ValueInvestorInsight-Issue 364 PDF

ValueInvestor
October 31, 2012
The Leading Authority on Value Investing

INSIGHT
Critical Path Inside this Issue
FEATURES
Small companies naturally try to move beyond what initially made them a
Investor Insight: Jeffrey Smith
success. It’s after they stumble that Starboard Value often finds opportunity.
Identifying unrecognized value and
F
or a successful activist investor, Jeff INVESTOR INSIGHT the specific steps needed to unlock it
Smith exhibits little of the “us vs. in Office Depot, Progress Software,
them” mentality you might expect. Wausau Paper and Regis. PAGE 2 »
“Management pursuing a different plan Investor Insight: VN Capital
than we propose doesn’t mean they’re Searching well off the beaten path
bad people or malicious,” he says. “It’s a for mispriced value and finding it in
difference of opinion. The good thing is that AirBoss, Ceres, Breeze-Eastern and
shareholders can decide which plan is best Big Rock Brewery. PAGE 9 »
for the company.”
Strategy: Bestinver
Smith’s instincts about what’s right for
How one of Europe’s foremost
companies have proven eminently sound. value investors is navigating today’s
Since launching his Starboard Value LP’s difficult environment. PAGE 16»
activist strategy ten years ago, it has earned
a net annualized 16.2%, vs. 10.2% for the Jeffrey Smith Uncovering Value: Bulldog
Russell 2000. Starboard Value LP What happens when a venerable
Never wanting for good ideas, Smith Investment Focus: Seeks companies in activist investor takes over the reins
which the market’s valuation reflects a loss of one of its targets. PAGE 19 »
today is finding opportunity in such areas
of patience in money-losing growth
as office supplies, paper products, software, initiatives and/or bloated cost structures. Editors’ Letter
semiconductors and hair salons. See page 2 On investors’ preference for bonds
over equities; A timely parable from
Coveting Obscurity Warren Buffett. PAGE 20 »
Investor demand for small, quirky companies has lessened since the financial INVESTMENT HIGHLIGHTS
crisis, say Jim Vanasek and Don Noone – which suits them fine, by the way. INVESTMENT SNAPSHOTS PAGE
I
n discussing the “obscure and mundane” AirBoss of America 11
INVESTOR INSIGHT
companies they own, James Vanasek Big Rock Brewery 14
and Don Noone of VN Capital know Breeze-Eastern 13
they run the risk of listeners’ eyes glazing Ceres Global 12
over. “Let’s just say that talking about Exor 17
rubber compounding and grain elevators Office Depot 4
isn’t naturally as interesting to people as Progress Software 7
Apple or Google,” says Vanasek. Regis 8
There has been nothing boring about Special Opportunities Fund 19
VN Capital’s returns, however, since the
Wausau Paper 6
firm opened for business in mid-2002. Over
that time it has earned a net annualized Other companies in this issue:
11.5%, vs. 6.8% for the Russell 2000. Acerinox, AOL, Escalade, Fiat, Fiat In-
VN Capital With a penchant for companies that dustrial, Firsthand Technology Value,
Don Noone (l), James Vanasek (r)
they expect to own for several years, Imperial Holdings, Industrias Bachoco,
Investment Focus: Seek off-the-beaten-
Vanasek and Noone see undiscovered Integrated Device Technology, Myrexis,
path companies that due to neglect or
complexity trade at prices unrepresentative opportunity today in such eclectic areas as Schindler, SGS, Ship Finance, SurMod-
of their sustainable business prospects. rubber processing, helicopter equipment, ics, Thales, Yungtay Engineering
agricultural services and beer. See page 9
www.valueinvestorinsight.com
I N V E S T O R I N S I G H T : Jeffrey Smith
Investor Insight: Jeffrey Smith

Starboard Value’s Jeffrey Smith, Peter Feld, Mark Mitchell, Gavin Molinelli, Tom Cusack and Jon Sagal describe where
they spend the majority of their research time, how they assess whether an activist “path” is open, how they hedge risks,
and what they think the market is missing in Office Depot, Wausau Paper, Progress Software and Regis Corp.
Most of your portfolio companies fall in of the business, it works well. But when
the “good core business, failing growth it’s unnatural and management is trying to
initiatives” camp. Why is that such fertile “create” the growth, that’s often a prob-
investment ground for you? lem. A private-company owner after 18 to
24 months of getting little traction on a
Jeffrey Smith: If you think about the life- new investment finds it pretty easy to pull
cycle of a small company, it usually ini- the plug – the money is coming out of his
tially succeeds in a relatively small niche or her own wallet and there’s not an ad-
where it delivers unique value and be- equate return on investment. It’s different
comes a market leader. The business inevi- with public companies, particularly when
tably starts to mature – producing strong there is little inside ownership. It’s just eas-
cash flow with a lower growth rate – and ier to perpetuate the hope that growth will Jeffrey Smith
the natural response from management is materialize next quarter or next year than
to take some of the cash generated and to it is to admit the investment may have
Natural Inclination
invest it in new areas of potential growth. been a mistake, reassess the opportunity Just two years into an investment banking
Hopefully these new growth initiatives are and reduce costs. career at Societe Generale, Jeff Smith in
related to the core business and hopefully Integrated Device Technology [IDTI], 1996 got a call from his father asking for
the company can have some competitive a semiconductor company in our port- help. His father’s company, The Fresh Juice
advantage. This pursuit of incremen- folio, is a good example. A substantial Co., had expanded its production capacity
tal growth is exactly what management portion of its revenues and profits come too quickly and needed in short order to find
should be doing. from semiconductor businesses where it new avenues for growth to fill the capacity.
One of two things will happen. Ei- has dominant market shares, high gross
Fairly certain that investment banking
ther the new initiatives work, everyone’s margins and very high operating mar-
wasn’t for him anyway, Smith, then 24,
happy, the stock has a high multiple and gins. However, some of these are mature
joined Fresh Juice as head of strategic
we never find it, or the new growth initia- businesses in relatively mature markets.
development and in less than two years
tives are not working, the market becomes To grow, the company has been investing
played a central role in building an East
disenchanted with the company because in new higher-growth areas with much
Coast wholesale business, merging Fresh
earnings and cash flow are depressed and larger “addressable markets.” That’s actu-
Juice with the wholesale competitor it had
that drives down the stock price. Those ally a fairly common theme for companies
taken on, making two acquisitions that
are the situations we find attractive. in which we invest. They’re not content
significantly expanded national distribution,
Once we’ve identified an attractive having a 40% share of a slowly growing
and then selling the entire company to
situation, we engage with management in $500-million market. Instead, they prefer
Saratoga Beverage.
order to try to get them to rein in spend- to try to capture 1% of a $20-billion mar-
ing on failing growth initiatives, refocus ket. In our experience, it’s more difficult Now CEO of Starboard Value LP and 14
on the good core business, improve cash and takes much longer than companies years into an investment career focused
flow, and put in place a greater level of dis- believe to capture a small market share on activism, Smith considers that early
cipline with respect to return on invested in a massive market, where there’s gener- experience in his father’s business as
capital – all of which is meant to make the ally greater competition from much larger less a wake-up call than it was an af-
stock price go up. players. firmation. “I wouldn’t say my Fresh Juice
In IDT’s case, the company spends ap- Co. experience made me want to be an
Peter Feld: This dynamic plays out regu- proximately 30% of revenue on R&D,
activist investor,” he says, “but it did
larly because of human nature. Most pub- significantly more than most of its com-
highlight my natural inclination. Trying to
lic companies want to provide sharehold- petitors, yet it’s struggled to reinvigorate
clearly see the issues, identify solutions to
ers with compelling growth, and small-cap its revenue growth. We have representa-
fix them and then work within the system to
companies in particular believe they need tives on the board and are working with
get those solutions implemented is exactly
to have even higher growth rates. Again, our fellow board members to apply a
what our kind of investing is all about.”
when this occurs within the natural flow better balance between growth and prof-
October 31, 2012 www.valueinvestorinsight.com Value Investor Insight 2

