In times like these, one needs to think like an owner rather than a generic shareholder. Do you consider selling your house every time your annual assessment drops or stays flat? Do you check the market value of your house every hour, day or week and fret when it doesn't go up steadily?
One should think the same way about quality wide moat companies as the homeowner's house. Most people actually only own a small share of their home (the bank owning the balance) so the analogy to the partial ownership of a public company through common shares holds.
One such company is Onex Corporation: OCX (TSE) a company that I view as Clarke Inc. (CKI)'s big brother
Profile: Legendary value investor Gerry Schwartz is the largest shareholder as well as the CEO and Chairman of the board of directors for this diversified Canadian holding company. It has a private equity arm which utilizes leverage heavily to buy out undervalued companies and 2 others subsidiaries which own various private and public companies such as Spirit AeroSystems, Sitel and Celestica. It also has developed an asset management firm that raises third party capital through limited partnerships and generates income for the parent company (OCX) by generating management/performance fees.
Like Clarke Inc (CKI) discussed at length previously, one has to be cautious using traditional valuation metrics to assess investment holding companies like Onex.
P/E, P/B, P/S ratios can easily be distorted by realizing one time gains from a previous investment. Thus when financial holding companies sell what they feel is an overvalued investment in a bull market, the P/E ratio drops because a large capital gain shows on the balance sheet and is calculated into the earnings. OTOH, during a bear market such as we are seeing now, the company is buying undervalued assets and holding their previous investments to sell later, in better times. The P/E ratio will rise, assuming their is not a huge sell off of the company's shares at that time (unlikely because of the high % of insider ownership), making the valuation look more expensive. So unlike many secular businesses with more or less continuous cash flow, the P/E multiple is often HIGHER when the company is a good value and LOWER when it is cheap. The use of NAV (net asset value) for valuation is a more appropriate metric and for value investors, the larger the discount to NAV, the cheaper the security is.
Bull Case for Onex Corp:
1. Remarkable track record for creating shareholder's value-- see chart at the top of the page. 10 year share price growth is 422% v.s. TSX of 147%.
2. Management's interests squarely aligned with shareholders. 28 Million shares = $1.4 Billion owned by insiders market cap $4 B. Options can only be exercised if 25% strike price and 25% of the carry realized must be reinvested in Onex stock and held until retirement---> management is highly motivated to make LONG TERM, sustainable profits.
3. No attributable debt for parent company. Individual debt attributable to each major investment is non-recourse to Onex-- a similar setup as with BAM (see previous posts).
4. Current portfolio is well diversified: 22% cash ($770 million), 14% private companies, 20% public companies, 44% limited partnerships. Healthcare and US industrials overweighted. Onex has set up funds to invest in distressed debt and US real estate-- a contrarian move that impresses me particularly since they initiated this strategy earlier than competitors-- August 07.
5. NAV conservatively calculated to be $32.86/share (10% discount). RBC analyst calculates FMV at $44 mostly due to overlooked profits from 3rd party management fees.
6. Aggressive stock buy backs when shares trading at discount to NAV. Has bought back and cancelled 34.2 million shares at an average share price of $19/share over the last 2 years. Another buyback is occurring right now.
7. Income from recent divestures and cash flow from 3rd party management fees plus a large surplus of cash on hand positions OCX to snap up more deep values plays.
Bear case for Onex Corp:
1. Cash balance is in US$ and high degree of US equity exposure. As the US bear market unravels further, this could diminish NAV accordingly.
2. Credit for near term large private equity finance deals will be trickier to arrange.
3. A large proportion of the company's direction and prospects rely on a single individual-- the CEO Gerry Schwartz. He is the controlling shareholder and is essentially immune to activist investor influence due to the share structure of this company.
4. Possible acquisition valuations are in flux so short term NAV/book appreciation uncertain.
Onex is definitely a stock to study. I've put in a small bid for $30 and hope to add to it over the next 12 months. Target price-- $60--$70
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