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!

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!

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!

One stock this blog watches closely is Colfax Corp. (NYSE: CFX) !

The company will  report its 2009 Q3 preliminary Earnings on November 3, 2009.

Those results are preliminary because they “exclude the impact of the favorable ruling for Colfax’s Warren Pumps subsidiary issued by the Delaware Court of Chancery on October 14, 2009 relating to asbestos-related insurance coverage.”

“The Company is currently evaluating the impact of this ruling on its financial statements and expects to record a gain in the third quarter resulting from the ruling.”

We will publish our thoughts about this earnings release and listen to the conference call.

….stay tuned!

Certainly, Colfax future earning’s power does not only depend on cost savings and on the solution of the asbestos problem.

Will orders of the oil and gas industry pick up in the second half of 2009 and in 2010?

This could happen if the price of crude oil continues to strengthen.

Will the „Global Navy and Commercial Marine End Market” remain strong?

As always in investing there is no guarantee but one thing is assured:

Colfax has a disciplined management. They are positioning the company for better times.

We just don’t know exactly when that will be!

So the stock is up but how do the numbers look like?

What could one expect given the current economic environment?

Colfax posted net income of $4.4 mil (0.10 $ /share basic and diluted) in Q2 2009

Adjusted net income (which backs out restructuring charges and asbestos related costs) was $8.5 mil ($ 0.20 / share), a decrease of 38.8%. This includes a negative currency effect of 4 cts/share.

Net sales were $ 129.2 mil, a decrease of 20% year over year.

Only in the segment „Global Navy and Commercial Marine End Markets” sales were up.

Orders in the second quarter were $ 104.1 mil, a decrease of 44.9%

Brutal numbers indeed!

But the CEO was rather upbeat on the conference call given the current environment.

Colfax Corp. rapidly started a cost reduction program of $ 13 mil until the end of 2009 and if necessary further cost reductions can be implemented.

He points to the healthy balance sheet: the debt/EBITDA ratio is 1.

As acquisitions are part of Colfax’s business model they also mention an improving „acquisitions pipeline”.

Perhaps the best news are - if all goes well - that the legacy asbestos problem goes to trial in october and Colfax awaits a definitive solution at the end of this year.

…….  continues  …..

Today Colfax Corp.  (NYSE: CFX) reached $ 12.10 in an overall positive market.

This blog first discussed Colfax on May16th of this year. Then the price was $ 7.27

Until today this means a performance of 66%, by far outperforming the overall market!

……… Dear Reader, I hope you were invested!

On this blog we will have a look at the latest Q2 2009 results of Colfax published recently and we will discuss whether they justify this performance!

Stay tuned!