A Healthy Net-Net for 1.93x Earnings
One of the largest brands in North America for less than its NCAV.
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In 1950, a twenty-year-old Warren Buffett was a graduate student at Columbia University.
He travelled to Jersey City to attend the annual shareholder meeting of Marshall-Wells, a hardware wholesaler.
Buffett had purchased the stock because it was a classic deep-value investment that fit the criteria taught by his professor, Benjamin Graham.
The company was the largest hardware wholesaler in North America and was large enough to be included in the Fortune 500 list a few years later.
The specific valuation metrics for Marshall-Wells were incredibly attractive to a value investor:
NCAV Ratio = 0.60
EV/EBIT Ratio = 1.93
At the time of Buffett’s purchase, the company had a market capitalization of $11.4M and an enterprise value of only $7.0M.
The stock was trading at a significant discount to its liquidation value.
The stock price was $200 per share, yet the Net Current Asset Value (NCAV) was $331.42 per share.
This means the stock was trading at a 40% discount to its NCAV.
The EV/Earnings ratio was also exceptionally low, calculated at 1.93x the company’s 1949 EBIT.
The margin of safety in this investment was derived from the company’s high-quality assets.
Cash and government securities made up 20.3% of total assets, and inventory accounted for 43.4%.
The inventory consisted of non-perishable items like tools and farm equipment, which carried very low risk of becoming obsolete.
This asset protection meant that an investor was buying $1.00 of liquid assets for roughly $0.60.
This gave a logical rationale for upside-potential simply through the realization of this underlying value.
Why The Stock Was Cheap
The stock price was depressed because the market had a pessimistic view of the hardware wholesaling industry following World War II.
Investors believed the seller’s market caused by post-war shortages was ending and that business would return to a reduced profitability.
1949 had been a recession year which caused Marshall-Wells’ revenue to contract by 8.9%.
There were also fears regarding future competition.
The industry was becoming more difficult as department stores and mass merchandisers began selling hardware.
These were taking market share from the independent retailers that Marshall-Wells supplied.
Investors worried that these structural changes and the need for increased capital investment would erode returns.
Management also seemed to treat the annual meeting as a mere legal obligation and showed little interest in shareholder engagement.
This also probably dampened investor enthusiasm.
How It Played Out
Buffett bought 25 shares of Marshall-Wells in 1950 at $200 per share.
He made this investment in a partnership with his father for a total outlay of $5,000.
This was a significant position for Buffett at the time, representing about 25% of his net worth.
The investment did not result in a large capital gain for Buffett personally because he did not hold the stock for long.
He sold his shares later in 1950 at a 1% loss.
However, the company paid a $12 per share dividend that year, so he likely made a small profit that was not reflected in the share price alone.
Buffett exited the position partly because he was unimpressed by the management’s lack of accountability to shareholders.
For the business, the immediate years following Buffett’s purchase saw a temporary boost from the Korean War, which kept prices high.
However, by 1952, the business began to decline as competition intensified and profit margins fell.
Despite this deterioration, an investor who bought at $200 and held the stock would have done well.
In 1955, Ambrook Industries purchased the controlling family’s stake for approximately $375 per share.
An investor who held until this buyout would have earned a mid-to-high-teens Internal Rate of Return (IRR).
Following the buyout, the company’s assets were slowly liquidated, and it eventually merged into a holding company in 1965.
Lessons For Today
I like the Marshall-Wells investment because it shows how little has changed in the world of deep-value investing.
This, in turn, provides conviction in its power.
It shows modern investors the power of purchasing assets at a deep discount to their liquidation value.
Marshall-Wells faced a shrinking market and increased competition.
Despite this, the investment ultimately provided a strong return because the entry price was so low relative to the tangible assets.
Look for things trading below their Net Current Asset Value, particularly when the current assets are cash or non-perishable inventory.
This one proves that a margin of safety based on hard assets can protect an investor from mediocre business performance.
However, it also highlights that such investments may require patience or a specific catalyst, such as a buyout, to unlock the value.
Very often, a dirt-cheap price will attract those very catalysts.
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