itability. The company has put out oper- general and administrative costs, to name firms were investors in companies we were
ating-margin targets that are significantly a few. Spending gets so out of line that involved with in the past and they bene-
higher than what it has done historically the company ends up significantly under- fited from our involvement and the value
and that are more in line with its peers. earning. Office Depot [ODP], which we’ll we created.
These are all steps in the right direction. discuss in more detail later, is an example
of this. Where do you focus first in research?
On what size companies do you focus?
How do you generate ideas? PF: Since we often suggest that companies
JS: We mostly focus on companies around refocus on their core business, the major-
$1 billion in market cap. The situations PF: There are two primary sources. One ity of our research time is spent on deter-
that fit our strategy are pervasive among is generating ideas internally, mostly using mining the health and sustainability of
smaller-cap companies, where there’s a variety of investment screens that have that business. We need to fully stress test
a significant focus on growth with less value as a key piece, but we also screen our assumptions on the core business –
discipline on return on invested capital. for financial metrics that may show symp- that’s where something could go wrong if
We also have to own enough stock to be toms of the types of situations we look for. it were going to go wrong.
able to influence management if neces- Next we analyze the company’s exist-
sary, which has historically meant owning On research focus: ing plan compared to ours. We need to
smaller-cap companies. determine if our plan can create signifi-
We often suggest refocusing cantly more value on a risk-adjusted ba-
Does every idea you pursue have an activ- sis than the status quo. If along the way
on a core business, so most
ist agenda? management is able to prove us wrong
of our time is spent on its and succeed with their existing plan, that
JS: We believe every company in our port- health and sustainability. works out well for us too, as value will
folio is undervalued, we have an alterna- significantly increase as their execution
tive plan to unlock value that is within improves.
our control, and we have a path to imple- Say revenues have been flat for the past
ment the plan. By “path” we mean that three years, but operating expenses have How do you judge whether your activist
we believe we could win a proxy contest increased in each of those years. We also path is open?
if it becomes necessary. The overwhelming typically look for companies that are un-
majority of the time a contest isn’t neces- derperforming on any number of profit- PF: This involves an analysis of the com-
sary, either because value is unlocked on ability or productivity measures, against pany’s corporate-governance mechanics.
its own or because management and the peers and against their own history. Be- Where are they incorporated? Do they
board choose to work with us to create cause they’re under-earning, many of the have a staggered board? Is there a dual-
value. To make sure we have the best companies that interest us look expensive class ownership structure or large blocks
chance of success in all situations, howev- based on current numbers, but are actu- of shares which may be problematic?
er, we remain prepared to run a contest to ally undervalued relative to the pro-forma What anti-takeover provisions exist?
replace directors. This way we will either earnings that can be generated if our plan These are just some of the many technical
create value with the company’s coopera- is implemented. items we analyze.
tion or, if the company won’t work with We also find ideas from outside sources In addition, we conduct a more quali-
us, we’re prepared to ask shareholders for such as more traditional investment firms tative analysis of the existing shareholder
support to implement change. that invest in a similar universe. When base. The performance of the stock is a
they find themselves in a problematic in- key barometer of the collective satisfac-
What ideas fall outside the “good core vestment, they typically have only two tion or frustration of shareholders, but
business, failing growth initiative” profile? choices – sell their position or just contin- we also use our experience and contacts
ue to hold and hope. Neither of these are with a large number of investors to gauge
JS: Many of our investments fit that pro- particularly good choices if they feel the the relative difficulty of a potential proxy
file but not all of them. One related type of company is undervalued and underper- contest.
idea we also pursue is when a company is forming. We provide a third option. Share
so focused on growing the top line that it the idea with us, let us do our work on it, How generally does Starboard approach
spends inefficiently without an acceptable and if it fits our criteria maybe we can get valuation?
return on that spend. These inflated costs involved and help to unlock value for the
can be on things like research and devel- benefit of all shareholders. Many of these PF: We develop upside price targets solely
opment, infrastructure, advertising and types of relationships started when these based on pro-forma cash flow and asset

value assuming we are able to implement enormous success for all AOL sharehold- other criteria are no longer met and we do
our alternative plan. Our plan focuses on ers, including us. While the changes so far not currently have a position.
actions that are within the company’s con- have been meaningful, the company has
trol, such as reducing costs, exiting mon- done very few of the hard things around What attracted your attention in office-
ey-losing businesses and selling assets that shrinking its cost base that we thought supply retailer Office Depot?
don’t produce cash flow but have value to were also necessary. But given the value
a buyer. that was unlocked, AOL shareholders JS: There are quite a few things that have
We put equal emphasis on the down- decided to give the board more time to us excited about Office Depot. The compa-
side price measurement. Where could the improve the operational execution, which ny has a hidden asset in its Mexican joint
stock go if our plan is not implemented or has been reflected in the stock price. venture which, we believe, may be worth
if we are not able to gain influence? That [Note: At a recent $35.50, AOL’s shares close to the entire market cap of the com-
can mean putting a historically low mul- have nearly doubled since early April and pany. On top of that, there is $11 billion
tiple on the depressed expected EBITDA. have almost tripled since Starboard’s ini- of annual revenue that we don’t believe is
However, our preference is to buy as close tial purchases.] So while we still have a efficiently managed from a profitability
as possible to some proxy of balance sheet plan to unlock value, at today’s price our standpoint. Operating margins are less
value, such as tangible book value or liq-
uidation value. [Note: In Starboard’s high- INVESTMENT SNAPSHOT
profile engagement with AOL, for exam-
ple, an important element of the potential Office Depot
(NYSE: ODP) Valuation Metrics
downside protection came from the esti- (@10/30/12):
mated value of the company’s intellectual- Business: Provider of office supplies and
services sold through company-owned ODP Russell 2000
property portfolio.] In general, our target Trailing P/E 8.4 31.3
stores and online, as well as to business
upside should be a multiple of our target customers through an in-house sales force. Forward P/E Est. 29.9 15.3
downside.
Share Information Largest Institutional Owners
(@10/30/12): (@6/30/12):
JS: The downside price is also extremely
Price 2.39 Company % Owned
important in how we size positions. We 52-Week Range 1.51 - 3.81 Thornburg Inv Mgmt 6.9%
usually own 15 to 25 companies at a Dividend Yield 0.0% Putnam Inv Mgmt 6.9%
time, roughly half of which are lead po- Market Cap $681.5 million BlackRock 6.2%
sitions where we’ve filed a 13D, and the Vanguard Group 5.2%
Financials (TTM):
rest are what we call seed positions, where AllianceBernstein 4.9%
Revenue $11.19 billion
we have a plan and a path laid out, but Operating Profit Margin 1.0% Short Interest (as of 10/15/12):
the valuation isn’t quite what we want Net Profit Margin 1.0% Shares Short/Float 15.9%
to see before owning a full position. We
limit each position to a maximum risk, ODP PRICE HISTORY
1010 10
measured in basis points, to our downside Clo
price. In other words, if a stock went to its 88 8
downside price, we don’t expect the fund
to lose any more than the maximum risk 66 6
for that particular position.
44 4
You’ve taken big profits on your AOL
22 2
stake. Would you say that the activist play
there is over? 00 0
2010 2011 2012
JS: Due at least in part to our pressure,
suggestions and proxy contest, AOL suc- THE BOTTOM LINE
cessfully sold a portion of its intellectual The market has weighed in unfavorably on the company’s performance, says Jeff Smith,
property for over $1 billion, committed to who has proposed a detailed plan for improving profitability to at least near peer levels.
improve the profitability of the display-ad- The stock today trades at an EV/EBITDA multiple, assuming his low to high cases for
vertising business, and said it would return annual EBITDA improvement occur, of 1.3x on the low case and 0.7x on the high.
$1 billion of cash to shareholders. This
Sources: Company reports, other publicly available information
unlocked a great deal of value and was an

than 1%, while the margins of the largest several steps to get its performance more EV/EBITDA multiple is 1.3x on our low
competitor, Staples, are above 6%. Some in line with the competition. Those are case, and only 0.7x on our high case.
argue that’s a function of the size dispar- just some of our ideas.
ity between Staples and Office Depot. But Is the big risk that secular challenges in
OfficeMax is the smallest competitor and The company’s response? the office-supply market, primarily from
it’s significantly more profitable than Of- online competition, overwhelm everything
fice Depot. We think there are significant JS: The company has been very cordial else you’re counting on here?
ways to improve profitability at Office and professional, but we really don’t
Depot based on changes fully within the know whether they’ll be willing to make GM: The office-supply-store industry has
control of management and the board. the changes we’ve proposed. We are pre- been challenged by online competition.
pared to work with them or to appeal to We believe the current valuation more
Describe the basic elements of the plan. the shareholders to ensure the appropriate than fully discounts the threats from the
changes are made. outside as long as the company begins to
Gavin Molinelli: One important compo- follow an alternative plan. We think la-
nent is getting costs in line with the busi- menting about the online competition has
On ODP Next steps:
ness reality and with competition. From gone too far. The service level and qual-
2007 to 2011 the total number of stores We’re fully cognizant of our ity you can provide by having a physical
declined by 108 and annual revenue de- store can be a huge advantage over online
clined by $4 billion, but general and ad-
choice as we approach the competitors. The company needs to start
ministrative expenses actually increased. board-of-directors nomina- playing to its strengths while running the
Advertising expenses as a percentage of business as effectively and efficiently as
tion deadline in January.
revenue are significantly higher than they possible.
are at both Staples and OfficeMax, and
the advertising-expense ratio has been The stock popped after Starboard’s inter- Next steps?
increasing. So Office Depot spends at the est became public, but at a recent $2.40 is
highest rate but has the lowest return on still down 75% from its post-crash high. JS: We’ll continue to have conversations
that spend. What do you think it’s more reasonably with the company. As those conversations
We believe the company can dramati- worth? continue and time passes, we’re fully cog-
cally improve the economics of its North nizant of our choices as we approach the
American stores by downsizing to smaller GM: We try to avoid talking publicly nomination deadline in January. Office
store formats. Management has said that about what we think a company may be Depot has a single-class board, which pro-
the new 5,000-square-foot format it has worth. Our target prices are quite conser- vides full flexibility for any shareholder
tested can retain up to 90% of total store vative, in that they’re based only on what looking to promote board changes should
sales from the existing 24,000-square- we believe the financials would look like if they be necessary.
foot-format, while at the same time signif- our plan is implemented. We discuss why
icantly reducing occupancy costs, improv- we believe the stock is undervalued and Describe the public case you’ve made for
ing labor utility, and reducing inventory how the operational performance can be changes at Wausau Paper [WPP].
investment. With roughly 45% of North significantly improved through the execu-
American leases up in the next three years tion of an alternative plan for the busi- Jon Sagal: Wausau is a paper-products
– and 67% up within the next five – that’s ness. Shareholders can then determine the manufacturer operating in two segments.
a huge opportunity. full value of the stock based on their own The tissue business makes paper towels
We have also defined a number of op- assumptions. and toilet paper for the away-from-home
erating initiatives to improve profitability. In Office Depot’s case, we’ve outlined a market, while the paper segment makes
The company can significantly increase low case and high case, assuming annual specialty and technical papers for a num-
the mix of higher-margin services – such EBITDA improvement of $275 million to ber of applications, from industrial tape
as copy and print services, security solu- $540 million. This range would indicate backings to fire-resistant paper to micro-
tions and shipping – in its North Ameri- a doubling or almost tripling of current wave-popcorn bags.
can retail division. It can improve gross EBITDA. We’ve also assumed that Office The tissue business is an excellent ra-
margins through more direct sourcing of Depot de Mexico, the 50/50 joint venture zor/razor blade type of business. Wausau
private-label products. It can lower the between Office Depot and publicly traded has developed very strong distributor re-
number of SKUs to reduce inventory and Grupo Gigante, is a non-core asset with lationships, and once a distributor has its
procurement expenses. Its Business Solu- substantial hidden value of $500 to $700 dispensers in the office-building or school
tions division in North America can take million. At today’s price, the pro-forma bathroom, they don’t get replaced easily

