Tuesday, November 29, 2011

A sum of the parts..Renault

Renault (RNO.France)

Price: €26.35 (11/29/2011)

This is an unusual finding for me, a large cap trading at such a discount.  I'm not adverse to buying large caps, my portfolio has a few, but I tend to avoid writing about them because a lot of ink is already spilled following the largest companies.  In the case of Renault I haven't been able to find much about this except for a brief mention in this past weekend's Barrons.

Background

In the late 90s the automotive industry was experiencing a consolidation wave, instead of merging Renault decided to form a new type of alliance with Nissan.  Renualt bought 34% of Nissan's outstanding shares with the agreement that Nissan would purchase part of Renault when financially able.  Nissan had hit a financial rough patch and had a near bankruptcy experience in 2000.  Nissan recovered and purchased 15% of Renault in 2001.  Eventually Renault increased their stake in Nissan to 44%.

The idea behind the alliance is that both companies can operate independently and retain their branding yet share key strategic technologies.  The cross shareholding structure encourages both companies to act in the best interest of themselves and the partner company.  A partnership structure like this seems very strange to US investors, but it was actually very common in Japan in the 60s and 70s but less so today.  A company would purchase shares of suppliers and distributors creating an incentive to work together.  At times the crossholdings could also lead to a certain nepotism where a company would use their preferred supplier even if the supplier had a higher price and worse execution.

Outside of the Nissan stake Renault also owns stakes in Volvo AB which is a truck manufacturer, and a stake in AvtoVAZ which is a Russian car company.  Renault looks at both holdings as strategic alliances but not to the same level as the Nissan holding.

As a note when looking at Renault's statements they use the equity method under IFRS to consolidate their statements, if anyone is unfamiliar with this method here is a great link.

Sum of the parts breakdown


Renault has a holdings in three public companies, Nissan, Volvo AB, and AvtoVAZ, since all of the holdings are public it's easy to piece together the current value of what Renault owns.  I have it broken down the values and translated to Euro in the following spreadsheet:


What's pretty clear right away is that the total of Renault's public equity holdings is twice the current market cap and amounts to €49.78 a share.  If we assume that Renault's market cap is an accurate reflection of their current operations alone and add back their holdings the total is €74.38.

A discount to such a tangible asset value is rare especially for a large cap.  Just a simple analysis like this is really enticing, this is the elusive $1 for $.50, but with a caveat.  The problem is the liquid assets most likely aren't realizable (I discuss below), and in a down market the value of all the holdings will shrink because Volvo, Nissan and AvtoVAZ are all automakers.

I think the better way to look at this investment is an investment in Renault with a sizable margin of safety.  At this point I'm not comfortable enough with my own understanding of Renault's operations to make an investment.  I think this is more of an investment in Renault with downside protection than an asset play.

Why does this exist?

In a lot of my recent posts I've been asking the question "why is the stock cheap?" as a way to examine if the stock is deservedly cheap.  The reasons for the Renault cheapness I think are a bit more straightforward and probably even more warranted.

The first thing is that Renault has no intention of liquidating the Nissan stake to unlock value.  Renault looks at the Nissan holding as a strategic relationship, where selling off Nissan would almost be like spinning off a subsidiary company.  I think the market reaction would actually be negative regarding a share sale instead of something positive that unlocks value.  I think this is true especially considering the fact that both parties talk about how great the relationship is to their related businesses.

The second reason I think this disparity exists is that the market judges both Renault and Nissan on their own respective operations.  The joint holdings have existed for more than a decade meaning this isn't some sort of hidden asset.

I'm not sure if either reason is a good reason for Renault to be selling at such a discount, I'd actually be interested if someone out there knows how long this condition has persisted.

Talk to Nate about Renault

Disclosure: No position

12 comments:

  1. Congradulations!
    Finally someone out there recognizes this! I was wondering how no value investor saw this peculiar situation.
    I'm long RNO, in fact- it's my largest position. if you look at RNO on 2007, it was selling for 4 times what it is today,and this was while they sold less cars than today. it was still cheap, but not as abnormal as it is now.
    If RNO decides tomorrow to sell its stake in Nissan and give out a dividend, the price should logically double or triple. In fact, if you ever need a proof that markets are inefficient, keep this post.

