Posts In:

Geoff Gannon December 18, 2007

Election Night at Nautilus

Forget about the upcoming presidential primaries; it’s already election night at Nautilus (NLS) – and the early exit polls favor the challenger.

Shareholders met Tuesday to settle a proxy fight between an activist hedge fund and the fitness equipment company’s incumbent board.

Late Tuesday, Sherborne Investors, LP (which owns 25% of the shares outstanding) declared victory in its proxy fight at Nautilus. The hedge fund claims it won four of seven board seats (which will effectively grant control of the company).

Nautilus Chairman & CEO Robert Falcone has yet to concede defeat.

Early reports provided subtle hints of a Sherborne victory with Falcone being quoted as saying, “Our proxy service says it’s close, but we just don’t know at this time” – and even more ominously, “It’s a dead heat.” Meanwhile, Sherborne’s representative was “optimistic” and claimed shareholders were “fairly supportive”.

News reports indicated the shareholders in attendance were dissatisfied with both parties’ presentations, with one shareholder saying, “Nothing was said here that hasn’t been said before.” In a series of press releases leading up to the meeting, Nautilus had been particularly expansive in its criticism of Sherborne which has been successful in several proxy fights, but hasn’t always had success in creating long-term shareholder value (in one case, that’s putting it very mildly).

Most shareholders I talked with in the lead up to the election had a low opinion of Sherborne and an even lower opinion of the board.

If the preliminary results hold, the greatest casualty of the fight will be Robert Falcone who was made interim CEO in August and (non-interim) CEO in October. His predecessor Greg Hammann stepped down in August. Falcone was then the company’s lead independent director.

Sherborne has already stated that Falcone will be removed as CEO. Technically, Falcone will retain his board seat. However, everyone’s expectation is for a quick and unceremonious resignation if the early results hold.

Falcone can’t be accused of inaction during his four month tenure, as this article makes clear:

Falcone has made several significant moves in his short tenure, including laying off 9 percent of the company’s work force and cutting expenses by more than $10 million annually. He’s also implemented an inventory reduction plan that should pump $20 million into the company’s coffers. Falcone also continues to look for a buyer for the company’s Pearl Izumi fitness apparel business.

Shares of Nautilus have traded between $18.63 and $4.31 this year. During today’s trading session (before Sherborne claimed victory), shares of NLS were up $0.97 or 17.32% to close at $6.57.

It will be interesting to see how the votes were distributed, as a couple shareholder advisory services had recommended electing some (but not all) of Sherborne’s nominees.

Note: No one at Nautilus has conceded defeat and it will be a couple weeks before any actual votes have been counted and verified. However, because most shareholders vote their proxies in advance, Sherborne’s proxy solicitation firm should …

Read more
Geoff Gannon December 17, 2007

Read Barron’s Cover Story on Berkshire Hathaway

Barron’s “Sell Warren” cover story is now available to non-subscribers. Read it here.

A few other blogs have commented on the story, some recent examples include a post from the Peridot Capitalist and a post from 24/7 Wall St.

If you haven’t already, you can read my response to Barron’s cover story.

Finally, visit Value Investing News for all the latest posts on this and other Warren Buffett / Berkshire Hathaway stories.

Right now, the Barron’s article and the responses to it are among the top stories at Value Investing News.

Read Barron’s: “Sorry, Warren, Your Stock’s Too Pricey

Visit Value Investing News

Read more
Geoff Gannon December 16, 2007

Gannon to Barron’s: Berkshire Fairly Valued…As a Buffettless Empire!


Warren Buffett’s face graces (or disgraces) the cover of this week’s Barron’s. In big, bold print the weekly stock market mag says “Sell Buffett”. Inside, the message is equally gloomy: “Sorry, Warren, Your Stock’s Too Pricey”.

Is it?

Barron’s says:

The Street’s enthusiasm for Omaha-based Berkshire…might be excessive. Its stock now appears overpriced, reflecting a sizeable premium for the skills of the 77-year-old Buffett. What’s Berkshire worth? Our estimate, based on several valuation measures, is around $130,000 a share – about 10% below the current quote.

Valuation – In Five Minutes or Less

My estimate – admittedly based on only a single valuation measure (the one I would use to value any holding company / conglomerate / corporate hodgepodge) is around $141,000 a share. By the way, that’s an “ex-Buffett” measure – in other words, that number is my first stab at the value of any corporate hodgepodge – not a corporate hodgepodge with an investment legend at the helm.

I didn’t come up with a specialized measure just for Berkshire (BRK.B) – all I really did was “privatize” Berkshire at $141,000 a share. Of course, Berkshire’s too big to go private; Buffett’s continued leadership adds value; and Berkshire’s collection of businesses (both majority and minority owned) is far from average.

All those factors deserve special consideration.

But, before we consider those factors, it’s worth noting Barron’s is being a bit too cautious in valuing Berkshire. Even if Berkshire had a miserable 2007, the sum of the parts would still be greater than $125,000 a share which Barron’s sets as the low-end of the range ($130,000 a share is the high-end).

What’s Berkshire really worth? That’s hard to say. If you gave me five minutes, a pen, paper, and the 2006 annual report, I’d say $141,000 a share.

That figure is the result of taking Berkshire’s year-end 2006 businesses and securities, valuing Berkshire’s pre-tax earnings to yield 8% (an appropriate rate for excellent, but not necessarily fast growing businesses), valuing Berkshire’s securities at their market prices at the time of the 2006 annual report, and then correcting the combined value for the time elapsed since the 2006 annual report was published.

I did it this way so anyone could follow my logic without needing anything more than the 2006 annual report – you could look at Berkshire’s latest filings for more up to date earnings and portfolio data. But, there’s no real need to add so many complications merely to get an intrinsic value estimate that is nine months more timely.

Golden Years

Not surprisingly, Barron’s mentions Buffett’s age:

Buffett turns 78 next August, and his actuarial life expectancy is nine years. He’s likely to stay on the job for as long as possible, but in reality, few CEOs can handle the demands of the job much past 80. When Buffett departs, the stock is apt to drop as longtime Berkshire holders cash out and the investment community waits to see whether his successors can

Read more
Geoff Gannon December 16, 2007

Suggested Link: Sell Buffett?

If you enjoyed my response to Barron’s “Sell Buffett” cover story, you’ll also enjoy Jeff Matthews post.

Visit Jeff Matthews is Not Making This Up

Also, note the comment I just added to the post below. I got an email asking how I came up with a $141,000 per share intrinsic value estimate for Berkshire Hathaway (ex-Buffett). I copied the text of my email response into the comments section of my post “Gannon to Barron’s: Berkshire Fairly Valued…As a Buffettless Empire!” so those interested in the (five minute) valuation process could follow the steps themselves.…

Read more
Geoff Gannon December 13, 2007

Favorite Bloggers Add New Positions

Some of our favorite bloggers have been adding new positions.

On November 13th, Fat Pitch Financials added Western Sizzlin (WSZL) at an average price of $13.12 per share. George subsequently wrote a post valuing Western Sizzlin.

On November 23rd, Cheap Stocks added Avalon Holdings (AWX) then trading around $6.50 per share.

Finally, John Bethel of Controlled Greed just announced:

“I placed an order with my broker to purchase stock in a leading provider of office products and supplies. This will be a new position in the portfolio. Assuming the order gets filled, I’ll post my rationale for buying later today or this evening.”

During the past month some of our favorite bloggers have been finding stocks to buy.

Have you?

Visit Fat Pitch Financials

Visit Cheap Stocks

Visit Controlled Greed

Read more