Biz Dev in NYC by Rob Tsai

Paul Kedrosky has a nice table on the recent $23 billion infusion by Asian/Middle East sovereign funds in the U.S. banking system:

Buffett confirmed on CNBC today that he’s been indirectly solicited by several financial institutions to help shore up their balance sheets, but he passed on those deals.   

Well, Buffett pulled the trigger, on a $4 billion purchase for 60% of Marmon Holdings, reported to generate about $7 billion in revenue.

Marmon has 125 businesses, comprised of nine sectors grouped into four business segments: (from their website)

Electrical Components: Wire & Cable Products serving energy related markets, residential and non-residential construction and other industries.

Transportation Equipment Services: Transportation Services & Engineered Products, including railroad tank cars and intermodal tank containers; and Highway Technologies, primarily serving the heavy-duty highway transportation industry.

Construction & Industrial Components: Distribution Services for specialty pipe and tubing; Flow Products for the plumbing, HVAC/R, construction and industrial markets; Industrial Products including metal fasteners, safety products and metal fabrication; and Construction Services, providing the leasing and operation of mobile cranes primarily to the energy, mining and petrochemical markets.

Retail Solutions: Water Treatment equipment for residential, commercial and industrial applications; and Retail Services, providing store fixtures, food preparation equipment and related services.

Member businesses employ 21,500 people and operate more than 250 production facilities, primarily in North America, the United Kingdom, Europe and China. Collective revenues totaled $7 billion in 2006. Forbes magazine ranked The Marmon Group 35th on its 2006 list of the largest private companies in the United States.

Marmon’s three year financials can also be found on their website:

Income Includes $184 million and $380 million gains on sales of investments in 2006 and 2005, respectively.

A couple items of note:

• Operating margins have increased steadily, with a pretty substantial runup or 330 bps to 11.4% in 2006
• Book equity actually declined in 2006, while revenue increased 24% and operating income increased 73%.  At the same time liabilities (debt) also declined, so Marmon appears to be making more efficient use of their assets.  Being a private company, I suspect they’ve paid out a fair amount of dividends.  If you apply a 35% tax rate to their $1.028 million EBIT, you’d get to about $670 million in net income.
• So Buffett’s $4.5 billion purchase of 60% (or $7.5 billion valuation) translates to about 11x 2006 earnings.
• We have no guidance on 2007 results over 2006, but let’s assume 10% improvement across the board.  This brings the multiple to under 10x P/E.
• If you were to exclude the gains on investment as extraordinary items ($184 million in 2006, or about 18% of income), the P/E multiples would look like 13.7x 2006 earnings.

An interesting follow-up might be to look at these nine sectors to get an understanding of estimated growth and margin.

I’ll highlight a few investment ideas that might merit further analysis:

Wire and Cable Products:   Corning (GLW), though known for its LCD glass, also makes bendable fiber for telcos like Verizon to wire up apartment buildings for HD video/telephony/internet over fiber.   I bought shares today.  According to Yahoo, it trades at a trailing 19 P/E and 15 P/E on 2008.

Transportation Services & Engineered Products:   Trinity Industries (TRN) is a manufacturer of railcars (among other segments) whose stock has been punished after citing a weak outlook for railcar demand in 2008.  The stock is off its 52-wk high of $49.70, and currently trades at $27 to $28.   I bought shares today.  It trades at a trailing and forward 8 P/E.

Flow Products:   Flowserve (FLS).  I’ve been long this maker of flow products.  Check out William Trent’s great article on SeekingAlpha on October 26th, 2007 when it closed at $77.47.  The stock trades today only 2 months later at $99.05.   It’s the richest of the bunch on a valuation basis, at 29 trailing and 20 forward P/E.

Construction Services:    Interesting that Buffett would invest in a leasing business.  I wonder if he finds them more attractive than the manufacturing side in today’s climate.   I own Terex (TEX), a manufacturer of cranes and mining equipment, who sells as well as leases its equipment  (trades at a trailing 12 P/E and 10 P/E on 2008).   Other companies worth looking into are Manitowoc (MTW) and Joy Global (JOYG).

The author holds long positions in GLW, TRN, FLS and TEX