenging in this still rather difficult economic environment!

It comes a bit of a surprise!

Colfax Corporation (NYSE: CFX) a company we track regulary here on this blog announced yesterday that its President and CEO John A. Young will resign and will be replaced immediately by board member Clay Kiefaber.

We don’t know Mr. Kiefaber very well because on the board of Colfax he only served since the company’s IPO in 2008 but the stock market reacted favorably.

The stock price moved higher together with the overall market.

The press release states that Mr. Kiefhaber has ample industrial experience in increasingly senior executive positions for more than 20 years.

At the same time Colfax reaffirmed its earnings and sales guidance for FY 2009.

We will discuss the results when they will be released later this year.

Yesterday Colfax’ stock price closed at $ 12.27:

this translates into a 69 %  increase from $ 7.27 on May 16th, 2009 when we first discussed Colfax on this blog!

Only a few days until Christmas and the end of 2009!

This is traditionally the time for predictions! Predictions about how the financial markets will fare in 2010!

As this blog openly states it is unable to predict the short or medium term moves of the market (and we think no one really can…..) perhaps one element of the coming years becomes very clear:

Rising long term interest rates!

In the aftermath of the financial crisis and the following recession, consumers started to wind down their debt. Private companies were doing the same.

But the governments of the Western world did the exact opposite: They run public deficits up to 10-12% and accumulated debt in an unprecedented way.

After Dubai Greece was the first sovereign debtor which ability to pay current obligations has been questioned. Two rating agency already downgraded the public debt of Greece below the A-level.

This general mistrust in sovereign debt will very likely increase in 2010 and beyond and will - in Europe - put more question marks behind the European monetary union.

As financial markets are recognizing that current interest levels are not compensating enough for the rising risk of public debt, it is not difficult to predict that long term interest rates will rise in 2010.

This must not be bad for the stock market as general wisdom suggests. The world economy continues to improve, earnings will improve too and real assets are becoming more and more “fashionable” (…another move away from „paper money”…).

But please do not expect returns like this year against a rising interest szenario!

The same applies for gold and other precious metals. If the move away from paper money continues gold will likely continue its longterm upward trajectory, after a little pause for profit taking and even against rising interest rates.

A Happy and Prosperous New Year to all our readers!

See you in 2010!

Fitch downgraded the public debt of Greece, a member of the Euro to BBB+

Moody’s and S&P both have a negative outlook for this country.

If the numbers are correct (and this is not always certain in Greece) the public deficit ballooned to 12%,  far above the 3% threshold the Maastricht treaty normally allows. Public debt reaches 120% of GDP.

Yesterday Moody’s lowered its outlook for Spain’s national debt. If informations are correct Portugal is not in a much better situation.

These countries face a serious problem: They cannot devaluate their currency in order to help their economy because they are members of the Euro. This could mean sluggish economy with rising public interest payments as creditors are willing to lend only with higher risk premiums.

For the first time a sovereign debt crisis within the monetary union could be on the horizon.

So far my fears expressed in my previous post begin to become reality!

The Euro weakened against the dollar for the first time after weeks.

Gold currently passes a correction after the huge runup this year but it will be interesting to watch where it will be heading in 2010:

Once again: Will gold rise only when the dollar is weakening or will it rise also when the dollar remains relatively strong?

If the second alternative prevails this could very well be a strong indicator of the beginning distrust in paper currencies Alan Greenspan mentioned earlier this year …. a distrust in all paper currencies, not only the dollar!

We would then be only at the beginning of a multiyear gold bull market!

Every day we are witnessing a new record price for gold and a lower price of the dollar.

And we are quick to explain it:

There are the carry trades:  to take on debt in US-Dollar costs a littlebid more than nothing and this money will be invested in assets like p.e. gold.

With an interest level of more or less zero you don’t bother that gold is an asset that does not pay any interest.

Other comments point to the US public deficit and to a possible inflation at the horizon.

So the rising gold price seems to be the parallel of the falling dollar.

But don’t these explanations focus too much on the dollar?

Is the public deficit and the accumulated debt of the Euro - countries so much better than those of the US ?

European economic growth perspectives are worse than that of the more dynamic US economy!

Japan with its extremely low interest level already spends 23% of its budget for interest on its public debt.

Do the Asian sovereign investors really have so much more faith in the Japanese Yen or the Euro when they try to diversify their currency reserves?

Isn’t Allen Greanspan right when he says that the „rising prices of precious metals and other commodities are an indication of a very early stage of an endeavor to move away from paper currencies.”?