or quickly. Given the required number and if any, profits on a significant portion of a much lower marginal cost of operation.
frequency of deliveries, market shares tend overall revenues. It’s also flexible in producing different tis-
to be very high in any given geographic re- sue qualities, including new products that
gion. Wausau has also built a strong pres- Wausau is making a huge capital invest- should allow Wausau to compete in new,
ence in the green, sustainable market with ment in its tissue business. Have you been higher-end segments of the market with a
its 100%-recycled products. As a result of on board with that? 100%-recycled premium product.
all of this, it consistently earns high mar-
gins – 20% EBITDA margins or better – Jon Sagal: This is a $425 million market- How are you looking at valuation with
and has shown better growth than most cap company and the plant it is about to the shares trading today at around $8.65?
other tissue manufacturers. complete is the centerpiece of a $220 mil-
The company has exited part of its lion investment – that’s almost $4.50 per Jon Sagal: The stock still trades at a mul-
paper business – the more commoditized share in capital spending for a stock cur- tiple that is more reflective of a commod-
printing and writing lines – since we first rently trading around $8.50. That said, ity paper business than it is a best-in-class
got involved. The remaining technical- the new plant will use less raw material specialty-tissue business. Other tissue
paper business generates only minimal, and energy for every ton of output and has businesses trade at 7-8x EBITDA and
Wausau’s is among the best tissue assets
INVESTMENT SNAPSHOT out there. On trailing 12-month numbers
– not even our pro-forma numbers – the
Wausau Paper stock today trades at only 5x enterprise
(NYSE: WPP) Valuation Metrics
(@10/30/12):
value to EBITDA.
Business: Producer of specialty papers for
industrial, commercial and consumer use, WPP Russell 2000
Trailing P/E n/a 31.3 PF: While we can’t say a lot about our
as well as a broad line of “away from home”
towel and tissue products. Forward P/E Est. 20.5 15.3 current interactions with management
and the board, one item of note is that we
(@10/30/12): (@6/30/12): recently amended our 13D to disclose that
Price 8.63 we’d increased our ownership here to over
Company % Owned 14% of the shares outstanding.
52-Week Range 6.85 - 9.92 Starboard Value 9.3%
Dividend Yield 1.4% Dimensional Fund Adv 5.4%
Market Cap $425.6 million Wilmington Trust 5.4% Is Progress Software [PRGS] another refo-
T. Rowe Price 5.3% cus-on-the-core-business idea?
Financials (TTM):
Revenue $1.05 billion Vanguard Group 5.3%
Operating Profit Margin 3.1% Short Interest (as of 10/15/12): Tom Cusack: Yes. The company’s core
Net Profit Margin (-2.4%) Shares Short/Float 3.9% business is a product called OpenEdge,
which is an application development plat-
WPP PRICE HISTORY form that is used by independent software
12
12 12
vendors to develop software. The custom-
Adj Close
er base is more than 1,500 independent
1010 10 vendors, which pay Progress a percentage
of all license and maintenance revenue
88 8 they earn on products they’ve developed
over decades using OpenEdge. It’s costly
66 6 and difficult for existing customers to re-
move OpenEdge from their products, so
4 4 this business is extremely sticky, has very
4
2010 2011 2012 high margins and generates a stream of at-
tractive cash flow for the company.
THE BOTTOM LINE As growth in the OpenEdge business
The company’s stock trades at a multiple reflective of a commodity paper business rather began to slow, Progress began using the
than of the specialty tissue business on which Starboard Value believes Wausau should cash flow from it to make acquisitions in
focus. On trailing-12-month numbers, says Jon Sagal, the shares trade at an EV/EBITDA high-growth software areas such as Busi-
multiple of only 5x, while more-comparable tissue businesses trade at closer to 7-8x.
ness Process Management [BPM] and
Complex Event Processing [CEP]. Most of
these acquisitions were unrelated to their

core business and had limited synergies Earlier this year, in April, the com- Does the just-announced departure of
with their other products. So at the time pany announced a new strategic plan to CEO Jay Bhatt, after less than a year on
we got involved last year, there were about increase shareholder value that was very the job, disrupt things?
15 different product lines spread across much in line with our and other share-
three reporting segments and our view holders’ suggestions. They agreed to di- JS: The stock price went down 15% on
was that the company was suffering from vest 10 non-core product lines, committed the news because the market fears the un-
a serious lack of operational focus. Many by fiscal 2013 to a 35% operating margin known. The risk at that point was execu-
of the acquired businesses were growing target – up from today’s 10% – and an- tion, and the individual who was supposed
revenue 20-30% per year but were losing nounced a plan to buy back $350 million to execute left. Jay said he was leaving to
money, obscuring the value of the core worth of stock, which is about 30% of the take his dream job, which turned out to
OpenEdge business. We asked the com- float. Once that restructuring is complete be CEO of the private education-software
pany to streamline product lines, reduce – the company has already announced the company Blackboard. We don’t believe
excess costs and consider separating the sale of 80% of its non-core businesses – this changes the company’s resolve to go
money-losing growth businesses from the we expect Progress to be a much more forward with its restructuring plan.
mature core business. profitable company.
Now at $19.30, how inexpensive do you
INVESTMENT SNAPSHOT consider Progress shares?
Progress Software TC: The stock trades at less than 4.5x

(Nasdaq: PRGS) Valuation Metrics what we believe EBITDA should be over
(@10/30/12):
Business: Develops and markets systems the next year or two. This excludes the
used by commercial and governmental PRGS Russell 2000
Trailing P/E 55.5 31.3 proceeds from the non-core assets that
customers worldwide for the development,
deployment and integration of software. Forward P/E Est. 14.7 15.3 have not yet been sold, so if you include
the estimated proceeds for those, the mul-
Share Information Largest Institutional Owners tiple is even lower. We think 4.5x EBITDA
(@10/30/12): (@6/30/12):
for an extremely stable business, with high
Price 19.30 Company % Owned
52-Week Range 17.01 - 24.76 recurring revenue and the potential to
T. Rowe Price 7.4% generate 35% or higher EBITDA margins,
Dividend Yield 0.0% Starboard Value 7.2%
Market Cap $1.23 billion represents a very compelling value. [Note:
Fidelity Mgmt & Research 6.4%
Perkins Inv Mgmt 6.0% The EV/EBITDA multiple for comparable
Financials (TTM):
Praesidium Inv Mgmt 5.7% software firms today is 6-8x.]
Revenue $484.4 million
Operating Profit Margin 12.7% Short Interest (as of 10/15/12):
Net Profit Margin 4.7% Shares Short/Float 2.1% How much further does your engagement
with hair-salon operator Regis [RGS] have
PRGS PRICE HISTORY to play out?
35
35 35
Adj Close
JS: For Regis, we concluded the company’s
30
30 30 core North American salon business was
capable of generating consistent free cash
25
25 25 flow and a high return on capital, but the
market wasn’t recognizing it because there
20
20
20 was a bloated cost structure and a variety
of non-core businesses obscuring the value
1515 15 of the core business. We won a proxy con-
2010 2011 2012 test and got three directors elected to the
board in October of last year.
THE BOTTOM LINE In our original plan, we identified four
The company’s announced strategic overhaul involving the divestiture of product lines assets that we recommended selling as
and setting of new profitability goals is sound, says Tom Cusack, so the story now rests well as roughly $100 million in annual
on execution. On what he believes the company can earn within the next year or two, the cost cuts. Two of the non-core businesses
stock trades at a 4.5x EV/EBITDA multiple, far below software-company peers. have been sold, the Hair Club for Men
and Women hair-restoration centers – the
deal for which is not yet closed – and a

INVESTMENT SNAPSHOT is all just good service execution and it

needs to be put in place in order for same-
Regis Corp. store sales to stabilize and start growing
(NYSE: RGS) Valuation Metrics again. The company has a great deal of
(@10/30/12):
Business: Owns, operates and franchises operating leverage, which should produce
more than 12,500 hair-care salons serving RGS Russell 2000 tremendous shareholder value when the
men, women and children; brands include Trailing P/E n/a 31.3
execution improves.
Supercuts, SmartStyle and Cost Cutters. Forward P/E Est. 17.6 15.3
Share Information Largest Institutional Owners You recently sold out of your position in
(@10/30/12): (@6/30/12):
healthcare company SurModics [SRDX].
Price 16.00 Company % Owned Another happy story, but why sell now?
52-Week Range 15.02 - 19.59 Fidelity Mgmt & Research 11.0%
Dividend Yield 1.5% Birch Run Capital 10.4%
Market Cap $916.5 million JS: Our plan for SurModics was relatively
Dimensional Fund Adv 7.7% simple: sell the money-losing pharmaceu-
Financials (TTM): Robeco Inv Mgmt 6.5%
tical business and re-focus on the excellent
Revenue $2.25 billion FranklinTempleton 6.1%
core business selling coatings for catheters
Operating Profit Margin 4.6% Short Interest (as of 10/15/12):
and other medical devices. The company
Net Profit Margin (-4.2%) Shares Short/Float 21.1%
was amenable to our plan, allowed us to
RGS PRICE HISTORY join the board and hired a banker to sell
25
25 25 off the
Adjpharmaceutical
Close business. After that
business was sold, operating margins im-
proved to 35% from less than 10%. Why
20
20 20 sell now? The stock is currently almost
twice where it was when we entered and
the company has made the changes we
1515 15
had set out in our plan.
One could argue that sentiment toward

