Georgia Gulf Corp GGC

GGC

The bull case:

1. 20+ year old major North American producer of commodity chemicals and polymers for doors, windows, exterior molding, PVC pipes etc. Highly associated with residential and commercial construction and the growing renovation/remodelling industry-- particularly in Canada. This is a classic case of a very CYCLIC company. The production of PVC pipes is less linked to the business cycle and more associated with infrastructure.
2. Share price knocked down by 50% from 52 week highs of $24 (now $11.74)
3. Valuation ratios favourable v.s. peers: trailing P/E 5 (Q2), P/B 0.97 P/S 0.14 compared to 18, 3.3 and 1.5, respectively for peers.
4. excellent free cash flow P/FCF of approx 5. $100 M past 12 months. Capital ex approx 3% of sales (low by industry standards)
5. 2.9% dividend yield. Payout ratio N/A
6. decent operating margin— 5 year average exceeding 6%. Five-year average ROE is over 23%. Recent acquisition of Royal Group improves margins and market share in Canada, where housing starts/renos have been much more stable than on the USA coastal metropolitan areas.
7. has sold two Canadian plants for $5 M, used to pay down short and long term debt while consolidating into existing Canadian plants to maintain "scalability".
8. Debt is favourably financed-major repayments do not start until 2012.
9. some insider buying starting in August at $17.25/share.
10. Charles Brandes, a well respected value investing guru, added to his position in GGC for $17.30/share to make up a total holding exceeding 2 M shares in June 2007.
11. As of Dec 2006 Morningstar's fair value estimate is $34/share.
12. very low EV/EBITDA ratio of 0.66 and P/B ratio of .96 make the company an attractive take over target, hopefully with a premium for the shareholder (remember that this does not always happen!).
    

My view on HOG

Concerns about inventory aside, I think that HOG is currently undervalued by the market and represents an excellent long term opportunity. I would not expect much movement in the stock price for the next 8 quarters but as value investors we don't care much about that anyway, remember? Current dividend support (which may increase in subsequent quarters) may reward investors for waiting for the capital appreciation in this extremely well managed company. Many fortunes have been lost by under-estimating the American consumer's resilience.

International growth potential is significant for HOG's products and IMHO will reduce reliance on the North American consumer. A healthy generation of new products in the pipeline along with high margin merchandise/accessory sales in the HD stores are also reassuring. The downside risk of investing in HOG is 10-20% share price decrease, barring a major global recession.

I have already bought some stock at $49 for my wife's RRSP. I have a bid in for more at $47 for my holding company. I expect that further dips could take the price to the low 40's and if it does, I will quite happily buy more. I estimate that share price will appreciate 7-18% avg over the next 5 years. I've set a goal price of $80 which can be revised per the fundamentals discussed below.

Good luck with your own analysis of HOG.

Next-- the long case for GGC Georgia Gulf Corp. A much "deeper" value stock with more risk and a higher potential reward than HOG.

Now... the down side for HOG

the bears say:

1. sales slipped 6% in the Q3 2007 period versus Q3 2006 numbers. That translated into a 15% decline in net profits
2. gross margins are slipping (see above)
3. no significant insider buying (at least according to EDGAR, 3 months+ ago)
4. accounts receivable up 23% and increasing defaults on loans through HD financial (offers loans to customers)
5. inventory up 34%. IMHO, this is the most worrisome number/trend and the bears are focusing on this quite a bit. Moving older stock to make room for 2008 models will usually require price cuts, further eroding margins.
6. North American middle and lower class discretionary income is likely to be impacted by the possible impeding recession, US dollar currency devaluation, burst real estate bubble, and banking crisis (i.e. opposite of the "wealth effect")

The LONG case for HOG: "Squeal like a pig, boy!"

HOG Harley-Davidson Motorcycles

Bulls say:

1. Very strong Brand with wide economic moat
2. Extreme brand loyalty from customers (do you see Honda tattoos?)
   
3. 101 year old company with mature, seasoned and respected management. Long term track record of profits and share-holder value (see graph of stock performance v.s. S & P above)
   
4. stock price 33% off 52 week high of $75 (currently $49)
5. 2.4% dividend yield (increased twice in the past 2 quarters and 15 X in the past 10 years). Payout ratio is only 22%, suggesting that HD can easily sustain and even increase this dividend yield over time.
   
6. just completed a second $0.5 Billion stock buy back program on a $12 B total market cap
7. ROE 38% (VERY impressive) ROA 19% (good) ROIC high--> all quantitative measures of effective management.
   
8. Projected conservative 7-8% earnings growth over 2008/9, mostly due to international operations (20%+ growth this year) despite flat or decreasing North American earnings.
   
9. strong free cash flows and $400 M of cash in the bank which gives company flexibility to finance overseas growth, increase dividend yield or execute more share buy backs. CEO suggested in last conference call that management feels that the share price is "very undervalued". This may be a hint that a buy back strategy will continue.
10. new better performing products with broader appeal, particularly in Asia and Europe i.e. the VRSC and Rocker Softail. (don't tell my wife---I want a Rocker NOW!)
11. P/E ratio at historic lows 12.5 v.s. 18 for competition (both trailing and forward). PEG 1.17 (almost 50% industry norm).
    
12. Margins that have recently been squeezed but are astronomical by industry standards: gross margin = 38.4%
13. Several highly respected value Investing gurus hold HOG in their portfolios including Robert Olstein (paid $62.20/share June 2007!), Chris Davis, Tom Gayner, Ruane Cunniff, Bill Nygren and Ronald Muhlenkamp.

for another opinion see this video clip

The birth of the VCI blog

Welcome to the Victoria Contrarian Investing Blog--- a mish mash of (hopefully) productive thinking about value investing in the current market environs...

What I hope to accomplish with this blog:

1. To educate myself and others regarding GARP strategy (Growth at A Reasonable Price) of recognizing a specific company's current and future value
2. To analyze specific securities in Canadian, US and international markets that may meet criteria as investment grade
3. To learn to identify the MARGIN OF SAFETY for investing in the above securities. "Only when the tide goes out do you discover who's been swimming naked."
   
   Warren Buffett

You may find this blog interesting or useful if you consider yourself to be a long term investor. A representative time frame for most contrarian investments would be 18 months-4 yrs++. In fact, Mr. Buffett has been known to hold onto some investments for many decades, i.e. KO

“We believe that according the name "investors" to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a "romantic”

Warren Buffett

Being contrarian means that you must be prepared to swim upstream from the herd. That means you must buy when everyone else is panicking and the market prospects appear most bleak. OTOH, you will need to sell some or all of your investments when stocks are red hot and everyone seems to be getting into the game. You will need to sit back and smile as you watch your investments plummet further after you buy them. You will not succumb to greed or fear based decision making. Easy, right? Just wait.... LOL.