This would mean a move away from all paper currencies!

Will public debt problems jump faster from the Arabian desert into the European monetary union than we think?

Members like Greece, Italy or Portugal are already in a worse situation than many people believe. Dubai could only be the starting point of a more widespread crisis.

I think if gold will hold or move up when the Dollar is at least temporarily strengthening this will be a clear indicatior that we are in a multi-year gold bull market which will us take much higher than the next threshold of $ 1′200 .

Don’t forget that the „All time high” of gold at $ 873/oz. about 30 years ago today would translate into $ 2247/oz. !

Markel Corp. (NYSE: MKL), one of the stocks this blog follows intensely released their 2009 Q3 results:

The combined ratio improved to 96% from 124% in Q3 2008 and they increased book value/share by 23% to $ 274.33 which was driven by improvement in the market value of the company’s investment portfolio!

So isn’t this a good moment to listen to some comments from Tom Gayner, chief investment officer of Markel, which he made on the conference call?

Markel in 2005 acquired its first controlling interest in a privately owned company.

In 2006 and 2007 prices for this type of investment were simply to high.

So Markel waited patiently with discipline through 2008 and now they saw the opportunities they were waiting for:

In October of this year they acquired privately held Panel Specialists Inc. based in Temple,Texas.

As a result of the dramatic dislocation in the world of private equity and alternative investments controlling interests of 80 to 100% of privately held companies were finally available at prices which represent good investment value.

But what are the criteria they are looking for?

They are the same as when they consider other equity investments:

They are looking for profitable, cash generating businesses run by management teams with equal measures of talent and integrity. These businesses have reinvestment opportunities and capital discipline and are available at fair prices.

When Markel acquires a controlling interest in these companies they are able to decide on capital allocation and executive compensation levels. These are exactly the 2 points where a lot of value gets dissipated in public companies.

Doesn’t this all sounds familiar?

Isn’t it classic Berkshire style?

I think we can expect great things from this company within the next couple of years as the economy continues to improve!

And by the way:

Don’t forget that Tom Gayner sits also on the board of Colfax Corporation (NYSE: CFX) where he can help to evaluate acquisition objects!

This was Colfax CEO John Young’s  comment about the 2009 Q3 results!

… and the numbers clearly reflect that:

Net sales in the third quarter were $ 128.5 mil, 16.2% less compared to Q3 2008.

Net income was $ 1.8 mil including restructuring charges of $ 9.6 mil.

These results are preliminary 2009 Q3 results because they do not include the recent favorable asbestos ruling on October 14, 2009 for the company’s warren pump division.

Colfax still felt the crisis, there is no doubt!

But in this environment management quickly reacted, cut cost and reduced headcount by 15%. All cost reductions will translate into approximately $16 mil of savings in 2009.

The most impressive evidence of management’s action is the dramatic improvement of their cash flow statement:

They went from free cash flow negative one year ago to a free cash flow of $26.2 mil and a margin of 6.7% in the first 9 months of 2009!

Encouraging signs are coming from their order book:

On a sequential basis, their organic orders were up 15% driven by increases in the commercial marine, Navy, power generation and general industrial markets.

Backlog is also up slightly since the end of the second quarter.

Colfax still remains cautious and lowers their outlook for FY 2009:

They now expect adjusted earnings/share of $0.88 - $0.94 .

On Friday the stock closed at $ 12.04.

So for FY 2009 the P/E is 13  and the price/free cash flow ratio is about 17.

This seems to be a reasonable price for a high quality company.

Why not snap up some shares and wait until the economy further improves?

Future acquisitions on this way will certainly bring some upside potential too!

Watch for the strategic moves of some market participants especially in Asia,

we pointed out on this blog several times when commenting the Gold market’s recent run-up!

And now India’s central bank buys 200 tonnes of Gold from the IMF!

This is the biggest single gold purchase within the last 30 years.

Gold jumped to a new record high this morning as it becomes evident that large buyers like governments and central banks accept these current price levels!

Will governments of other countries follow? Will they diversify their reserves away from the US-Dollar?

India today confirmed they will do so!

Don’t forget that the Asian countries are not indebted like the US or the major European countries. They have money. They accumulated huge currency reserves over the last years and they are more and more frustrated about the declining value of the US-Dollar.

Stay tuned as this story unfolds!

And here they are, the preliminary results of Q3 2009!

Adjusted earnings came in at $ 0.23/share.

… if it is of any importance for you they beat analysts estimates by 3 cents.

And the market reacts favourably:  The stock is up more than 2 % in today’s early trading!