1010 10
2010 2011 2012 activist investors is as positive as it’s ever
been. Why do you think that is?
THE BOTTOM LINE
Jeff Smith believes the company is taking the steps necessary to refocus on its core JS: Shareholders are becoming more in-
North American salon business and he is “very supportive” of the new CEO’s efforts to terested in how they can create alpha in
improve the customer experience. Given the company’s operating leverage, a return to their portfolios and are happy to support
same-store sales growth should produce “tremendous” shareholder value, he says. other shareholders whose interests are di-
rectly aligned with theirs to create positive
change at companies. There is growing
sentiment that a shareholder perspective
minority ownership stake in Provalliance, At $16, the stock is back to where it was in the boardroom is helpful, which was
a French salon chain. That leaves two as- when you won the proxy contest a year not the case 25 years ago. I’d like to think
sets remaining that we consider non-core, ago. How are you looking at valuation? we’ve moved past the corporate-raider
a U.K. salon business and a 50% interest phase and that most activism today is
in a chain of cosmetology schools called JS: It comes down to how successfully the done professionally with the interests of
Empire Education Group. operational and efficiency initiatives are all shareholders in mind.
The bulk of the story now is about executed. Dan will be active both on the Companies have also increasingly real-
execution. We’re very supportive of the cost side as well as on improving the in-sa- ized how unproductive it is to resist share-
new CEO, Dan Hanrahan, who joined lon experience, which had been neglected. holder input. When activists show up,
the company in July from Royal Carib- Stylists were trained on how to cut hair, management for the most part behaves re-
bean’s Celebrity Cruises, where he was but not on how to treat their customers as sponsibly and respectfully. That results in
CEO. Dan had been successful in turning guests – how to greet them, the right ques- healthy, constructive dialogue about how
around Celebrity Cruises by significantly tions to ask to make sure they’re happy, a company should operate. That type of
improving the service experience in order how to follow up and improve the chances dialogue is absolutely in the best interest
to drive an increase in return rates. they come back for their next haircut. This of all shareholders. VII

I N V E S T O R I N S I G H T : VN Capital
Investor Insight: VN Capital

James Vanasek and Don Noone of VN Capital explain how they unearth ideas that are typically well out of plain sight,
what virtues they see in portfolio inactivity, the lesson they learned from getting frustrated by management, and why they
see unrecognized value in AirBoss of America, Breeze-Eastern, Big Rock Brewery and Ceres Global Ag Corp.
Your target company typically operates – when in fact the business model is
well off the beaten path. Can you gener- primarily based on long-term contracts,
alize about the companies and businesses and the company has diversified, with
you find most interesting? 40% of revenues coming from the leasing
of offshore drilling rigs. Finally, for rea-
James Vanasek: We focus primarily on sons we don’t understand, people seem to
companies in the U.S. and Canada with look at the large share ownership in the
market caps of $500 million or less and company of John Fredriksen, a Norwei-
that operate in odd-ballish kinds of busi- gian billionaire with a long history in the
nesses where they have strong positions tanker business, as a negative. We actually
in relatively small niches. Investors run- think he has an impeccable record of do-
ning larger funds can’t put enough money ing right by all shareholders and think his Don Noone, James Vanasek
to work in them. Wall Street tends to ig- association with the company gives it ac-
Serendipity over Screens
nore them because they have good bal- cess to investment opportunities at a low
ance sheets and cash flow and don’t need point in the cycle. It’s a safe bet that most viewers of reality
investment-banking services. Our basic What’s representative here of our typical show Man vs. Wild, in which the show’s
premise is that there’s a higher likelihood holding is that some level of misunder- star is dropped into the wild to fend for
these types of companies will be mispriced. standing is conspiring to keep the stock himself, don’t come away with investment
Sometimes obscurity alone is enough from trading at what we think is full ideas. But as the protagonist was hoisted
for the stocks of such companies to be un- value. As Jim said, that may result from to safety by helicopter, VN Capital’s James
dervalued, but there’s often also something neglect, or from time horizon, but it can Vanasek wondered if making the equip-
else going on. Occasionally the broader be even more compelling when our view ment that lifted people out of danger might
industry is under pressure for cyclical rea- is that the market’s fundamental analysis be a good business. One thing led to an-
sons or due to some exogenous event, like is just wrong. other and he’d found a new core position
a regulatory change. The company itself – a firm called Breeze-Eastern that made
may also be undergoing a restructuring Ship Finance is at more than $1 billion in just such equipment – for his portfolio.
or building a new business, both of which market cap, but has the average company
may take more effort to understand and in your portfolio gotten even smaller since In seeking out quirky small-cap ideas, Va-
require more patience than the small-cap we last spoke [VII, April 30, 2008]? nasek and partner Don Noone rely more
manager with 150 names can muster. on serendipity than computer screens.
JV: We haven’t consciously decided to pur- “There’s nothing systematic we can do to
You’ve owned oil-tanker and drilling-rig sue smaller companies, but since the finan- find, say, a new idea every three weeks,”
lessor Ship Finance International [SFL] cial crisis we’ve noticed more risk aver- he says. For another recent idea, Vanasek
since 2004. What about it has kept your sion among investors when it comes to would have ignored a news item on Ce-
interest? less-liquid smaller-cap names. For almost res Global Ag Corp.’s purchase of grain
anything under $200 million in market elevators, except that some of the el-
Don Noone: There are three fundamental cap, the number of people willing to invest evators had been separated from malting
reasons we think Ship Finance is misunder- dries up fairly dramatically, so it’s no businesses, which he’d found interesting
stood and mispriced. The first is that it has surprise we’re finding better opportunities years earlier in researching craft beer. That
this crazy lease-finance accounting that is at that size. prompted him to look at grain elevators,
difficult to understand and distorts share- We saw a graph recently showing how whose economics had similarities with the
holder equity, cash flow and net income aggregate hedge fund assets had shifted to- cement business, in which he’d invested
– throwing off all the high-level metrics a ward large-cap stocks. Now close to 50% successfully in the past. “You don’t know
stock analyst typically uses. The second of all assets are in market caps of more when enough things will pull together that
is that it’s treated as a high-risk business than $10 billion, up from around 35% in say, ‘Here’s an idea,’” he says, “but if you
heavily subject to spot tanker-lease prices 2002. Small caps, defined as less than $2
uncover enough rocks, it does happen.”
– which are currently cyclically depressed billion, went over the same period from

nearly 30% of assets to closer to 15%. there are some good little companies that Did the crisis prompt any changes in how
It’s safe to assume that shift is even more supply products to the gaming industry you do things?
pronounced away from the smallest-cap that have been worth a look.
stocks, which is good for us. JV: It really hasn’t. We’ve tried to be very
You’ve said your portfolio management at conservative both in how we run our
You’ve described your idea generation as times in recent years has been character- management company and how we run
much more organic than systematic [see ized by “conspicuous inactivity.” Is that a our fund, which was certainly vindicated
box, p. 10]. Is there any process to how habit, or a reflection of the environment? as once-hot hedge funds crashed and
you flag potential ideas? burned after the crisis. It’s common in
DN: It’s both. We’re constitutionally set this business for managers who have had
JV: We don’t find screening helpful, up to be inactive, following the War- some success to develop an outsized view
primarily because our type of company ren Buffett idea that you should always of their actual skill. One benefit of our
may have less accessible public data, which judge how you’re doing in any given year partnership is that we keep each other
means it won’t show up in a standard relative to if you’d done nothing. As long grounded so that doesn’t happen.
database or that the data for it will be as we’ve made good decisions and our
incorrect or out of date. investment cases are intact, that creates a DN: I also don’t think you can underesti-
We do spend a fair amount of time main- mate the importance of having an inves-
taining a list of companies with quirky, On inactivity: tor base that allows you to stick to your
odd businesses that we like and market strategy. We were down more than 40%
caps under $500 million. Most of the We follow Warren Buffett’s in 2008, but our investors knew what we
time they’re fairly valued or overvalued, owned and why we owned it and were
idea that you should always
but we’ve programmed our Bloomberg confident we’d react to the selloff in a
to alert us if something happens and the judge how you’re doing rela- way that would benefit the portfolio in the
valuation drops to a pre-defined level at tive to if you’d done nothing. long run. We wouldn’t have been able to
which we’d want to look at it. come back as strongly as we did in 2009
It’s kind of a bizarre conversation to and 2010 without that confidence.
have, but we actively discuss what isn’t bias for inactivity. We can go long stretch-
being talked about. Maybe an industry es without adding a new name to the port- Some managers responded to the crisis
is at a low point in its cycle, where our folio. Our latest addition was AirBoss of by running less-concentrated portfolios,
favorite company would be one that is America [BOS:CN] this year, which was but you still own around 10 positions at
still making money and looking to expand our first new name since 2010. a time. Why?
while competitors are losing money and As the financial crisis hit, we also made
retrenching. If a commodity is trading at a an active decision to be more inactive. Our JV: Our investors hire us to manage a
multi-year low, we’ll look at the producers basic view was that the crisis was more of concentrated portfolio of obscure small
of the commodity who may be suffering. a financial panic than a true crumbling of companies. They don’t need us to diversify
If a commodity is at an all-time high, we’ll the foundations of the global economy. So for them. We’re going to have volatility
look at companies that use the commodity we looked at our portfolio and concluded in our returns, but we’re clearly of the
as a raw material and are getting hurt as that if you had to run and hide while the mind that concentrating on a small number
a result. This all becomes a starting point panic raged, where would you go? We of ideas that we know inside and out is
and then we wander around from there. had a big position in a beer company in one of the best ways to have a shot at
Canada, Big Rock Brewery [BR:CN], and outperforming the market over time.
Give an example of where your counter- Canadians drink a lot of beer. We owned I would add that the stocks we own,
cyclical bent is pointing you today? a chicken company in Mexico, Indus- even though they’re small and less liquid,
trias Bachoco [IBA], and Mexicans eat a don’t gyrate that much in price. Ship
JV: We’ve been thinking about the casino lot of chicken. Even with Ship Finance, Finance can be an exception because it’s
business, which was hit hard by the finan- while oil demand is variable, the demand treated as more cyclical than we think
cial crisis and is far from having recovered. for the transportation and drilling of it is it really is, but most of our companies
If you’re a supplier to the North American fairly steady. We concluded we had the are just kind of plodding along in niche
gaming industry, you’re still looking at a type of portfolio you would want to run markets where we put a premium on high
fairly bleak demand outlook as few new to, so other than selling off a couple hold- and stable market shares.
casinos are being built and existing ones ings that were extremely economically
are stretching out replacement cycles. We sensitive, we mostly just hunkered down DN: Industrias Bachoco, for instance, is
haven’t made any conclusions yet, but with what we had. in a cyclical business, but its stock price

