matisse capital management

Is Art a Good Investment?

Apparently, yes, if it is by the right artist.  On the left is Mark Rothko’s “Homage to Matisse.”  In 2005, Christie’s sold the painting for $22.4 million.  It was previously sold in 1984 for $975,000.  The seller was Meshulam Riklis, husband of Pia Zadora.  This equals a compound annual rate of return of 16.1 percent.  Over the same time period, the Dow had an equivalent annual rate of return of 10.7 percent.   In May, Sotheby’s will auction a Rothko owned by David Rockefeller.  It is titled “White Center, with Yellow, Pink and Lavender.”  He acquired the painting in 1960 for $10,000.  Sotheby’s has given him a guarantee of $46 million.  At this price, the painting will have a compound annual rate of appreciation of 19.7 percent.  During the same time the Dow grew at an equivalent annual rate of 6.7 percent.  And certainly, during the 1970’s, you would have fared better having your money in art than in stocks.  Franz Kline, the 1950’s master of black and white modern art, had two similar paintings sell recently.  The first sold in 2002 for $4,519,000, while a second sold in 2005 for $5,448,000.  Although these are slightly different works of art, for the sake of argument the rate of appreciation was 23.9 percent per year.

Royal Bank of Canada - A Consistent Performer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Price: $52.46, P/E = 15.4 x, PEG = 0.46, Dividend Yield = 3.1% I added shares of Royal Bank of Canada (RY), yesterday.  It was 1.7 % below its high, even though the company exceeded first quarter estimates by $0.13 per share.  As is evident in the chart, the bank has been a consistent performer over the last 15 years, and shares have resisted going down, even when there have been major downturns in the market.  Above, it is compared with Bank of America (BAC). The bank's US sub prime lending exposure is minimal, and Canadian residential mortgage volume should increase in 2007, as the government has lowered the down payment requirement for mortgage insurance.  RY net income has increased more than 30.0 % each of the last three years and long-term debt is only 8.9 percent of total assets (in contrast, Barclay’s, BCS, has almost 48 % long term debt).  During the past year the share price has increased 22.0 %.  Dividend yield is 3.1% and, as the US dollar devalues against the Canadian dollar, this will increase. 

Longwood Gardens - Philadelphia Area

This is the first in a series of posts: “Places That Deserve Our Support.”

Longwood Gardens, 20 miles southwest of Philadelphia is certainly one of those places.  Pierre S. du Pont purchased the land and house in 1906 so he could preserve the trees located there.  Today Longwood has over 1,050 acres of gardens that include a four-acre conservatory, woodlands, meadows and outdoor gardens.  There are also astonishing fountains.  In the summer, The Savoy Company, an amateur theater group, produces Gilbert and Sullivan operettas at Longwood’s amphitheatre and the fountains create a curtain of water for the stage.  The gardens are open Mon., Wed., Thurs., and Sun. 9:00 am–6:00 pm, and Tues., Fri. and Sat. 9:00 am–10:00 pm.  Adult tickets are $14.  On the right is an orchid in the "Orchid House," a picture from a recent visit - click to enlarge.  After the jump, below, are more pictures from Longwood.  Also interesting to know is that Longwood's grounds were a stop on the Underground Railroad in the mid 19th century.  http://www.longwoodgardens.org/

http://www.savoy.org/

SDX - Sodexho Alliance, SA, the Food Company

Current rating: Hold

Current Price: $74.19, P/E = 27.0, PEG = 0.94, Dividend Yield = 1.4%

Sodexho is a food and food services facilities manager that has contracts with schools, corporations, and the military.  It is a multi-national headquartered in France, but with operations in the US, Central and South America, Australia, Asia (including Russia), and every EU country including the Balkans, Czech Republic, Hungary, Romania, and Slovenia.  The emerging market EU member states and Russia should keep revenues growing and the company has, in fact, reported a revenue increase of 7.9 percent for the first half of 2007.  Additional increases in net operating income are expected to come from cost containment.  And, according to Barron's, Sarkozy may reform France's 35-hour work-week, which should "improve productivity at labor-intensive companies like food retailer Sodexho Alliance." Long-term debt is currently a moderate 23.7 percent of total assets.  The company promotes diversity and equal opportunity to keep employee turnover low, which we view as a positive trait.  Sodexho is a buy if the price drops in a general market downturn, but to get to the current share price had to assume 25% earnings growth for each of the next three years, reversionary growth of 3.0% and a 10% discount rate, using 2006 EPS as a starting point.  The PEG was calculated using average annual NI growth over the last three years, as 2005 income incorporated some one-time items.

