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Stock Picks

The Second Investment

Nearly two months after making my first investment, I made my second investment in the IV Portfolio on the 30th May, and it has been worth the wait. While one may be tempted to chase returns given the steady upward march of stocks prices (S&P 500 is up approx. 6% during this period), I have forced myself to remain patient and focused on absolute value in my search for prospective investments. I am happy to say that this search (and my approach to it) has yielded a real hidden gem. In fact, I believe I have identified (after much digging) one of the most compelling investment opportunities in public markets at present.

My second investment is in the common stock of GEA SA, a France-based niche business that supplies electronic toll equipment (hardware and software) to all the major French toll road operators. GEA is the market leader in France, (which has largest road network in Europe), but also generates approx. 40% of its revenue from overseas markets.

It has all the characteristics of a classic “Buffett stock”:  excellent management, high returns on capital with no leverage, consistent earnings power, favourable prospects, and durable competitive advantages, and is available at the bargain price of just 3x EV/EBIT (its most comparable peers trade at 7x – 17x EBIT).

The opportunity gets more compelling however, as this Buffett stock is actually available at a Ben Graham-like price, trading for two-thirds my estimate of intrinsic value, under very conservative assumptions. I believe there is 50% – 80% upside from current levels, the majority of which is on the balance sheet today, in excess cash (at 55% of market cap). And there is no better margin of safety than actual cash.

Why is it so cheap? GEA is virtually unknown among the investment community and is not covered by any investment banks or research firms, and management do not appear to have any interest in changing this. The most likely catalyst is a buy-out by a PE firm or trade buyer, but sheer valuation is also a catalyst in my view, as I simply do not believe that a business like GEA will continue to remain undiscovered – after all, I found it!

My investment case for GEA can be found here: https://independentvalue.wordpress.com/2014/06/10/gea-sa-all-roads-lead-to-grenoble-and-50-upside/

I find this opportunity so compelling that I have made it a 10% position in the IV Portfolio – please refer to the Independent Value Portfolio section of this blog for an overview of the Portfolio.

GEA is an excellent business that I expect will prove an excellent investment in time. In the meantime, I will collect a 4% dividend, and may look to increase my holding in the near future.

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Discussion

3 thoughts on “The Second Investment

  1. Great post and excellent blog.

    This has to be the most thorough and comprehensive analysis I’ve seen on GEA. I like those shares too.

    You might also want to look at other French micro / small caps such as Installux or Precia for instance, which I also find undervalued.

    Keep up the great work. This is really promising.

    Posted by Laurent | June 17, 2014, 1:49 am
    • Thanks for reading and for your kind comments Laurent, glad you found my analysis interesting.

      I will take a look at Installux and Precia, thanks for sharing.

      Posted by independentvalue | June 17, 2014, 8:16 pm
      • It’s a shame that you can’t post on your blog anymore. Such thorough value investing equity research is a rare thing. I would have been prepared to pay to read more of this. That will be missed.

        Posted by Laurent | December 24, 2014, 7:12 am

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