doesn’t move all over the place because mousetrap in CBRN protective gear. This To the extent the two businesses are
it just keeps executing, chunking out a business today generates roughly the same cyclical, where are we in the cycles?
consistent return on equity and adding a level of annual operating earnings as the
point or two of market share every year. compounding business, around $11 mil- DN: China’s slowing down and the impact
You never know how long you’ll own lion, on about one-third of the revenues. that’s had on the mining business has hurt
something, but I could see this in our port- One thing that sealed it for us was them. At the same time, sales to military
folio five or ten years from now as the com- spending time with management. We’re customers are also in what we expect to
pany continues to expand its product and sitting in this converted house and they’re be a temporary down cycle. Both of those
geographic footprint. It wouldn’t at all sur- describing how the company got started things have put pressure on the stock.
prise us to see it mentioned up there with after buying a tire plant from Uniroyal
Tyson Foods or Pilgrim’s Pride one day. for $1, and then signing up Uniroyal as With the shares trading today at C$4.55,
its first compounding customer. They got how are you looking at valuation?
AirBoss of America would seem to qualify into the CBRN business initially by tak-
as the type of “obscure and mundane” ing over a government testing lab, beating DN: Net income last year, which we con-
company on which you focus. Why is it a out much bigger defense-company suitors sider a modestly good year, was C$13 mil-
good investment today? because they played up the fact that they lion, while free cash flow was more than
were Canadian and had extensive rubber C$22 million. At today’s market value
DN: The company’s headquarters is in the knowledge. We like that kind of contrarian then, the stock on trailing numbers goes
middle of nowhere in northern Ontario, nature and scrappiness. for an 8x P/E and less than 5x cash flow.
consisting of a few guys set up in the con-
INVESTMENT SNAPSHOT
verted project house of a new develop-
ment that ran into financial trouble. But AirBoss of America
it’s a substantial business, the biggest part (Toronto: BOS:CN)
of which is in rubber compounding, where Business: Develops, manufactures and Financials (TTM):
it’s the second-largest player in North sells rubber compounds as well as specialty Revenue $271.4 million
America. They basically take different rub- rubber-based protective gear used in de- EBITDA Margin 6.6%
bers and mix them in these giant kettles to fense and industrial applications. Net Profit Margin 3.0%
produce compound rubbers that meet cus- Share Information Valuation Metrics
tomer specifications for things like hard- (@10/30/12, Exchange Rate: $1 = C$1.00): (Current Price vs. TTM):
ness, flexibility and weather protection. Price C$4.55 BOS:CN Russell 2000
It’s not a great business because it can be 52-Week Range C$4.20 – C$5.92 P/E 8.0 31.3
Dividend Yield 4.4%
cyclical and low-margin, but it’s also rela-
Market Cap C$104.6 million
tively insulated because there aren’t many
companies that have the expertise to do BOS PRICE HISTORY
this and the capital costs to get started 9
6000 9
are high. The primary customers are tire Ad
manufacturers and equipment suppliers to 8
5000 8
the mining and coal industries.
7
4000 7
JV: The other main business, in which Air- 6

6
3000
Boss is the world’s largest supplier, is pro-
ducing protective boots and gloves for use 5
2000
5
in dealing with chemical, biological, ra-
diological and nuclear [CBRN] contami- 4 4
1000
2010 2011 2012
nation. Most of the customers for this type
of protective gear are military and there’s
an attractive replacement profile, as the THE BOTTOM LINE
gear has to be replaced once it’s been used Worried about cyclical pressures in the company’s traditional rubber-compounding busi-
in an actual contamination. We’re skepti- ness, the market doesn’t appear to appreciate the higher growth and profitability of its
increasingly important protective-gear business, says Don Noone. At only 12x “a good
cal of synergies, but this is a case where the
year’s” C$15 million in profit, he says, the company’s shares would trade at around C$8.
company applied its sophisticated knowl-
edge of rubber properties and compound- Sources: Company reports, other publicly available information
ing to make what appears to be a better

We try not to make overly aggressive plants because it’s a lot cheaper to buy ce- Ceres had around C$40 million in cash
valuation assumptions, but we don’t be- ment from the guy who’s 10 miles away and run-off investments. It owned C$160
lieve a company like this should trade for than 200 miles away. The same thing million worth of grain in its elevators,
8x earnings. It should reliably generate applies with grain elevators, but kind of against which it had C$80 million of debt.
C$10-15 million in annual profit, earn- in reverse. If you’re a farmer, it’s a lot At the fund level there was also another
ing an 8-10% return on assets and a 15% cheaper and easier to transport your grain C$40 million in debt. So for less than C$5
return on equity. You could see earnings to the elevator that is very close than one million at today’s price, you’re getting the
spike as it wins big CBRN contracts, and that’s far away. In these situations it comes grain-elevator assets and the profits they
the overall profitability profile should down to what you pay for the fixed as- generate. It recent years those profits have
improve as the protective-gear business sets – the lower the price, the higher your been as high as C$12 million, with an av-
accounts for a greater share of total rev- return. In Ceres’ case, we believe we were erage of around C$8 million. Discount
enues. While you could argue all that’s able to buy those fixed assets for free. that average annuity at 10%, and that’s
worth at least a market multiple, even at C$80 million in value right there.
12x a good year’s C$15 million in profit, Walk through that math given today’s
the shares would be around C$8. C$5.80 share price. Is there any reason to be more optimistic
about the elevator business?
JV: We also believe we’re getting free op- JV: The current market cap is around
tion value, in the unfortunate event that C$83 million. Using year-end March JV: One significant thing happened in the
a large-scale accident or attack increased numbers, reflecting a full harvest season, third quarter of this year, which is that the
demand for protective gear. As the pri-
INVESTMENT SNAPSHOT
mary supplier out there, AirBoss would
substantially benefit. Ceres Global Ag Corp.
(Toronto: CRP:CN)
So why is a Canadian company in the rub- Business: Provider of agricultural grain stor- Financials (FY ending March 2012):
ber business named AirBoss of America? age and supply-chain management services Revenue C$184.4 million
through a network of storage facilities in the Operating Profit Margin 2.7%
DN: I actually have no idea. We said the northern United States and Canada. Net Profit Margin (-0.7%)
companies we invest in tend to be quirky. Share Information Valuation Metrics
(@10/30/12, Exchange Rate: $1 = C$1.00): (Current Price vs. TTM):
A perfect transition to Ceres Global Ag Price C$5.78 CRP:CN Russell 2000
[CRP:CN], a closed-end fund on its way 52-Week Range C$4.20 – C$7.24 P/E n/a 31.3
Dividend Yield 0.0%
to becoming a grain-elevator company.
JV: The backstory here is that Ceres was CRP PRICE HISTORY
formed in late 2007 by Front Street Capital 10
6000 10
to invest in the then-hot agricultural com- Adj
9
5000 9
modity boom. Within a year those mar-
kets crashed as the recession hit and man- 8
4000
8
agement shifted focus to hard assets with 7
7
3000
the purchase of a dozen privately held
grain elevators from a Minnesota-based 6
2000
6
hedge fund manager, Whitebox Advisors. 5 5
1000
In 2011, Ceres announced it was going to
run off its investment portfolio and rein- 40 4
2010 2011 2012
vest the cash into similar operating assets.
As we studied grain elevators, we
concluded the business was similar to that THE BOTTOM LINE
of the cement business, where we’ve in- As the company transitions from a failed strategy as a closed-end investment fund, the
market is almost entirely ignoring the value of what will be its ongoing business of manag-
vested with some success before. There are
ing grain elevators, says Jim Vanasek. If that business ultimately earns a 10x multiple on
high fixed-cost assets, with a good that is
its average profit in recent years, he says, the share price would nearly double.
fairly low in value but bulky and expensive
to transport. That allows cement compa- Sources: Company reports, other publicly available information
nies to have natural monopolies near their

