Magna International Inc

Ticker: MGA, Buy below $50.

Why I Would Buy

1.     Cheap – Magna trades at 8x current earnings and an astounding 5x forward earnings!

2.      Investment grade credit rating – Magna’s long term senior debt was already investment grade, it was recently upgraded another notch by Moody’s (from Baa1 to A3).

3.      Upbeat Analyst Consensus–5 star “strong buy” rated by S&P,  9.7  equity consensus score by Reuters’ (at Fidelity) .

4.      Low Debt – Just 25% of the capital structure is comprised of debt.

5.      Low Payout Ratio – Magna pays out less than 20% of its earnings as dividends.

 What Could Go Wrong

1.       Trump and NAFTA – About 60% sales of Magna’s sales is spread across Canada, US and Mexico, enough said!

2.      Highly Cyclical –  The automotive industry is highly cyclical, Magna is probably riding the crest of an industry peak right now ( the company lost money during 2009 recession).

3.      Meagre Returns of Equity – RoE is my favorite metric for picking stocks, Magna has earned anemic single digit returns on this metric.

Disclosure: I am long MGA, please read additional disclosures here before taking any action based on this post.

Daimler AG

daimler

Ticker: DDAIY, Buy below $80.

Why I Would Buy

  1. Cheap – Daimler trades at less than 9 times trailing earnings, 1.3 times book and below 0.5 times trailing sales!
  2. Generous R&D Spend – Daimler consistently spends between 4 to 5% of revenues on research and development. In 2015 this amounted to an astounding 6.5 billion Euros.
2011 2012 2013 2014 2015
5.3% 4.9% 4.7% 4.4% 4.4%
  1. Strong Returns on Equity –Daimler  has posted impressive RoE numbers:
2011 2012 2013 2014 2015
14.6% 17.4% 20.1% 16.4% 15.9%
  1. High Investment Grade Credit Ratings – Daimler enjoys strong credit ratings on its long-term debt (S&P: A-, Moody’s: A3, Fitch: A-).   
  2. Low Payout – Despite a dividend greater than 5%, the payout ratio is at about 40%.

What Could Go Wrong

  1. Poor Cash Flow – The company has surprisingly been negative free cash flow for the past 5 years. The poor cash flow generation is exemplified by it’s operating cash flow in 2015: it was a miniscule 222 million Euros earned on revenues of 149+ billion Euros!
  2. High Beta – Despite having a diversified product line (the ubiquitous Freightliner trucks for example are a part of Daimler’s offerings), a majority of profits are derived from its luxury car business. Luxury vehicle sales tend to suffer during economic downturns; for instance during the financial crisis in 2008 Daimler’s profits cratered and in 2009 it reported a loss.

Disclosure: I am long DDAIY, please read additional disclosures here before taking any action based on this post.

Jardine Matheson

Jardines

Ticker: JMHLY, Buy below $60.

Why I Would Buy

  1. Access To High Growth Markets – Jardine Matheson is a conglomerate that operates businesses in South-East Asian markets such as Indonesia, Singapore, Hong Kong etc. Newer investments are in hard-to-access, hyper-growth countries such as Myanmar and Vietnam.
  2. Astute Capital Allocation – Management has displayed strong skills at initiating and expanding ownership in businesses at extremely opportune times. Examples include: scooping up a 50% stake in Indonesia based Astra during the Asian financial crisis, and entering into joint ventures in Myanmar at the first sign of market liberalization there.
  3. Diversified Business Mix – The mix of businesses under the Jardine umbrella are awe-inspiring: real-estate, auto dealerships, hotels, restaurants, palm oil plantations, construction, engineering and more.
  4. Strong Returns on Equity – Jardine Matheson has averaged an impressive 11+% RoE during the past 5 years. Although there are signs of a slow down at Indonesia based Astra, their recent forays into Thailand and Myanmar shows potential for maintaining the high returns.
  5. Fair Price – The Company trades at about 12 times earnings and 1.1 times book.

What Could Go Wrong

  1. Convoluted Shareholding Structure –The conglomerate has a puzzling shareholding structure: Jardine Matheson holds ownership in many of its underlying business via a 83% stake in an intermediate holding company called Jardine Strategic. Jardine Strategic in turn holds a 56% stake in it’s parent Jardine Matheson! Look at the graphic below to see this strange looped shareholding:JardinesComplexHoldings
  2. Dynastic LeadershipThe Company is run by a single family – the Keswicks. The family projects a controlling influence over this conglomerate although it possess only 14% of voting rights. Jardine Matheson does not have professional management, rather the senior-most leadership is dynastic and is derived entirely from the Keswick family.
  3. Currency Risk –JM transacts business in various South-East Asian currencies, these are emerging market currencies and could move in any direction or degree relative to the USD.

Please read disclosure here before taking any action based on this post.

CK Hutchinson Holdings Limited

CKHoldings

Ticker: CKHUY, Buy below $15.

Why I Would Buy

  1. Cash Flow Generation – A hard to replicate collection of cash-flow generating assets such as ports, utilities, telecom, infrastructure assets, retail stores and more.
  2. Global Diversification – Revenues are generated from a highly diversified geographical base, reducing concentration and currency risks:CKRevenues
  3. Large Insider Holding – Legendary investor Li Ka-Shing and his family owns approximately 60% of the company. Minority shareholders can benefit by aligning themselves with the family’s interests.
  4. Strong Ratings Consensus – According to The Financial Times, of the 15 analysts covering CK Hutchison 7 held “Buy” opinion and 8 had “Outperform” opinion. None had a “Hold” rating or below.
  5. Extremely Cheap – Trades at about 17% discount to book and at about 7.3 times 2015 earnings.

What Could Go Wrong

  1. Large Beta –Ports and infrastructure businesses are strongly correlated with global trade volumes and the world economy. Even a mild recession could hit earnings hard.
  2. Capital Intensive BusinessesCK Hutchison operates capital hungry businesses such as ports, infrastructure, railroads, utilities etc. The large recurring capital expenditures can be a drag on returns-on-equity.
  3. Persona –CK Holdings is run by the highly-skilled investor Mr. Li Ka-Shing, the company benefits greatly from his tremendous business acumen; Mr. Li is 87.

Please read disclosure here before taking any action based on this post.