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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: James Clarke who wrote (4548)	7/31/1998 1:57:00 AM
From: Michael Burry	Read Replies (1) \| Respond to of 78710

RE:NH Times are booming now, and have been for the last three or four years. You know NH better than me. Heck, you've sat down with their executives, which I can't do. And I admit I have been early and wrong on these cyclicals, and maybe I just need to be around long enough to see them cycle. So forgive my obstinance. Looks like North America and Brazil are the only ones going really right for them as of last quarter, accounting for a little less than half of revenues. Europe, Asia, Middle East, Africa all down. In fact, Asia down 40%. Maybe not as low as they can go but still down. It's not as if they are hitting on all cylinders now as far as I can tell. Seems if they were hitting on all cylinders, earnings and earnings growth would be much higher than they are now, so I don't see this as peak earnings. Then again, I'm not looking at next year as much as I am over the next 3-5 years. They are moving to diversify and take some of the cyclicality out, both geographically and in product lines. Investments in Turkey, Pakistan, Asia recently. Not bad value investing mentality by the managers. Agricultural equipment is their heritage obviously, but now they are growing light industrial equipment at 20+% clip and construction equipment at a 10% clip to offset massive agriculture's negative growth. The industrial and construction equipment would be growing much faster if the developing world would cooperate and get out of their recessions. The growth of the financing arm will also help smooth out the cycles. None of this will help the current downturn, but it will help over the long run for stock valuation purposes. And then I see how it gets its tentacles in every market, with near worldwide coverage, if token in some countries. With smart acquisitions and good management, I don't see why NH couldn't smooth out some of the coming bad troughs simply by expanding in virgin markets like Poland or Pakistan. Again, long-term, and not necessarily for this cycle, but it raises that mid-cycle number. It has the cash flow and balance sheet to show that it will be around to see its plans implemented. Moreover, I don't see the current/near term downturn as typical of a cyclical in that it is simply following the tragic shock to the long-term upward-trending business cycle of its targeted high-growth countries, and is not the result of boom years flooding the market with nearly new machines that need to get old before the next wave of new purchases occurs. Seems that many developing countries including Asia have the need, but the currency crisis has dampened their ability to satisfy that need with NH product or any product for that matter. When many of these countries recover, NH should be there, with an expanded presence thanks to its investments now. I don't see the managers doing anything I don't like, and with some developing market recovery I can see the stock doubling in 3 years, and probably much more than that in 5 years. And if CAT or whoever sees their cash flow, balance sheet, and growth prospects as attractive, and Fiat wants to sell, then maybe there will be a lesser return but on a shorter time frame. So I'm buying more. Maybe this will be the one that teaches me what the word cyclical means and I'll lose my shirt. Until I know bettter, I'll continue to find companies like this at this price very attractive.

To: James Clarke who wrote (4548)	7/31/1998 2:18:00 AM
From: peter michaelson	Read Replies (1) \| Respond to of 78710

Jim: Why do you say " If you can buy a cyclical at 12 times mid cycle earnings, that's not investment. That's theft. " If you are intending to convey that buying a cyclical at 12 times mid-cycle earnings is a good investment, I would like to hear more about why you think so. Does it mean that you think that, say, a 14x multiple for a company,in normal times, growing at say, 10% annually, is a good deal? Basically, I look at it this way: Assume a 14x multiple with a 7% growth rate in earnings and a long-term 4% inflation rate. For a long-term investment (eliminating taxes), I'd say my money is growing at 7% per year the first year, and with the increase in 'real' earnings, this 8% increases over time. I'll do a spreadsheet to get a 50 or 100 year IRR. Compare this to an apartment building, which you can buy at 10x pretax earnings and expect to grow, more or less, at inflation plus population growth, maybe 5.5%. The risk of the company is doubtless much higher than that of the apartment what with competition and obsolescence. When I was buying mid-size businesses in the 1980's I pretty much got turned off when the multiple exceeded 6x operating profit (not cash flow). What is the long-term average multiple of earnings on Wall St. Any reaction? Peter