Falling Knife: ELDERS LIMITED (ELD)
May 5, 2010 6:09 pm by Dean Morel
Elders is hitting new low. As Justin said in the comments a buck now seems likely.
First up the two year chart and then zooming in the last six months. Current management are meant to be good and have a decent strategy to turn Elders around. Operating in a business with trough margins which opens up the possibility of the double play of margin and ratio expansion. Worth looking at.
Disclosure: No position, waiting for this knife to finish falling.
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It may have some interest as a cigarette butt. Is this the end of the asset writedowns though? Are they involved in the MIS stuff? If they are I would stay away completely. I had a look at GNS recently as it had got to 50c. I decided to stay away for longer. Timber assets are likely to be worth more in the future but possibly not in this structure. Underneath all the complexity, the MIS component (to my simpleton brain) is still an investment based on a ponzi scheme. Even though that ponzi scheme has now blown up, it does not mean that the value of those assets is anything above zero (even though they were valued more before the blow up). In my opinion, ponzi investments that will never make any economic return often logically end up being worth close to zero in the long term.
With ELD, Huntley’s value it at 1.00. If the MIS component is less than 20% of assets, I’d consider buying only at below 60c. Even at 60c I probably wouldn’t buy it. What is their business model? In fact what is there left of their business? I don’t understand it so I’ll stay away.
I’m reading Phil Fisher’s Common Stocks and uncommon profits at the moment. I don’t think ELD is in Buffet’s investment universe. Back to Fisher’s points:
1. Does the company have products with sufficient market potential to make possible a sizable increase in sales for at least several years?
2. Does the management have a determination to develop products or processes that will still further increase total sales when the growth potential of currently attractive product lines has been largely exploited.
3. How effective are the company’s research and development efforts in relation to it’s size
4.Does the company have an above average sales organisation
5. Does the company have a worthwhile profit margin
6. What is the company doing to maintain or improve profit margin?
7. Does the company have outstanding labour and personnel relations
8. Does the company have outstanding executive relations
9. Does the company have depth to it’s management?
10. How good are the company’s cost analysis and accounting controls?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor clues as to how outstanding the company may be in relation to it’s competition?
12. Does the company have a short-range or long range outlook in regard to profits
13. In the foreseeable future will the growth of the company require sufficient equity financing so that the large number of shares then outstanding will largely cancel the existing shareholders benefit from the anticipated growth?
14. Does management talk freely to investors about its affairts when things are going well but “clam up” when troubles or dissapointments occur. “in any event, the investor will do well to exclude from investment any company that withholds or tries to hide bad news”(page 77)
15. Does the company have a management of unquestionable integrity?
“any investment may still be considered interesting if it falls down in regard to almost any other on of the fifteen points…Regardless of how high the rating may be in all other matters, however, if there is a serious question of the lack of a strong management sense of trusteeship for stockholders, the investor should never seriously consider participating in such an enterprise” (page 78).
Actually Huntley’s value it at 1.6, but I still wouldn’t buy it at 60c.
A quick note on Elders.
It appears like this falling knife may have bottomed.
Earning out today showed signs of the business gaining traction.
http://www.businessweek.com/news/2010-05-16/elders-posts-first-half-net-loss-on-forestry-charges-update1-.html
“Profit before one-time items was A$1.1 million, compared with a loss of A$21.8 million in the previous period, the company said. One-time, post-tax charges totaled A$167 million.”
““The company anticipates a substantial lift in its earnings in the second half, given suitable rainfall in Western Australia and suitable market conditions,” Elders said in the statement. Full-year profit is also expected to benefit from increased live exports, it said.”
Dean,
Been working through the agricultural sector trying to get my head around valuations. Haven’t rummaged through Elders (but given their track record and small cap status – was going take time to get there). My question is have you had a look at AWB? Still a tad difficult to break it into pieces – but from what I can glean it’s looking pretty good. Assuming the grain trading sale and JV go through, the business will have immaterial debt and will essentially revolve around Landmark. Expect transparency to improve – especially as management seem intent on simplifying the business.
Gotta run – but just wanted to check whether you had looked at them?
Cheers
Rohan
Elders are down 40% to 49cents after profit downgrade. http://asx.com.au/asxpdf/20100622/pdf/31qy75c9mjf6mv.pdf
How low can it go? Underlying EBIT to May was estimated as $39.2M and now $15M. Sales down, margins down and costs now being slashed. Weren’t costs already slashed?
Looking to the future. I’ll keep watching Elders as if they ever right the ship they will have such a low cost basis in the business that profitability could take off.
Even cheaper now at about 40c!
This is one for the true long term I guess.
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