The Story of "O" - Realty Income Corporation

Current Price: $28.01, P/E = 16.5, PEG = 1.6, Dividend Yield = 5.5%

Great concept, great company.  This REIT has a $2.2 billion portfolio.  Last year the share price appreciated 27%, and with the dividend yield, the total return was 32.5%.  "O" acquires freestanding retail properties, through sale-leasebacks, and has a portfolio that includes Pier One, Circle K, National Tire, Pizza Hut, Midas and Friendly’s stores.  These leases typically have 10-25 year terms with renewal options and, of course, they roll over at different times.  Holdings were diversified across 48 states and 103 separate retail chains in 2006.  “O” says its primary goal is: “to provide dependable monthly income to shareholders,” and it has paid out dividends every month since 1969.  The current dividend yield is 5.5%.  The P/E of 16.5 is exceptionally low for a REIT, which often have P/E's from 25 to 60x earnings (e.g., SPG or MAC).  Long-term debt is only 36% of total assets, which is also unusual; most REITs are highly leveraged.  This leaves more capital for growth. Major shareholders include Deutsche Bank, Vanguard, and TIAA-CREF.    Why put money in risky "growth" stocks when O generates these returns from high credit tenants?

Discounted Cash Flow Valuatation = $29.00 per share, assuming 10% EPS growth the next three years, 3% reversionary growth, and a 10% discount rate.

Image above: Penn Station, New York before the 1963 "renovation."

AIB on Sale, 10% Off

Current Price: $58.05, P/E = 11.73, PEG = 0.59, Dividend Yield = 3.2%

At the current price of $58.05, Allied Irish Bank is on sale.  One NYSE is share is equal to two London or Dublin traded shares.  On the "two share basis," 2006 EPS was $4.95, an increase of 25% over 2005.  Using this EPS,  we performed a discounted cash flow assuming very low 5% annual EPS growth for the next 3 years, reversionary growth of 3% annually, and an 11% discount rate. Using these conservative metrics, the result was $63 per share.  In our opinion, the stock has been "over-discounted" as AIB owns 23% of M&T Bank, which issued an earnings warning earlier this year due to sub prime exposure.  M&T revised its earnings estimate downward 15%.  Note that 23% of 15% is only 3%, but AIB has been discounted nearly 10% from its February high of $64.38, an over correction that creates a buying opportunity.  Ireland's economy remains strong and AIB has a high growth subsidiary in Poland, Bank Zachodni WBK S.A., with 400 branches.  Therefore, substantial earnings growth should continue for AIB over the next year.  On the right: AIB Branch, Galway.

Bullish on the Euro

When you hold a currency, you are holding de facto shares in the "corporation that is that country."  The dollar continues to devalue against the Euro, partly because financing the US deficit through debt increases its risk.  In 2006, the US current account deficit was 6.5% of GDP.  In theory, interest rates need to increase to get investors to finance the deficit, but the Fed seems unlikely to do this now. Alternatively, lowering rates will decrease demand for the dollar and therefore its value.  When the Euro was launched in January 1999, the price of one Euro was $1.17 or £0.67; today it is $1.3436 and some countries prefer to hold reserves in Euros.  The EU’s Stability and Growth Pact limits its members’ current account deficits to 3% of GDP and long term debt to no more than 60% of GDP.  These fiscal limitations may prevent governments from capital spending to stimulate the economy during a recession, but they do promote a sound currency.  We expect the Euro to strengthen further this year and to rise above $1.36 by the end of summer, if the Fed leaves rates unchanged.  Importantly, a stronger Euro increases dollar returns on EU stocks.