We never found out whether Lawrence Wildman successfully turned around Anacott Steel. He sure was serious about it. You don’t drive all the way out to The Hamptons to make a deal with Gordon Gekko on a Friday night unless you’re serious. But did it work? Aside from Nucor, there haven’t been many happy endings for American steel companies. We’ll never know. My guess is that Sir Larry probably extracted some union concessions, sold some assets and limped along for a few years. Lakshmi Mittal probably bought Anacott a decade later for a pence on the pound.
Of course, you can’t know the future. Wildman thought he was buying an industrial stalwart at a bargain price. He couldn’t have foreseen the collapse of the Soviet Union and the opportunists like Oleg Deripaska and Mittal picking over the crumbs of a failed industrial empire. They would produce steel in Eastern Europe at a fraction of Western costs. He couldn’t know that Deng Xiaoping was about to unleash one of the greatest economic miracles in modern history. Nobody in 1987 could have foreseen all the cheap Chinese steel that would eventually flood the market.
So it goes with investing. You have some theories about the future, you can find some businesses that appear to be selling for less than (or more than) their intrinsic value, you make some assumptions about interest rates, and there you have it. Only time will tell how the market weighs your decisions. Time can mean decades or minutes. There is no certainty.
I decided to assess my own book of business. I’ve looked back over my articles since the summer of 2024 and charted the results. The results are decent. Since July 1 of 2024, the S&P 500 is up 2.67%, my selections have delivered a 6.6% return on a weighted average basis. It’s not exactly 1950’s Buffet performance, but it’s enough to keep me going.
I had two big misses in my “circle of competence” – real estate. I was long Peakstone Realty Trust (PKST) and short Welltower (WELL). I am convinced that Welltower is one of the most overvalued real estate businesses currently selling in the public markets. Guess what? Old Man Keynes’ axiom applies here. Nobody cares. It’s senior living and you can’t beat the demographic trends. Welltower will continue to dilute shareholders with more stock sales, overpay for B assets, deliver a paltry dividend yield, and people will keep buying the stock.
I’ve already moaned about Peakstone. They had been on a pretty good run. Paying down debt and liquidating weak assets seemed like a no-brainer. Then they went out and bought a bunch of B industrial at 5% cap rates. Didn’t see that coming.
My biggest wins came from Hong Kong. I found exceptional bargains in January. I really did well with Johnson Electric, Budweiser APAC, WH Group, CK Hutchison, and Sinopec Kantons. I still own Budweiser, Hutchison and a little Johnson Electric. WH Group was sold after the tariffs were announced and Sinopec probably doesn’t go much further with oil below $65.
I had some decent luck shorting the AI capex boom. Lumen is down 50% and I also had nice profits on Digital Realty and Iron Mountain. I closed those shorts for some nice gains. They weren’t very large holdings, though.
There were four stocks in which I took no position. Shiseido has suffered from a decline in Chinese sales and poor margins, yet the stock is far from being a bargain. Learning my lesson from Welltower, I didn’t short Brookfield Infrastructure Partners. The company is an investment holding company that should trade closer to NAV, but it probably never will. Because, well… Brookfield. International Game Technology could have been a good short but I didn’t think it was worth the effort. I wish I had shorted Alexandria Trust. Biotech has been pummeled, and ARE is the industry’s biggest landlord.
My biggest disappointment has been following Elliott into long positions in Sensata and Southwest Airlines. Just because someone smarter than you has done something, it doesn’t mean that you should too. I had my doubts about Sensata, yet went ahead with the investment. Tariffs hurt, of course. My short position in trucker Heartland Express mitigated some of this fallout.
Finally, I am committed to Bayer for the long term. The company has the potential to improve margins, and I think RoundUp herbicide is indispensable. Patrick Industries is a long term short. A pandemic darling that has yet to fully capitulate. REX American Resources is an outstanding ethanol producer with no debt and disciplined management. It may be dead money for a couple of years, though.
By the way, Terence Stamp played Wildman in Oliver Stone’s film. A legendary actor, Stamp was fantastic as a cockney gangster in Steven Soderbergh’s 1999 film The Limey.
Until next time.
DISCLAIMER
The information provided in this article is based on the opinions of the author after reviewing publicly available press reports and SEC filings. The author makes no representations or warranties as to accuracy of the content provided. This is not investment advice. You should perform your own due diligence before making any investments.