Canadian Wheat Board officially lost its resulted in the two biggest shareholders, We think that’s about to change. The
monopoly to purchase Canadian wheat. Tinicum Capital and Wynnefield Capital, company has consolidated its manufactur-
That opens up a significant new base of controlling more than 50% of the shares. ing into new facilities and has spent most
potential customers for Ceres’s assets, They brought in a new management team of the upfront engineering costs for new
many of which are located in the U.S near to sort out the mess and go back to basics. projects coming on stream over the next
the Canadian border. The business will decade. Signed new projects alone will add
continue to fluctuate somewhat based DN: While all this is getting underway, $10 to $20 million in annual revenues, de-
on weather and crop yields, but the new the financial crisis hits. The company was pending on the year, to a current revenue
demand should have a positive long-term also saddled with large legacy contracts base of around $80 million.
impact on both capacity and pricing. for supplying hooks and winches in cargo
Another upside we see here is that as airplanes that left them holding the bag How do you see that translating into share
the non-elevator portfolio is sold off, there on significant engineering-cost overruns. upside from today’s $8 price.
will be no need for Ceres to maintain its So while the turnaround has been going
closed-end fund structure. Savings related on for some time now, the financial results DN: The core business in the past has
to that could add another C$2 million or haven’t really shown it. earned as much as $15 million in net prof-
so annually to the bottom line.
INVESTMENT SNAPSHOT
Describe the turnaround you’re betting on
at Breeze-Eastern [BZC]. Breeze-Eastern
(NYSE: BZC) Valuation Metrics
(@10/30/12):
Business: Manufacture, sale and servicing
JV: The company’s core business is making BZC Russell 2000
of hoists, winches, hooks and other lifting
hoist and hook equipment used in and restraining devices utilized primarily in Trailing P/E 33.1 31.3
helicopter search-and-rescue missions. commercial and military aviation markets. Forward P/E Est. n/a 15.3
It has roughly 60% of that global
market, in which it operates basically in a (@10/30/12): (@6/30/12):
duopoly with a division of Goodrich Corp. Price 8.00
The customer base is primarily military, Company % Owned
52-Week Range 5.77 - 9.86 Tinicum Capital 34.8%
though there are commercial end-user Dividend Yield 0.0% Wynnefield Capital 22.3%
applications as well. Market Cap $75.9 million T. Rowe Price 6.7%
This is equipment that absolutely has Dimensional Fund Adv 3.5%
Financials (TTM):
to work, in the worst environments and Revenue $81.1 million Kennedy Capital 0.7%
operating conditions. As a $100,000 item Operating Profit Margin 11.1% Short Interest (as of 10/15/12):
in a $23 million helicopter, it’s not the Net Profit Margin 2.9% Shares Short/Float 0.1%
type of thing where the manufacturer will
play hardball over price. There’s usually BZC PRICE HISTORY
12
12 12
good visibility on future cash flows, be- Ad
cause once you’re on a platform you’re on
it until the helicopter is no longer made, 1010 10
and because there’s a healthy stream of
replacement-parts business. From a bar- 88 8
rier-to-entry standpoint, this also isn’t an
area where you’d expect a price-cutting 66 6
Chinese competitor to come in and take
business. 44 4
Breeze-Eastern starting in the 1990s 2010 2011 2012
took the plentiful cash generated by this
core business to invest in becoming a more THE BOTTOM LINE
diversified defense supplier. They bought The company’s long road back to focusing on its strong core business – made longer by
a bunch of companies, paid too much for the recession and a number of unprofitable legacy contracts – is finally about to pay off,
them, loaded up on debt and then didn’t says Don Noone. At a market multiple on what he considers a conservative $10-12 mil-
lion estimate of normalized earnings, the stock would roughly double from today’s price.
manage it all well, basically running the
company into the ground. That eventually Sources: Company reports, other publicly available information
led in 2007 to a special capital raise that

it. That’s been depressed in recent years, new energy and ambition into the business. erating very little if no profit, he’s winding
but we think we’re being conservative in His first focus, which we believe is right, down the production of private-label beer.
assuming they get back to the $10-12 mil- is on product innovation. For Labatt or He also plans to cut at least C$1 million
lion annual range. That means the stock to- Molson drinkers, you need to graduate in annual expenses, not insignificant for a
day trades at only 7-8x more normal earn- them into the craft-beer market. For the company that’s been earning C$6-8 mil-
ings. A private buyer for a business with beer nerd, you need to provide them with lion per year.
this type of predictability and profitability new, exciting and flavorful brews. That all The last piece of the plan involves geo-
would pay significantly more than that. We requires pushing the envelope with new graphic expansion, focused on neighbor-
feel good when we can model out a double products, which Big Rock hadn’t been doing British Columbia. The idea would be
in the stock price over the next few years, ing. It has now launched a number of new to translate, through acquisition or build-
which is pretty much where we are here. and seasonal beers, one of which, a Scot- ing a new brewery, the success Big Rock
tish heavy ale, is already being introduced has had in one vibrant market to another.
Does the recent sale of top-competitor into the full-time product stable.
Goodrich to United Technologies pose On the operational side, Sartor is shift- At today’s C$13.95, how cheap do you
any risks? ing marketing spending away from what consider the shares?
he calls “trinkets and trash” – things like
JV: The competitor was already a tiny di- coasters and key chains – toward more DN: If the product and operating initia-
vision of a very large company and now on-premise events like beer tastings. To tives prove successful, we believe the com-
it’s part of an even larger firm. People are free up production capacity that was gen- pany should earn at least C$10 million per
worried that now Sikorsky, which is also
owned by United Technologies, will stop INVESTMENT SNAPSHOT
buying from Breeze. Sikorsky is run quite

Big Rock Brewery
independently, so we think that concern is (Toronto: BR:CN)
overblown. Probably more likely is that Business: Produces, markets and distributes Financials (TTM):
Sikorsky’s competitors will now think twice a line of premium craft beers and alcoholic Revenue C$46.6 million
about buying from Goodrich, which could cider, sold primarily in and around its home Operating Profit Margin 10.7%
incrementally benefit Breeze in the end. province of Alberta, Canada. Net Profit Margin 8.0%
Share Information
Has your case for Big Rock Brewery been (@10/30/12, Exchange Rate: $1 = C$1.00): Valuation Metrics
(Current Price vs. TTM):
slower to materialize than you expected? Price C$13.90
52-Week Range C$11.50 – C$14.50 BR:CN Russell 2000
Dividend Yield 5.8% P/E 22.4 31.3
DN: The thesis is still fully intact. Big Rock
has the best reputation and brands in the
craft-beer business in the Alberta province
BR PRICE HISTORY
of Canada, which is booming with the ex- 18
6000 18
pansion of the energy business there. The Ad
area is importing oil workers from around 16
16
5000
the world, mostly men making good mon-
ey during the biggest beer-consuming pe-
14 14
riods of their lives. The company is grow- 4000
ing and making good money, but it is true

12 12
that they haven’t really made it sing yet. 3000
Why not? 10 10
2000
2010 2011 2012
DN: There have been some fits and starts

with management. The founder, Ed Mc- THE BOTTOM LINE
Nally, was slow to let go of control and A new CEO’s injection of “energy and ambition” should unearth latent value in the com-
kind of let the company drift in the past pany’s core brewing franchise, says Don Noone. At 12x the C$10 million in annual profit
he believes the company should earn, the shares would be 50% above today’s price. The
couple of years. But early this year he
price of options on successful geographic expansion and/or an eventual buyout: free.
named a new CEO, Bob Sartor, who we
believe is a world-class operator. He has Sources: Company reports, other publicly available information
articulated a clear plan and is injecting

year. It was making that much in the mid- It hasn’t been a disaster investment for us, leaving, the stock went from the low-teens
2000s, so we don’t consider that a stretch. but after years of one step forward, two to $40 [split adjusted]. We had the conver-
Put even a 12x multiple on that and you’ve steps back, we’ve decided to move on. sation at $7 about whether to take a much
got almost 50% upside from today’s price. bigger position and pound the table more
You then have an option on successful DN: We’ve tried to speak constructively to with management, we just didn’t do it.
geographic expansion, as well as on Mol- the board, to get them to focus for each
son or Labatt swooping in over the next piece of the business on where they’re We asked last time what advice your men-
couple of years to buy some craft-brew earning a return on capital and where they tor in the business, Joseph Reich of Reich
credibility that almost all big brewers have aren’t. That strikes us as common sense, & Tang, had been offering up. He had sug-
had a tough time creating. As you wait for but there just hasn’t been adequate will at gested maintaining plenty of liquidity, and
some of those things to play out, there’s a the board level to do that. you added, “Having been through some
very healthy dividend yield, which on to- really bad markets before, he doesn’t think
day’s price is just below 6%. Speaking of another idea we discussed last this one is over yet.” Pretty good advice in
time, it would appear you sold cigarette- April 2008. What’s he counseling today?
What’s something you’ve been selling re- paper maker Schweitzer-Maudit [SWM]
cently and why? way too early. What happened? JV: He usually focuses on how we’re run-
ning the business, such as whether we’re
JV: We spoke last time about Escalade DN: There’s a good lesson there. What at- sticking to our discipline or how we’re
[ESCA], which has this mish-mash of busi- tracted us to it was that there was a strong treating clients. One piece of advice he did
nesses, some of which are good, like ping- underlying business, but it was poorly give us recently was that while we should
pong tables and archery products, and managed. Dealing with management was selectively try to work with our companies
others which aren’t so good, like paper so frustrating that it discombobulated us to create value, we shouldn’t start think-
shredders and letter openers. Our thesis and we concluded the situation couldn’t ing we’re investment bankers with 45
was that better managing the portfolio of be fixed. In fact, we should have stepped different ideas for the company to imple-
businesses – getting rid of underperformers back and recognized that the attractive- ment. The message was to be careful not
and investing in those doing well – would ness of the business would outlast man- to get out of our competence zone, which
result in a much more profitable company. agement. Within a year of the old CEO is always good to be reminded of. VII

