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Case Study 4 Clear Investment Thesis Winmill_cash Bargain

Case Study 4 Clear Investment Thesis Winmill_cash Bargain

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Published by John Aldridge Chew

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Published by: John Aldridge Chew on Dec 14, 2011
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Case Study #4 of an Investment Thesis-Cash Bargain
www.csinvesting.wordpress.comstudying/teaching/investing Page 1
10-K (2001) in the Appendix starting page 8
Winmill & Company (WNMLA) - $1.70 on Jul 13, 2001 by charlie479
2011 2012Price: $1.70 Earnings Per Share:Shares Outstanding (in M): N/M P/E:Market Cap (in $M): 3 P/FCF:Net Debt (in $M): N/M EBIT (in $M): N/M N/MTEV (in $M): N/M TEV/EBIT:Winmill & Company has
net cash of $3.91.
The stock trades for
. If the stock trades to net cash value,the total return will be 130%.Generally, the "catch" in companies that are trading for below cash value is either (1) there are substantialliabilities or (2) there is a large operating burn rate that is depleting the cash assets. Neither of these apply here:WNMLA has no funded debt and only a very small amount of current liabilities. After subtracting ALLliabilities (Cash and Marketable Securities minus Total Liabilities), net cash is $3.91.Operating cash flow was a loss of $0.13 per share in the most recent quarter. However, this was affected by anon-recurring payment on accrued taxes related to the sale in the prior year of a non-operating asset. Adjustingfor this working capital item produces operating cash flow in the most recent quarter of positive $0.01. The mostrecent quarter's results do not include any contribution from the sold assets.WNMLA is a securities firm that has been selling off its principal assets in the last two years. Originally, thecompany was called Bull & Bear Group. That company had 3 main assets: a brokerage operation, a commercialreal estate property which produced rental income, and a fund management division. In 1999, the company soldits brokerage operation (and the rights to the Bull & Bear name) to Royal Bank of Canada. In 2000, the companysold its real estate property. What remains now is the cash and the fund management company, which I believe
will be eventually sold as well.The remaining fund management company manages approximately $170 mil in capital. As I'm sure many of theVIC members who are fund managers know, the fund management business is an extremely good one. Annualmanagement fees are received based on a percentage of assets under management. Therefore, revenue increasesdirectly proportionally with AUM whereas the expenses of managing a larger amount of assets stay relativelyfixed (you do not have to increase operating expenses 10x if your assets under management grow from $50 milto $500 million). Additionally, these management fees are recurring in nature and it produces a nice ongoing
stream of revenue.The assets under management of WNMLA can be classified into 3 categories: (1) Closed end funds, (2) Moneymarket funds and (3) Open end mutual funds. WNMLA has 3 closed end funds that account for approximately1/3 of the assets under management. Likewise, WNMLA has a money market fund that also accounts forapproximately 1/3 of assets under management. These 2 categories have produced market-rate returns and shouldgrow assets at roughly the industry average.The performance of the third category (open end funds) is the reason that WNMLA is so cheap today. WNMLA
Case Study #4 of an Investment Thesis-Cash Bargain
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manages the Midas family of funds which, in accordance with its name, has historically specialized in goldequities and precious metals. The performance of these funds has been abysmal. However, these funds nowaccount for only 1/3 of assets under management and the two largest (by far) funds within this category areshowing signs of getting on the right track. Midas Special Equities shifted its investment strategy last year andturned over its portfolio. Its largest holdings now include Phillip Morris, AIG and Berkshire Hathaway (each10%+ of assets). WNMLA's other main mutual fund, Midas Fund, was up 9% in the latest quarter (ending June
30).1. Company trades for less than 50% of cash minus total liabilities.2. Company may be sold as Bassett Winmill (chairman) approaches retirement. He is 71.3. WNMLA's mutual funds had decent performance in the 2nd quarter. Midas Fund alone was up 9% in thequarter. This should positively impact WNMLA's 2nd quarter results when they are announced.# Author Date Subject Private16
 12/28/05 03:05 AM pete0911Yes, indeed. Good news for Bexil shareholders, too. Their portfolio was undermarked after all. Looking at thefigures on this York investment, I think maybe the Winmills aren't such poor capital allocators . . .15