Shiseido is a Japanese cosmetics company founded in 1872 by Arinobu Fukuhara, the former head pharmacist for the Imperial Japanese Navy. Fukuhara opened a pharmacy after leaving the navy and added a soda fountain after visiting stores in the United States. In 1917, the company introduced face powder and began expanding its footprint. Today, Shiseido is one of the world’s leading cosmetics businesses with 2024 sales of nearly $7 billion.
In addition to Shiseido products, the company owns leading brands such as NARS and Cle de Peau. Drunk Elephant is among its up-and-coming marks. Unfortunately, revenues have been on a downward trend since 2022 when sales to China began to decline. The recession caused by the Chinese real estate collapse has been a problem for most luxury brands. Shiseido (SSDOY) stock has fallen by over 66% over the past five years, and the market capitalization stands at $6.4 billion (909 billion JPY).
I became interested in Shiseido when I saw that Independent Franchise Partners, the London-based activist firm, had taken a 5.2% position in the company. Japan’s notoriously sclerotic corporate culture is slowly becoming more accountable to shareholders. The company has introduced its 2026 “Action Plan” which aims to grow sales and expand margins. Changes can’t come fast enough. Shiseido stumbled to a loss of 9.3 billion yen in 2024.
The contrast with the French cosmetics giant L’Oreal is stunning. L’Oreal posted sales of $49.6 billion last year, and operating profits of $9.4 billion. L’Oreal (LRLCY) has a market capitalization of $208.7 billion and trades at an EV/EBITDA multiple of 18.6x. L’Oreal boasts a return on capital nearing 19%. Operating margins are a healthy 19%. Meanwhile, Shiseido trades for a multiple of 14.4x with much more debt than the French company.
The most glaring difference between the two glamour brands is the level of employment costs. L’Oreal generated nearly $525,000 per employee last year while Shiseido sales-per-employee amounted to roughly $250,000. Although Shiseido employees are about $30,000 less expensive per head, the overall labor effectiveness for the French company is more than 35% better.
I don’t have any insights into why such a disparity exists. Japan has a famously attentive customer service culture that may demand a higher number of sales staff. Perhaps L’Oreal outsources more aspects of their business. Whatever the case, Shiseido will have to dramatically reduce headcount if they are going to reach their stated goal of 7% operating margins.
Judging by 2024 financial results, Shiseido remains overvalued despite its protracted market slump. I used an earnings power valuation method to calculate the value of the business based upon last year’s numbers. I applied a discount rate of 6.12% for capitalization purposes. Debt, 30% of the weighting, costs Shiseido 1.64%. I estimated the cost of equity to be 8.2%, given Japan’s higher default spread and equity risk premium. On this basis, Shiseido has a value of less than 228 billion yen. The result of my equation is more punitive than illustrative – Shiseido book value exceeds 632.4 billion yen.
What happens if the company achieves the sought-after 7% margins? I adjusted the numbers and the market capitalization reaches 988 billion yen, only slightly better than the current market price. Finally, I wondered what could happen with L’Oreal’s margins. “Le Shiseido” is worth about 2.3 trillion yen – or about 150% more than its current value.
I’m pressing the pause button. There is no margin of safety at the current price, and the resuscitation of the Chinese consumer will probably take a few more years. The leadership of Shiseido recognizes the problem, but it’s not clear that the “Action Plan” goes far enough. I’m sure Independent Franchise Partners won’t find the projections sufficient for their return requirements.
Will radical changes come to Shiseido? Japan, Inc. seems serious about unlocking shareholder value. Even beleaguered Estee Lauder (EL) manages an operating margin of 8% excluding impairment and restructuring charges, so the target seems underwhelming. Shiseido has rarely delivered returns on capital in excess of the high single digits – even in the heady days of lockdown makeovers.
An opportunity may arise to own part of a 150-year-old brand which is a staple of the Asian beauty market for what it traded for ten years ago, but it will require much more than an “Action Plan”. Some day, perhaps soon, a slimmed-down Shiseido may eventually beckon from the mirror.
DISCLAIMER
The information provided in this article is based on the opinions of the author after reviewing publicly available press reports and SEC filings. The author makes no representations or warranties as to accuracy of the content provided. This is not investment advice. You should perform your own due diligence before making any investments.
Physics was never boring. At least not when Richard Feynman was teaching. Despite the complexity of his subjects, he kept things simple and fun. Feynman was awarded the 1965 Nobel prize for his work on quantum electrodynamics. His method for learning a topic was to be able to write about it in such a way that a 12 year-old could understand. “Anyone can make a subject complicated but only someone who understands can make it simple,” explained Feynman. That’s why I write down my thoughts, theories and formulas for various investments. To learn. To teach myself.