S T R A T E G Y : Bestinver
Eye of the Storm

With a painful economic contraction at home and the European economic union in trouble, Bestinver’s Francisco
Garcia Parames would be forgiven for having a downbeat investment outlook. Such, however, is not the case.
INVESTOR INSIGHT has not changed and most certainly will defense contractor and aerospace firm
not change in the future. But that doesn’t Thales [HO:FP]. It is clearly impacted by
mean you don’t evolve as an investor. For changes in defense budgets, but its mar-
example, while I wouldn’t attribute this gins have also suffered from a number of
directly to the crisis, we have moved more poorly negotiated contracts under prior
from a pure Benjamin Graham style of management. The new CEO has put or-
value investing to one closer to Phil Fisher der to the way the company accounts
and Warren Buffett, in the sense that we’re for costs and negotiates contracts, so we
putting even more weight on the qual- expect EBIT margins to increase from
ity of the business. I don’t know, maybe 6% to an 8% normalized level, which
when you’re younger you just care about is still below the 10% earned by peers.
getting things that are cheap and making Just making that assumption allows us
Funds People
money fast. But as you become old you see to find the stock quite undervalued. If
Bestinver Asset Management
(l to r) Alvaro Guzman, Fernando Bernad and that buying companies with high and sus- defense spending also eventually comes
Francisco Garcia Parames tainable returns on capital at reasonable back to normal levels, which it is likely to
On perspective: “Overly focusing on prices tends to work a little bit better. do, that would be icing on the cake.
what is going on in Spain and even what The second adjustment we’ve made is to Contrast that with businesses in which
is going on in Europe is losing the right concentrate more. In our global portfolio there are no competitive barriers and
perspective from our point of view.”
we used to have 100-120 stocks, but market shares can vary greatly from one
now we have around 50. With the top 15 year to the next. These are usually more
Editor’s Note: The distant observer might stocks, we cover 70% of the portfolio. purely commodity businesses that, absent
imagine a siege mentality among European The more concentrated you are, the more clear low-cost leadership, are difficult to
investment managers, clinging for dear life sure you have to be about everything – the normalize and we’re not very interested in.
as the fate of the European Union hangs barriers to entry, the leverage, the down-
in the balance. The view from the inside as side. Every stock in which we hold a large What macro views are informing your in-
described by Bestinver’s Francisco Garcia position has to be very safe by its nature. vesting today?
Parames, however, is very different. One of
Europe’s foremost investors – his flagship Has it gotten harder to estimate normal- FGP: Sometimes we can add more value
Bestinfond has returned a net annualized ized free cash flow in Europe? on this front than others, and I would say
15.7% since inception in 1993, vs. 8.5% for today is a difficult time. Much of how
its mixed Spanish and global benchmark Alvaro Guzman: When you look at our things play out in Europe will depend on
– Garcia Parames oversees €5.5 billion average stock, we’re not making a huge politicians making decisions, which we
in assets from his Madrid home base. effort to predict earnings. A typical busi- consider almost impossible to forecast.
We recently caught up with him and co- ness would be like that of Schindler Hold- We do spend a lot of effort trying to un-
portfolio managers Fernando Bernad and ing [SCHN:SW], the elevator company, derstand how China will grow. Given that
Alvaro Guzman to see how they’re navi- which has barriers to entry and is difficult its growth is based on savings and produc-
gating today’s difficult investing environ- to copy. We’re comfortable in a case like tivity improvement, we’re still positive on
ment. Cautious? Yes. Fearful? Not at all. this in assuming 1-2% volume growth and the sustainability of its economic expan-
flat-to-1% pricing growth translating into sion. Even as China slows down, if you
It’s been an eventful few years since we 4-5% annual EBITDA growth. We don’t look at the absolute growth in its forecast-
last spoke [VII, November 26, 2008]. have to be more aggressive than that for ed GDP relative to the expected GDP pull-
Have you called any of your core value-in- almost all of our holdings. back in vulnerable European countries,
vesting tenets into question in the interim? I’d distinguish between cyclical stocks there’s no comparison. Overly focusing on
with barriers to entry and those without what is going on in Spain and even what is
Francisco Garcia Parames: The core of them. When market shares are stable, going on in Europe is losing the right
what we do, investing with a long-term if the size of the pie goes up and down, perspective from our point of view.
horizon in stocks that are inexpensive you have historical data points that al- That’s why we own global companies.
relative to their normalized free cash flow, low you to normalize. We own French Acerinox [ACX:SM] is a stainless-steel

company based in Spain, but it just set up holding-company Exor [EXP:IM], Thales, Describe the more detailed investment
a 600,000-ton-capacity plant in Malaysia information-services firm Wolters Kluwer case for one top-five holding, Exor.
to serve Asian countries outside of China [WKL:NA] and Schindler – are mostly
– that’s a market of 600 million people. in very different businesses and we own AG: This is the investment holding
Despite what’s going on in Europe, this them for company-specific reasons. That’s company of Italy’s Agnelli family, which
company has been growing 5-6% per year the normal situation for us. holds important stakes in difficult-to-copy
for several years. global businesses that are for the most
FGP: There are sectors we continue to part easy to value.
Do you still have your own analyst in avoid, generally those in which we have The first is in a publicly traded Swiss
Shanghai? no knowledge of what’s going to be the company, SGS [SGSN:VX], that together
situation in ten years’ time. That’s the with Bureau Veritas and Intertek is one of
FGP: Yes, he’s been there four years. This question we ask ourselves every time we three dominant global players in the busi-
forces us to go there, to learn. If you invest, and it’s the main reason we avoid ness of inspecting, testing and verifying
invest in almost any sector in the world you technology stocks and sectors with chang- any number of products, processes and
have to know what’s going on in China, ing dynamics. We see no current oppor- services involved in global trade. It earns
both for companies that want to sell there tunity in real estate. Financials also make 50% returns on capital and its market has
and to know what competition may come us very uncomfortable, because of the been a stable tri-opoly for years.
from there. leverage and the difficulty still in truly The second big holding is Fiat Industrial
We’re also learning about Chinese understanding the numbers. [FI:IM], which makes trucks and pow-
stocks and while we haven’t yet invested in
mainland China, we have invested in a Tai- INVESTMENT SNAPSHOT
wanese company called Yungtay Engineer-

ing [1507:TT], which is very active in Chi- Exor
(Milan: EXP:IM)
na. It’s an elevator company, an industry
Business: Investment company controlled Valuation Metrics
we know very well from investing in Euro- (@10/30/12):
by Italy’s Agnelli family, with top holdings
pean companies like Schindler and Kone. EXP
that include Fiat, Fiat Industrial, SGS
We are comfortable with its corporate and Cushman & Wakefield. NAV per share (@6/30) €25.64
governance, and feel it provides good ad- Discount to NAV 34.3%
Share Information
ditional exposure to an industry we like in (@10/30/12, Exchange Rate: $1 = €0.770):
a part of the world that is growing. Price €16.94
52-Week Range €12.87 – €17.57
Has the geographic mix of your portfolio Dividend Yield 2.3%
been shifting? Market Cap €4.59 billion
EXP PRICE HISTORY

Fernando Bernad: In putting more 25 25
6000
emphasis on truly global companies, we Ad
have over the last couple of years reduced
20
5000 20
our exposure to the euro zone. In terms of
the underlying economic exposure of the
15 15
companies we own – which we calculate 4000
by looking at both revenues and EBITDA

– our euro zone exposure today is 42%, 10 10
3000
down from 54% two years ago. Our next

biggest exposures are 20% in emerging 5
2000
5
markets (up from 14% in 2010), 17% in 2010 2011 2012
North America and 11% in the U.K.

THE BOTTOM LINE
Other than global exposure, are there any Even though this investment holding company of Italy’s Agnelli family owns large stakes
themes or sectors you’re finding particu- in “difficult-to-copy businesses that are for the most part easy to value,” says Alvaro Guz-
larly appealing? man, the market appears decidedly unimpressed. Based on his intrinsic-value estimates,
he puts the sum-of-the-parts value of the company’s shares at well above €40.
FB: Not really. For example, our five larg-

est holdings today – BMW [BMW:GR],

ertrains and, through its majority holding say how that will turn out, but we support FGP: We naturally when the market feels
of CNH, is the second-largest agricultur- the position he’s taking. somewhat peaky will move from somewhat
al-equipment manufacturer in the world With respect to John Elkann, he is more cyclical stocks to more defensive
after John Deere. This also is a difficult-to- young and doesn’t have a long track re- stocks. If our BMW shares have gone up
replicate business, given the importance of cord, but we think the moves he has made 100%, we’ll sell some of them to buy
brand names and the extensive distribu- show that he knows what value is and shares of [U.K. grocery chain] Tesco that
tion network necessary to provide main- that he has an eye for capital allocation. have fallen 20%. But the fact that everyone
tenance and repairs. Separating Fiat Industrial from Fiat Auto today is talking about tail risks tells me
Then you have Fiat Auto [F:IM], which was a messy undertaking and he pulled it that the world is roughly prepared for
gets a lot of bad publicity because of its off successfully. He’s now in the process of that. The problem was five years ago when
financial and union problems in Italy, but fully merging Fiat Industrial with CNH, no one was thinking about tail risks what-
which overall is actually not that bad. It which will also be messy but should make soever. Perhaps the world is less prepared
makes far more money in Brazil, for ex- the value of the combined business more for a continued boom in several countries
ample, than it loses in Italy. It bought clear and management more accountable. in the world.
Chrysler when absolutely no one wanted On the investment front, his acquisition of Our view is that the best way to de-
it and has done well so far to turn that Cushman & Wakefield wasn’t the greatest fend against financial disruption on a
business around. The real gems within timing, but that company will make more long-term basis is to invest in real assets.
Fiat Auto are Ferrari and Maserati, which money in 2013 than it made in 2007. Of the real assets that we can buy in the
are obviously one-of-a-kind brands, and He certainly hasn’t yet made any big world, we prefer the stocks of companies
which together produce between €400 investment mistakes. with high barriers to entry that over many
million and €500 million in earnings be- If we look at the underlying value and years should create value and protect you
fore interest and taxes. quality of the assets here, and where the against terrible scenarios. We think the
If we just take the public market values market is pricing them, that John Elkann equities we own cover us in all possible
of Exor’s stakes in those three companies, doesn’t have a long track record is an af- scenarios, rosy or not. The average return
plus conservative value estimates for fordable risk for us to take. on capital of our portfolio companies is
smaller stakes in companies like real estate 40%, but they trade at an average 7.5x
brokerage Cushman & Wakefield, Italian There’s much talk today about the need earnings. It’s maybe not as interesting a
tour operator Alpitour and European paper for investors to prepare for “tail” risks, time as in the panic moments like early
and packaging distributor Sequana, we such as the euro zone imploding. How 2009, but we think people’s reluctance to
get to a share value for Exor of €31-32 would you characterize your preparation invest in equity markets is creating plenty
per share. If we adjust those market values for extreme bad news? of opportunity. VII
upward in certain cases – primarily to
reflect added value we see in CNH and
Ferrari/Maserati – we think Exor is worth
well north of €40 per share. That’s against Expand Your
a current market price for the preferred
shares of around €17. Idea “Grapevine”
There seems to be some controversy over Subscribe now and receive four quarterly issues
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He’s making an all-in bet in Italy, saying if
we cannot make money manufacturing in
the country, we will leave. It’s difficult to

