November 12 , 2017

On Friday, the S&P 500 was down 0.1% and Toronto was down 0.3%.

A big winner was AutoCanada up 9.2% after releasing earnings. Some observers predict hard times for auto dealers as the industry moves to more reliable electric cars and ride-sharing and as driverless cars potentially become so popular that fewer people feel the need to own a car. I don’t know if such predictions will come true. I do know that predicting the future is always tough. Meanwhile the auto sales industry is enjoying record sales in Canada and the West is once again outpacing the rest of the country. “Sales for the Company were up 9.4% in the third quarter, out-performing the national sales increase of 6.8%.” On a trailing year basis, the P/E ratio based on adjusted earnings per share seems reasonably attractive at 16 given that earnings could continue to increase on a year over year basis. According to Yahoo Finance, the stock is trading at 12.5 times the expected level of 2018 earnings per share. I have a relatively large exposure to this company and I am not thinking of reducing my position.

Stantec was up 2.0%.

Regarding Melcor Developments, I came across the following analysis of its value in an RBC update of a few days ago:

Our (RBC’s) $16.00 price target is derived through a sum-of-the-parts valuation, which includes: 1) a $9.25 value for Melcor’s Community Development division, derived though a ~0.50x price-to-book ratio, a discount to peers which trade at 1.5x, reflecting negative
investor sentiment due to the company‚Äôs exposure to the oil patch; and 2) a $6.75 value for the company’s Commercial Properties¬†portfolio, derived though a ~0.55x multiple to our NAV per share estimate, which reflects a holding company discount and compares to the current P/NAV of Melcor REIT at 0.84x. Overall, our target price implies a ~0.56x multiple to our adjusted book value of $28.49. Based on relative risk-adjusted return expectations, we rate MRD shares Sector Perform, supported by our price

So RBC believes that due to its exposure to the oil patch Melcor’s lands should sell at just half of what those lands cost Melcor (including the costs of development and capitalized interest on the land). With this logic, when Melcor buys new lands or invests in developing raw land into lots, they are effectively as Buffett would say “turning dollar bills into 50 cents pieces”. Meanwhile “peers” (not exposed to the oil patch) sell at 1.5 times cost. And meanwhile oil prices have risen in recent months and activity in the oil patch is increasing. To me, RBC’s analysis looks like nothing more than using whatever multiple happens to basically explain the current share price. If one is to believe that the current share price of stocks is generally correct then why bother with analysis? If the market is always correct and there is no ability to identify under-valued stocks then it would be logical to simply invest in the index. In my view the $28.49 book value is likely a more reasonable estimate of the true value of Melcor. Even though the share price might not reflect that true value anytime soon, I like to think that buying Melcor around $15 is basically what Buffett would describe as “buying dollar bills for 50 cents” or something close to that. Well, only time will tell which view is more correct.