Most situations are easily understood in retrospect. It is one thing to watch a live soccer game where we don't know which team will win; it is quite the other when we know who had already won the match. In the former, we try to make sense of what we don’t know, and in the latter, we make sense of what we already know.
It is a similar situation in stock investing. When you know the price of a stock has been declining - consider General Electric, for example, that started the year at $15 and is now trading at $7 - it is easy to see the decline in price. GE had a shakeup in management; the spot price of energy dropped; and solar energy is not as alluring as it was when Al Gore ran for president (GE traded at $45 a share at the time).
But trying to determine whether in a year’s time GE’s stock will again halve in price is quite a different task. As opposed to Physics, where three formulas explain 99% of the observed phenomena, in stock investing 99 formulas explain less than 3% of what eventually happens.
There are simply too many, unknowable and unforeseeable variables that will cause a stock price to move up or down. And to predict the price movement is to predict the future. Rarely a success.
This week I came across Voxx International, a small capitalization stock of $108 million that is controlled by its founder, the 86-year old Mr. John Shalam. Voxx sells audio accessories across the globe and holds an umbrella of 30 brands that it has acquired over the past decade. It is reasonably leveraged and has earned little over $1 per share in 2017. It is expected to earn roughly the same in 2018. It is trading at about five times the 2017-2018 average earnings per share.
More intriguing about Voxx are its owners. I mentioned already that Shalam owns the majority of the outstanding shares, and had rarely sold shares over the past 15 years (less than 1% in dilution, compounded annually).
And more of interest is that Kahn Brothers Group (KBG), the flagship investment arm of the legendary value investor Irving Kahn, of blessed memory, not only holds about 15% of the outstanding common stock but has also been a shareholder in Voxx International for 15 years.
Why the the long hold period I wonder. As nothing appears to be special about Voxx International. The operating margins are slim and the business model has not been consistent either.
Fifteen years ago the strategy behind the company was to leverage the brand Audiovox Corporation. But the business model completely changed over the past decade as management realized that Mr. Market preferred that it grew earnings via mergers and acquisitions. And the company had enough years of operating losses that Benjamin Graham would warrant its stock to be a speculative position.
It is beyond my ability to understand why Kahn Brothers Group continues to hold the stock. Initially, I estimated that this was a classic loss aversion case. Based on the 13-F filings, the average cost per share for KBG was $9, and since the paper loss is now about 50%, KBG is simply waiting until the stock climbs to a reasonable price.
Or perhaps KBG cannot easily sell the shares in Voxx. If a company owns over 5% of the outstanding shares in a publiclytraded firm, the company must publicly disclose its intention to sell shares.
Finally, I concluded that KBG must understand something that I do not. Perhaps Mr. Market is unhappy with the controlling member or perhaps the value of the business, as an umbrella that holds many brands, is worth much more than the price of the brands individually. Perhaps KBG believes the intrinsic value is much greater than what basic discounted cash flow approach reveals.
While on the surface Voxx appears to be a bargain at price to earnings ratio of five times, at a closer look, management reported that only 3 cents of the reported earnings of $1.41 are from continuing operations.
In other words, $34.6 million, or $1.57, is the result of the selling of Hirschmann Car Communication. The purchase price, net, was $148.5 million euros or roughly $170 million on reported net asset for sale of $102 million and $28.8 million, or $1.31 in foreign currency translation adjustments, skewed the reported earnings.
The sale of Hirschmann is why the Kahn Brother Group continue to hold the stock is my final guess. KBG believes that the net value of the assets are much greater than the value of what the company can be purchased for in the private market, perhaps, even at a liquidation value.
In numbers: At its most recent annual filing, the company reported assets of $575 million with associated liabilities of $125 million. The equity is $450 million or $20 book value per share, resulting in a price to book value per share of 22%.
Removing goodwill and intangible assets of $250 million, which are 43% of the reported assets, the equity balance is $200 million or $9 per share, a price to book value of 49%. In short, Kahn Brothers estimate the value of the equity to be $200 million while Mr. Market is valuing the company at $98 million.
It is at this point that I imagined a weighting machine with a left side that is heavier than its right side. The left side represents return. The right side represents risk.
So I went ahead and bought a few shares in Voxx. I bought 2,000 shares at a total cost of $9,100, which represents less than 2% of my stock portfolio. While I understand little about the consumer sector (I did not recognize a single brand owned by Voxx) I am hoping for two things.
First, that KBG knows something about the business that I have yet to discover, and second, that, indeed, the value of the assets is worth more than what Mr. Market is now willing to pay for them at the moment.