I fall short of Feynman’s dictum of elegant simplicity on most occasions. Never more so than my recent attempt to explain the valuation of Brookfield Infrastructure Partners (BIP) using the firm’s consolidated financial statements. It’s not entirely my fault. Understanding BIP’s organizational chart practically requires a degree in quantum electrodynamics.
I think BIP management prefers things to be as complicated as possible. BIP is a publicly traded limited partnership. They obfuscate the value of their underlying utility, transport and midstream properties through a web of holding companies and partnerships, most of which are offshore. Buffett would surely file BIP in the “too hard” pile.
BIP is far from a monolithic operating company with a series of divisions. BIP is really a loose confederation of businesses – virtually all of them joint ventures with third parties – that pass cash to limited partners only after everyone else takes their cut. BIP limited partner units trade for nearly three times book value despite only having a claim on about 16% of the equity in the collective companies.
The price is held aloft by a generous 6.23% dividend yield. I concluded that BIP limited partner “equity” is probably just mezzanine debt in masquerade. The company’s allocation of “maintenance capital expenditures” in non-GAAP “adjusted funds from operations” gives investors a flawed belief that dividends are easily supported by operating cash flows.
In short, I am coming around to the thinking of Keith Dalrymple who has produced comprehensive research on the company. He argues that such a holding company structure deserves to trade for book value, and no more. Just like the old Canadian holding company Edper, the Brookfield game is to layer debt at the asset and corporate level and shuffle cash around as needed. Dalrymple’s most recent post explains that BIP is papering over the erosion in net asset value by writing-up the value of illiquid holdings in the accumulated other comprehensive income account.
What about other investment companies? Are they trading above book value? I ran the numbers on some large European holding companies. Unlike BIP, the market capitalization for each company is less than the net value of its assets. In most cases, the discount is greater than 30%.
These are mostly multi-generational wealth vehicles for legacy industrialists which also offer shares to the public. The most well-known company is Exor, the holding company for the Agnelli family of Italy, the pioneering family behind the Fiat empire. Exor holds portions of several public and private companies, most notably Stellantis, Ferrari, CNH Industrial and Philips. No, legacy automakers do not inspire much hope these days. However, I would argue that the assets held by the heirs of the Wallenbergs and their ilk are far superior to the Frankenstein that BIP has stitched together among toll roads in Brazil, Alberta LNG factories, and Indian cell towers.
If the holding companies for some of the world’s leading industrial families trade below net asset value, why should BIP sell for a premium?
Tariff Don’t Like It
I am also not Feynman-qualified to lecture on the topic of tariffs. However, I do believe that in the long run, most countries specialize and benefit from what is known as comparative advantage. You want your Swiss making watches, your Italians making pasta, and your Mexicans making tequila. I wouldn’t drink Swiss tequila. If China is producing steel below cost and dumping it in the US, yes, tariffs should apply. But there’s a reason why Bangladesh and Vietnam produce most of our clothes now. We produced most of the textiles of the world in the 1880s to 1900s. I’d prefer to live in the 21st century, thank you very much.
I am traveling in the low country this week. A visit to Savannah got me wondering about cotton. I imagined that the end of slavery meant that the price of cotton rose dramatically after emancipation. Did higher labor costs translate into higher cotton prices after the Civil War? Could that period of history be an analog for 2025?
The opposite happened. Cotton prices dropped. By a lot. Historian James Volo has a well-written summary. There were a couple of reasons for the decline. One, English textile manufacturers responded to the wartime shortages of the American South by sourcing more cotton from Egypt, Brazil and Africa. Two, the cotton gin made production so efficient that the supply of cotton boomed. In fact, American cotton production kept rising until 1937.
What’s the lesson here? Sudden price adjustments might produce unexpected consequences. Bulgarian pasta could just turn out to be a pretty decent substitute for that pricey penne from Pisa. Robot weaving machines in Cleveland might replace millions of Bangladeshi weavers. But that manufacturing renaissance on the banks of Lake Erie? It may not be coming after all. Three programmers in an office building on the outskirts of Hyderabad may control those looms.
Prices send signals to markets. Producers and consumers shift accordingly. Where they turn their gaze is not known with certainty.
Until next time.
DISCLAIMER
The information provided in this article is based on the opinions of the author after reviewing publicly available press reports and SEC filings. The author makes no representations or warranties as to accuracy of the content provided. This is not investment advice. You should perform your own due diligence before making any investments.