    BTW - if you look at the electric car you can see that Tesla motors for example is selling for 3.3 billion while losing money. RNO's and Nissan's electric car technology and prospects are much better, and the stock is still this cheap.

    We have a great value investing forum (more like group) in israel,and a huge discussion on RNO, Nissan and the electric car, unfortunately it's in hebrew.
    you can still look around (maybe google translate will help) and in addition look at the clips and interviews with carlos ghosn which is one of the best CEOs out there in my opinion. the management is shareholder friendly .

    If you manage to get around in the forum, you can obviously respond and ask anything. we all obiously speak engligh.

    respond and tell me what you think please, good luck

    ReplyDelete
  2. oh yeah, I forgot to add:
    1. I don't think that trying to figure out why the stock is cheap is benefial. You say that it's because they are not going to sell their stake in nissan. Good!
    First, Nissan is in its own right a cheap company. Second, it pays a dividend which will probably grow in the coming years, and has a growing market share and a brand that's worth a lot more now than it was 3 years ago. plus, NISSAN is taking market share and fast. so why would I like RNO to sell? I would consider buying Nissan myself if I didn't have RNO.

    2. RNO is in part a sales financing company - it gives loans to car buyers and it's one of the only companies I know that succeed in it. BTW, this makes the company appear leveraged on the surface while it has virtually NO DEBT. this department is so steadily profitable that on it's own right it's easily worth 5 billion.

    If you try to find reasons you may find some comfortable excuses. for example, you may say that the company is lost because it bets on electric cars, which is nonsense from every prespective I can think of since the experience with Nissan and the Leaf shows that electric cars make the brand appear more technological, greener and overall better. instead of advertising, they produce a possibly world changing car, and let the media do their publicity. Renault and Nissan are world leaders in EV, and this leadership and image of leadership is priceless, just like you can't price Toyota's leadership in Hybrids.

    so again - in such a huge company, you may find something you don't like (french people?), but I think this is one of the cheapes and safest investment I've seen in a long while.

    ReplyDelete
  3. agree it is interesting, have never pulled the trigger myself. to your question on how long this has existed as a discount, many years. shlomi, this is not an unknown situation, people debate this all the time. having said that it is currently at its largest discount.

    ReplyDelete
  4. Shlomi,

    Thanks for the two great comments, I was surprised myself with the lack of(English language) interest online. I browsed the thread you mentioned through translate and there's a lot of good stuff in there.

    You mention that Nissan is cheap in it's own right, and Renault is as well, this is what I really need to dig into to feel comfortable with this investment. As another commenter mentioned this disparity has existed for years so investing based on the equity value probably isn't wise.

    Thanks for mentioning the financing arm, I need to look into that further. The company's debt level is low, although it seems in the last six months they've started to re-lever a bit. One aspect of the partnership that's nice is that Renault has started issuing low yielding Yen debt.

    As for figuring out why a company is cheap in some ways I'm looking for good reasons to not invest but that's not my entire purpose. First off I don't want to lose money, and often a company can be selling for cheap due to a real legitimate reason. It's easy to see a low P/B or low P/E stock and think it's a gem, but the markets are large, I'm sure thousands have looked at the same stocks I'm looking at. By examining the reasons a stock is cheap I can start to determine if the market is right. Sometimes the market is right, but the magnitude is wrong, other times the market is just plain wrong.

    Part of my methodology is to look at a stock in reverse, the first thing I do is figure out why it's bad or why I wouldn't want it. A lot of times there are bad things that I can handle, and I keep digging further and further. If eventually I'm comfortable with all of the negative issues I'll usually invest. This approach is much more downside focused than upside focused.

    Thanks again for the comments, I have continued to look at Renault, I want to break out some data on their operations. I'll probably do a follow up post with Nissan and Renault's operating data.

    Nate

    ReplyDelete
  5. yes, I would agree, there has been a lot of conversation about these companies. It is important to work out why it is cheap as that is the only way to work out the catalysts. Either way, I have been baffled by this one however, seeing as Fiat and Peugeot are also quite cheap (as well as other non-Euro makers) it is probably people being bearish on the sector (i.e sector is priced for serious consolidation). In addition, suppliers like Autoliv are quite cheap which suggests a sector story.