 12/21/05 02:36 AM rrackam836They put their financial statements in their press releases. So you can go to the 12/13/05 press relase for the9/30/05 financials. If you read that, the historical annuals, and the documents filed by BXL and TUX, that shouldbe enough. When the company is a pile of cash and and a couple securities, I don't know that there is much elseto analyze.14
 08/19/03 10:10 AM Less safetyI'm not sure if anyone is still following this but
the margin of safety is eroding a bit.
Cash and marketablesecurities minus all liabilities is now $4.37 per share but the stock is currently $2.94
so the discount to net cashis 33% (versus 57% originally).
I think the Bexil portfolio may be undermarked so things could move higherstill but the margin of safety change is worth considering.13 north481 07/24/01 11:54 PMDoes badmgmtmatter?Just talked with a former employee...used to run the Dollar Reserves and the CEF's. His main concerns with thecompany are that he feels they are in the process of converting the CEFs to operating companies and willeventually bleed them for personal gain. He described a mgmt that is highly shareholder unfriendly. Granted heis a former employee, but his depiction of the Winmills wasn't flattering to say the least.Is it possible, even with the cushion, that a bad mgmt, motivated buy person gain, can sink an investment madeat such low prices? The Winmills run this company as if it is private and have done a truly awful job of managing their mutual funds. AUM has fallen over the past 10 years. Also, I was given the strong impression,that Bassett (the dad) has passed along the day to day mgmt of the company to Thomas. According to the formeremployee, Thomas just doesn't know how to do anything else. Think about it, What incentive does Thomashave....1. stay making a few hundred thousand dollars a year plus manage money without any oversight orapparent skill or outside pressure or 2. sell the company, give up the pay and think of something else to do.Big discount to today's intrinsic value, but given another 10 years of dismal corporate performance and
Case Study #4 of an Investment Thesis-Cash Bargain
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# Author Date Subject Privateshareholder unfriendly moves and the discount could shrink dramatically.Look at the WSJ profile from 98 or 99....not too pretty a picture of Thomas and Bassett!12
 07/20/01 11:37 AM tank I think the main focus of the idea is the incredible margin of safety versus assets that are liquid within an entitythat is free of obligations and cash burn. The secondary factor is the potential sale of the company.The father remains the key decision maker. He has been supportive of the asset dispositions in the last two yearsand I'm sure he is thinking about how he wants to organize his estate as he gets up into the 70s.The son is involved in the business and he may like his job currently but this would not be an obstacle to anacquisition. Any potential acquirer could continue to employ him (his salary is about average for a Wall Streetfinancial professional). I'd also note that Bassett sold the discount brokerage business, even though his other sonwas running that company.I, too, noted the options pricing. Needless to say, I don't like it. The best I can do is to deduct an estimate for"value destructive" actions like this and demand an even larger margin of safety. As you state in your post, thediscount to adjusted NAV is still about 50% even taking conservative assumptions for this.11
 07/20/01 11:20 AM AUMI have slightly different numbers from Morningstar as of 6/30/01:MIDSX: $37 milMISEX: $22 milMUSOX: $3 milMIDIX: $3 milTUX: $12.4 milGIF: $29.8 milBXL: $11.2 milI have a slightly higher number than you do for the Dollar Reserves fund but since this is a money-market fundthat they 0.5% management fee on, this is less important. Overall, I am in the same ballpark as you for totalAUM.I would multiply each fund by the estimated management fee plus the distribution fee and the expensereimbursement that each fund pays to Midas Management Corp for accounting and other admin services (lastcategory does not appear in revenues but as a reduction of expenses on WNMLA income statement, I believe).Dollar Reserves: 0.5% mgmt fee, 0.25% 12b-1 fee, 0.49% expense reimbursementMidas: 1.0%; 0.25%; 2.23%MISEX: 0.9%; 1.00%; 1.54%MUSOX: 1.0%, 1.00%, 2.95% (but subtract 0.75% expense waiver)MIDIX: 1.0%; 1.00%, 3.86% (0.75% waiver)I don't have the closed end funds handy.10 north481 07/19/01 02:02 PMAUMrevisitedlooks like they own shares in their own funds..they aren't minority owners of the CEFs

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