Guy Gottfried: Prospecting for Value in the Great White North

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Guy Gottfried: Prospecting for Value in the Great White North Note to readers: I am writing all these posts very informally. I have found that readers like this the best, and it enables me to take the most notes possible and get them up in real time. I will be updating the presentations in real time, and tweeting, so make sure to check back frequently or on Twitter, Facebook or Feedburner. Also you can check out this website announcement Value Investing Congress Website Announcement.

All notes are the speaker’s own statements, except for the brackets.

Gut Gottfried is the founder and manager of Rational Investment Group, a value-oriented investment fund. Rational employs a risk-averse, research-intensive value methodology to uncover securities exhibiting material upside potential along with minimal risk of capital impairment. Prior to launching Rational, Mr. Gottfried was a senior analyst at Bruce Berkowitz’s Fairholme Capital Management. Mr. Gottfried is a graduate of York University in Toronto, where he was a President’s Scholarship recipient.

I have a great idea on a Candian investment.

Many Americans are concerned about the economy and want some

Canada has the lowest GDP and fastest growth in the G7.

No Candian bank even cut its dividend during the crisis.

The value investing community is small. Even the investment industry is small, there are only 150 hedge funds in the company.

The Brick Ltd. is my idea which is TSX:BRL, BRK.Wt.

Its at a $340million market cap (in Candidan dollars, everything here will be in Candian dollars).

It trades at 6x trailing FCF, and 4,5x FCF. The market is valuing the retail chain at zero.

The company has great management who are buying shares. The blaance sheet is strong.

The Brick paid out all of its cash flow in dividends from 2004-2008. It nearly went bankrupt and was saved by FairFax financing.

Brick brought in a new CEO, issued warrants, and brought in a new CEO.

Why is it cheap?

It is heavily illiquid by insiders who never sell.

Many investors got killed in 2009 and are scared to get back in.

The company has no coverage.

There are three branches:

Corporate retail

Financial Services

40% pretax FCF

Franchising is very profitable and has low capex.

Sells warranties that cover defects, offers credit insurance. FCF TTM $22m

It also franchises 58 stores. It gets initial fee, ongoing 2.5% fee, and mark up on inventory.

Francise store growth has been dramatic, and management plans to ramp it up.

Total sales by franchises has tripled since 2005. Brick takes close to a 4% cut of the franchises’ sales.

Some cheap stocks have been destroyed by capital misallocation. Prem Watsa owns 33% of the company. He has compounded Fairfax’s book value at 25% for over 25 years. Fairfax’s continuing involvement will continue to provide confidence in the company.

Bill Gregson the CEO since 2009, has a history of successful turnarounds. It has increased GMs by 300 bps. Reduced inventory and achieved great same store sales.

Brick has outperformed peers in this environment.

The Brick is reducing shares outstanding by over 20% without spending a penny. The shares issued warrants well in the money, but gave the investors gave a no cash offer for the warrants, so 90% of investors participated.

In August 2010 the company intiated buybacks and finished redeeming warrants.

It has diluted 25% of o/s in 12 minutes.

Insider buying is a good sign. 13 insiders and Fairfax have bought back a lot of shares since May 2010, and again in June and August of 2011.

Old management paid out 95% of FCF from 04-08. The old management was underinvesting, however they did expand their distribution capacity by 30% in 2006.

The payout ratio was 101% in 09.

Leon’s furniture sells very similar goods to The Brick. Operating costs are 31% compared to Leon’s 22%, and management is tackling this to decrease operating costs. Even if Brick cannot reach Leon’s, for every 1% reduction in operating costs the Brick will increase FCF by 18%.

Brick’s year end cash allows it to repay all the debt and still have cash left with an increase in FCF of 18%.

At current share price you are getting retail franchise for free.

Their assets are very high quality.

It is one of the most powerful brands in Canada

It has economies of scale, and is number two behind Sears Canada.



P/FCF is 6.2x is super cheap. However looking at upcoming share and possible debt repurchases P/FCF will be 4.2x or 4.6x, and net debt stays very low at either 0.8% of FCF of 0.2% of FCF.

If you expand your time horizon the Brick could both repurchase stock and repurchase debt and have enormous FCF. Whatever multiple you put on it it leads to very large gains.

This scenario assumes zero growth in very segment.



Debt repurchases. Accretive FCF with healthy reserves due to share buybacks.

Possible resumption of dividends.



Great business with solid balance sheet.

Good management and insiders

Cheap valuation.


The company was in dire straits in 2008/09, but they have improved their GMs compared to their good years 05-07, by improving inventory, vendor discounts. Little things here and there. Now they are doing that with rest of cost structure. They have reduced commissions on warranties. They are very cost concious.

One anecdote: I visited the CEO and CFO in Toronto. The CFO commented that their suppliers paid for a conference. So they had a big conference with investors and did not use a dime of shareholder money to pay for it.

Housing market bubble crash in Canada, how would that affect company?

In the event of a correction, the management could take advantage by taking share with competitors. You also have a good management team in place. The balance sheet is strong enough to whether the storm, and can buy back shares at cheaper prices.

The housing market is overvalued but we never experienced anything like in the US, I also dont think we have the same risk if the housing market does collapse. Because the US had an insane bing of liar loans, in Canada the best you can probably do is 5% down. The more esoteric products dont exist.People who can stay in their house dont want to sell. I doubt there will be a foreclosure mess like in America, which created force sellers. In Canada, all loans are recourse and you can go after personal assets unlike in the US.

Leon’s is very well run but the stock never moves because the family owns 2/3 of the o/s. It has no catalyst and will probably stay cheap based on sum of parts.

The CEO emphasizes constantly that the franchise business is the one that they want to grow. This is very under-penetrated and even had double digit growth during the economic downturn.  Most of Canada is smaller towns besides for a few big cities, so this is an area where The Brick can expand. Franchising not only increases cash but also improves the brand without laying out any capital.

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