    Another issues is financing, I haven't looked at the maturity of debt but European companies are mainly funded by banks instead of the market so investors could be worried about the company being unable to refinance at some point (However, companies like Renault or Fiat are 'national champions' so this view probably isn't realistic).

    Either way, I would love to see more research in this sector.

    ReplyDelete
  6. Hey Anon. I follow some forums and many RSSs and never seen anything 'bout RNO, But maybe. do you have an online source?

    Nate, I hope the forum is understandable with google translate and it's great that you do your research. I've had this stock for a short while (half a year) but I'm pretty up to date.

    As you can probably see in the forum, we're really into electric cars and a lot of discussion is about that. The group's focus on EV's surely serves as a great commercial (let's ignore the fact that 20,000 Leafs already sold, and there's a large waiting list). The EV focus of the group is a huge option, with little downside risk (you buy the company after most of its expenditures on EV research - which by itseld was 4 billion euros- 55 percent of market price. you get this free, when, as I mentioned, TESLA stock buyers pay 3.3 billion for a losing company's similar but smaller option.

    another thing that may interest you is that just recently the sales RNO has outside Europe have surpassed 50 percent (or, at least, they're very close). If you look at information and research about the car business you can see that many of the markets RNO and Nissan are entering are on their way to a really long growth in which the number of vehicles per capita is on secular increase- China, Russia and Brazil. This is while the European and US markets are saturated with cars. there's a really interesting post on the Freakonomics blog that talks about the level of GDP per capita in which societies start the long increase in vehicles per capita. One can argue that RNO should be priced as growth company, but, alas, here we are doing the sum of the parts analysis and still finding it oddly priced.

    BTW, a few months back RNO started a partnership with Daimler (mercedes) as well. They also switched shares, but not on market prices because anyone can recognize that the market price of RNO doesn't make sense.

    Anyways, I would love it if you want to challenge me. I'm really in love with this company which can be dangerous- but I can't see what's not to like (except, maybe, the France government's stake in RNO, but that's just because I ditrust governments in general..)

    ReplyDelete
  7. Hi,

    I like your blog and your analysis.

    i've been long RNO (too long) and feel now (a tiny bit) better about it...

    I also owned SCMR a couple of years ago after reading third avenue writings about it, but cashed out after the 2009 special dividend while the stock price was still high (a few days only)...

    regarding hidden champions, i loved that book.
    below are a few of the companies named that are listed:
    - Koenig & bauer (skb)
    - kloeckner
    - fuchs
    - ceag
    - rhi
    - basler

    I like the first one a lot, but no matter how many patents and how financially solid, printing machines are in a tough environment for years to come...

    I haven't looked much into the others, but kloeckner seemed smart enough to issue shares when price was high at the beginning of the year!
    and a neighbor working for a local steel furnace was wondering how come his employer cheaply sells their products to Kloeckner to buy them back at a high price after some machining / transforming...

    looking forward to reading your thoughts about it.

    a french guy living in the country of the hidden champions

    ps: where do i find your email address btw?

    ReplyDelete
  8. Anon,

    Thanks for the comment some really great stuff there.

    What was your original purpose for buying Renault? Was it the discount, or do you like the business?

    Thanks for the list of hidden champions, kloeckner looks interesting at first glance, according to the latest interim statement they're selling for about 55% of working capital, looks like profits are down though. Lots of good stuff to look through in that list

    My email is: oddballstocks [at] gmail [dot] com

    ReplyDelete
  9. Hi Nate,

    Yes, the Renault discount has been around for years. Like you often see with Italian or Japanese, for example, these discounts often seem to persist for years without any visible catalyst for change. I did own RNO a long time back, collected some nice dividends (which have been decimated since), and gave up on the stock eventually.

    Just to highlight: Finally got a chance to tackle ARGO properly. I've posted two articles (with plenty of expansion on my previous comments on message boards and here)on my blog - just reached my 20th post - cheers:

    wexboy.wordpress.com

    ReplyDelete
  10. Hi Nate,

    A quick question: Given the messy cross-holding structure, how did you eliminate double counting the equity value?

    ReplyDelete
  11. Take a look to FFP

    http://www.boursorama.com/cours.phtml?symbole=1rPFFP

    Family holding which owns a part of Peugeot (UG) (35% of the asset of the holding)

    Veryyy cheap !

    ReplyDelete
  12. This comment has been removed by the author.

    ReplyDelete