U N C O V E R I N G V A L U E : Special Opportunities Fund
Narrowing the Gap

Phil Goldstein and Andy Dakos have built an enviable record investing in rather obscure closed-end funds and
operating companies. Having taken the reins of one such target, where are they finding opportunity for it today?
As portfolio managers of Bulldog Inves- and is burning minimal resources in pur- holder lawsuits, and may by late next year
tors, Phil Goldstein and Andy Dakos [VII, suing acquisitions of cancer and autoim- run out of money to pay premiums on the
March 31, 2008] aren’t afraid to challenge mune-disease drugs. Goldstein says he’s large amount of life policies it owns. De-
management in an attempt to narrow the confident that if the company can’t make spite all that, Goldstein, who now chairs
discounts they see from a company’s or an accretive acquisition within a year, it Imperial’s board, sees potential to work
closed-end fund’s market price and its un- will liquidate and distribute its assets to through the problems and realize share
derlying asset value. They’ve now taken shareholders – a “heads we win a lot, tails value closer to the firm’s $8 book value
that one step further: After winning a we win a little” investment, he says. than its $3.50 share price.
proxy fight over a former UBS closed-end Further out on the risk spectrum is And what of Special Opportunities
municipal bond fund, they have renamed Imperial Holdings [IFT]. In the contro- Fund’s own discount to NAV, which is
it the Special Opportunities Fund and are versial business of financing and buying currently around 11%? “Don’t give any-
running it utilizing Bulldog’s basic hedge- life-insurance policies, it recently settled a one any ideas,” says Goldstein. “But se-
fund strategy. “Not our first intention,” U.S. Attorney’s office inquiry, is still un- riously, we will do the right things if the
says Goldstein, “but the further we went, der SEC investigation, faces several share- discount stays too high.” VII
the better we liked the idea.”
INVESTMENT SNAPSHOT
As in their private funds, Goldstein and
Dakos often place bets on obscure funds Special Opportunities Fund
or operating companies. Eaton Vance Risk (NYSE: SPE) Valuation Metrics
(@10/30/12):
Managed Diversified Equity Income Fund Business: Closed-end fund investing
SPE
[ETJ] is a typical example. Despite employ- primarily in other closed-end funds, special
NAV per share 17.73
ing a “collared” options strategy meant to purpose acquisition companies [SPACs]
Discount to NAV 10.7%
lessen equity risk, its performance since and special-situation equities.
inception in 2007 has been dismal and it Largest Institutional Owners
Share Information (@6/30/12):
has traded at a chronic discount to net as- (@10/30/12):
set value. Since Bulldog started agitating Price 15.84 Company % Owned
for change, management has responded 52-Week Range 13.91 - 16.38 Karpus Inv Mgmt 6.4%
with share buybacks and hefty dividend Dividend Yield 1.8% Relative Value Partners 6.1%
Market Cap $108.1 million Ancora Advisors 0.9%
payments. Dakos considers such effort
a positive sign for the shares, which still
trade at a 10% discount to NAV. SPE PRICE HISTORY
20
20 20
A more recent purchase is Firsthand Ad
Technology Value Fund [SVVC], which
bills itself as a publicly traded venture
capital fund. It acquired shares in Face-
book pre-IPO and also holds positions in 1515 15
private social-media firms like Twitter and
green-tech companies such as SolarCity.
Such holdings are of little interest, says
Dakos, who is more interested in how 1010 10
investors’ cooled ardor for social media 2010 2011 2012
has sent Firsthand shares from a “crazy”
premium to NAV to a sharp discount. At THE BOTTOM LINE
$18, the shares trade at a 24% discount After winning a proxy fight, Bulldog Investors’ portfolio managers have turned this fund
to NAV and at even 10% below the fund’s into a public vehicle that invests with the same basic strategy as their private hedge
uninvested cash on hand. funds. Which means an eclectic portfolio of closed-end funds, special purpose acquisi-
tion companies and some asset- and controversy-rich common stocks.
Myrexis [MYRX] is a typical Bulldog
non-fund idea. Its shares trade for $2.50, Sources: Company reports, other publicly available information
but it has more than $3 per share in cash

EDITORS’ LETTER
The Arithmetic of Equities

The typical investor letter can be a futures the asset will cover the loan. In Family Legacy
dour affair, with a boilerplate macroeco- any scenario in which that is not true – Regardless of who wins the upcom-
nomic discussion followed by a dutiful invasion, the acts of an especially angry ing presidential election, Washington in
reporting on the number of basis points god – no other asset including Treasuries coming weeks will likely be occupied by
in performance gained or lost in the latest will be worth much either. We know the discussion over the short- and long-term
period on this or that stock. There are re- “future” of this bond because the value ramifications of the U.S.’s formidable debt
curring gems, however, filled with insight of the assets vastly exceeds the price. burden. As input into the discussion, we
and actionable information – think the let- offer the following simple parable from
ters of Jeremy Grantham, Howard Marks, Similarly, if a stock sells at a P/E of 50,
Warren Buffett, from Berkshire Hatha-
you have to be right about too many
Bill Gross and, of course, Warren Buffett. way’s annual meeting in 2005:
things to consider the principal secure: at
One up-and-comer on the letter front
a minimum you have to be right about
is Andrew Redleaf of Whitebox Advisors. We’re like an incredibly rich family. We
both future earnings and the future P/E.
While at times more erudite than we can sit on the porch of our huge farm – so
With a P/E of 12, several points below
follow, he is most often clever and con- big we can’t even see the end of it – and
the historic average, you can get away
trarian in describing the current investing each year, we consume 6% more than the
with being right about either future earn-
environment and what he’s doing about it. farm produces. To pay for this, each year
ings or future P/E. With a stock selling
His latest letter, “The Arithmetic of Eq- we sell or mortgage a little bit of the farm
well below book, all you have to be right
uities,” is an excellent example. In it he that we can’t see, so we don’t even notice.
about is book value and the efficiency of
explains why he finds investors’ general We’re very, very rich and the rest of the
your claim.
preference for bonds over (particularly) world is happy to buy from us or lend
blue-chip equities to be borderline crazy: to us, so each year they take a piece of
Basically I am a bond guy. I like fat cou-
our valuable assets – and they work very
pons. And I like return of principal. But
hard. But we will have to service this. If
The best measure of security of principal I take my bonds where I can find them.
it goes on for a long time, our children
is how much one needs to know about And these days the place to find fat cou-
will pay. VII
the future to be confident the principal pons and return of principal is among
will be returned. A bond secured by col- blue-chip equities.
lateral of enduring value amounting to
several times the price of the bond is all We highly recommend the entire letter,
but perfectly secure. In most plausible available here.
Value Investor Insight™ is published monthly a

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ValueInvestor

October 31, 2012

The Leading Authority on Value Investing

Coveting Obscurity Warren Buffett. PAGE 20 »

agricultural services and beer. See page 9

Investor Insight: Jeffrey Smith

October 31, 2012 www.valueinvestorinsight.com Value Investor Insight 2

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Progress Software TC: The stock trades at less than 4.5x

October 31, 2012 www.valueinvestorinsight.com Value Investor Insight 7

INVESTMENT SNAPSHOT is all just good service execution and it

One could argue that sentiment toward

October 31, 2012 www.valueinvestorinsight.com Value Investor Insight 8

Investor Insight: VN Capital

October 31, 2012 www.valueinvestorinsight.com Value Investor Insight 9

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JV: The other main business, in which Air- 6

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buying from Breeze. Sikorsky is run quite

ing and making good money, but it is true

DN: There have been some fits and starts

October 31, 2012 www.valueinvestorinsight.com Value Investor Insight 14

October 31, 2012 www.valueinvestorinsight.com Value Investor Insight 15

Eye of the Storm

October 31, 2012 www.valueinvestorinsight.com Value Investor Insight 16

wanese company called Yungtay Engineer-

EXP PRICE HISTORY

by looking at both revenues and EBITDA

down from 54% two years ago. Our next

North America and 11% in the U.K.

FB: Not really. For example, our five larg-

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October 31, 2012 www.valueinvestorinsight.com Value Investor Insight 18

Narrowing the Gap

October 31, 2012 www.valueinvestorinsight.com Value Investor Insight 19

The Arithmetic of Equities

Value Investor Insight™ is published monthly a

October 31, 2012 www.valueinvestorinsight.com Value Investor Insight 20

General Publication Information and Terms of Use

October 31, 2012 www.valueinvestorinsight.com Value Investor Insight 21

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