Northamber - A Berkshire Hathaway clone?
Just last week I wrote about how investing in large and successful businesses is generally a happier affair than messing with sickly small-caps, and to prove the point I offer Exhibit A: Northamber.
If you’ve been around the value investing blogs over the last few years you’ve probably already heard of Northamber. I owned it myself for a year or so back in 2008/9 and Richard Beddard over at Interactive Investor has owned it too.
It trades well below book value and tangible book value and has tons of cash, all of which are of interest to deep value investors.
So what’s the link to Berkshire Hathaway?
Of course, they don’t look very similar today, but the Berkshire of 1950s vintage would, I suspect, look eerily similar to Northamber.
Comparing the Northamber of today to the 1950s Berkshire Hathaway:
- They’re both companies with long histories, steady sales and well known names in their industries (cotton mills for Berkshire and IT distribution for Northamber).
- They both operate in fiercely price competitive industries without a competitive advantage.
- They're facing decline in their core business with no obvious alternative places to reinvest retained earnings.
Berkshire Hathaway faced inevitable decline and probably should have closed long before Buffett eventually did close the old textile part of the business in 1985. It may have only lasted that long with help from the more successful parts of the business that Buffett had bolted on during his early ownership.
Northamber has no equivalent knight in shining armour.
Priced for its death-bed
The market seems to agree and has Northamber priced for its death-bed. For example, the market cap stands at just over £12 million while tangible book value is twice that, there is zero debt and £13 million cold hard cash in the bank too.
If you shut the business today you might get something like 100% of the face value of its cash, 75% for receivables and 50% for inventory. If we’re really pessimistic we can assign a value of zero to fixed assets (which is overly pessimistic as those assets are freehold properties valued at £2.5 million). Add that lot up and subtract 100% of all liabilities and, as at the latest interim report, the total would come to just under £14 million.
This means that the market cap is below a crude estimate of the company’s liquidation value. That’s got to be pretty cheap in anybody’s book.
The assumption with this stock then is that if the company closes you might get your money back, but if it doesn’t close the management have a lot of time and assets at their disposal to try to generate some half-decent profits… at some point.
So despite this company’s obvious short-comings I have added it to the 21st century net-net model portfolio. To reduce risk the position size is just 1.6% (1/60th) of the total and the expected holding period is five years.
You can see the existing holdings below:
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6 comments
PS v clever title. Bet that boosted the readership numbers. It's the first and last time that Northamber will be compared to BH though !
I too have looked at this company and steered away because
1) it had no competitive advantage
2) I felt it was run for management and not for shareholders.
3) the management refused to return my calls when I was researching it (see previous point)
I will take another look, but until I see actions that challenge point 2 I will stay on the sidelines.
Thanks for reminding me though
I'd been researching this company and then spotted this old article. Thought I may as well update it with the current state of affairs. The company is still going and still has a massive discount to net asset value and no debt and no pension obligations.
It seems possible that a significant announcement may be on its way. Reasons to believe in a change of direction (i.e. realize the value of the property assets and potentially distribute to shareholders rather than slog away at the core business):
1. Director appointed in Feb 2016 with significant property experience
2. Planning permission gained to convert one of their key buildings in Chessington into 28 flats.
3. Interims talked repeatedly about the value of the property portfolio and thanked shareholders for their patience.
4. Shortly after the interims "John and Sarah Rockliff" declared a combined holding of 1,000,000 shares (worth around a third of a million pounds) - over 3% over the entire company!
Of course these might be red-herrings... so DYOR and see what you think. I hold.
They are likely to report full year results in the next month or so (last year FY results were 23 Oct).
Sounds like what Ben Graham or Buffett would call an "NCAV" stock. Note that such stocks need the most careful verification of assets.
I guess the net net approach is easy to criticise when picking off individual companies, because by it's very nature it will mostly pick up companies that are suffering real operational problems.
Any gains therefore must come from a minority that do manage to come good - a few good winners and a lot of losers.
But here you state that the company has a lot of time and assets to turn a half decent profit. I know next to nothing about this company, but looking at their P&L summaries over the last 7 years see that in total they've made sales of over £1bn, so must be doing something right, but profits over that period amount to c£2m.
So, it might be a net net today, but that seems to be a marginal call and the evidence suggests that those future profits will remain elusive, the business model doesn't work and net assets are likely to fall.
Hi shipoffrogs. You're right in that the last 7 years has shown that management have been flogging a dead horse, but that doesn't mean they'll keep doing it for another 7 years. At some point they may work out that the company either needs to shut down or have a major turnaround project done to move it into something that actually does make money.
The probabilities of these events and the magnitude of their various effects are beyond the powers of mere mortals to calculate I think. My assumption is that the company will survive and somehow, something will happen to make investors less pessimistic than they are now. The what/where/when and how of all that are nothing more than a guess.
My defence against all this ignorance is adequate diversification and a talent for emotional detachment.