Description
Value Investors Club www.valueinvestorsclub.com 1
price: $ mkt cap: $ ticker:
GUARDIAN CAP GRP LTD-CL A
GCG/NV CN 18 355.43
description:
It is said there is no such thing as a free lunch. It is also said that you can’t get something for nothing.
Guardian Capital belies these two sayings as in this case the two thoughts are wrong.
Here is the what and why of a free lunch and how you can in fact get something for nothing. A business for sale for
free.
Guardian Capital Group is an investment management firm managing money for institutions, mutual funds, high net worth individuals and others and also operates a financial advisory business.
Now this is key to this recommendation. On May 11, 2001, the now 42 year-old firm, Guardian Capital Group, sold its family of 31 mutual funds with C$2billion in assets to the Bank of Montreal for 4,960,140 Bank of Montreal (BMO) common shares.
It was stated at the time of the sale that the company made this sale in order to focus on its investment-management business and build its private-client and financial-advisory business. And have they ever. (They also still continue to manage the mutual funds for a fee –-have cake and eat it too.)
Today the value of Guardian’s holdings of 4,960,140 shares of BOM and some mutual fund investments presently equals the entire value of the stock i.e. the C$18 per share. market price.
The Bank of Montreal shares alone at this writing have a market value of some C$282 million (at C$56.76 per share) or C$14.25 per GCG share.
BOM also trades in U S dollars on the NYSE. It is a first class Canadian institution and owns the Harris Trust Company in the U.S. It has been a solid earner and it has increased its dividend every year for at least the past ten and in fact it twice increased
its dividend in 2004. It is now at the rate of C$0.44 per Q or C$1.76 per year. It now brings in over C$8.7 Million per year to
Guardian.
Thus a share of GCG is backed up by solid, liquid, marketable securities which are alone worth the price of the shares.
So you buy GCG and you get now a C$15 billion AUM business for free.
That business is growing and has the following asset statistics:
As at December 31 2002 & 2002 and June 30, 2004($ in billions except per share amounts and all figures are expressed in CANADIAN DOLLARS,
6/30/04 2003 2002 03 v 02
Assets under management
$14.3 $13,444 $10,031 +34%
Assets under administration
3.2 2,731 2,308 +18%
Value of corporate holdings of securities
(C$ millions)
339 335 272 +23%
Value of corporate holdings of securitie
diluted per share
16.77 16.63 13.60 +22%
As of June 30, 2004 AUM broke down as follows
C$ in millions
Institutional $13.599
High net worth .581
International .109
Total $14.289
By year end 2004 AUM should be well in excess of C$15 billion.
What is this money management business worth?
Allow me to say I don’t know exactly.
Moreover, rather than comparing GCG to all of its peer valuations (You can easily do that), is it not suffice to say it is worth not nothing but rather something?
Assigning a value to this money management business, which as you can see is a growing entity, of just 2.37%% would equal the entire current share price of C$18 per share.
Want to value it for just 1% of AUM? Then it is worth C$7.60 per share or 42% more than today. I suggest it may be worth more than double the current price and at least if not more than the implied 2.37% of AUM price I used.
It should also be noted that the Canadian dollar has been in a strong uptrend vs. the U.S. dollar which if it continues will add to the U S dollar value of GCG.
Guardian has outstanding 2.880 million Common Shares and 16.878 million Class A non-voting shares for a combined
outstanding share count of 19.758 million. Both trade on the Toronto S E (GCG CN and GCG/NV are the Bloomberg symbols) and at similar prices of near or about $18 per share. The founder Chairman of the company controls the voting shares.
A word about the P & L and Cash Flow and Enterprise Value. Bloomberg for example, on its FA functions, shows very high
Enterprise Value multiples. This is of course wrong. They do not deduct the market value of GCG’s liquid assets as they normally do for analytical purposes. Deducting the marketable securities value from the company’s market value leaves zero
Enterprise Value. Thus the actual Enterprise Value to revenue, income, CF, BV etc are all zero or negative ratios.
The Company is profitable and growing as well and so I bother not here with a discussion of the P & L. It is the liquid assets on the balance sheet, carried at cost, which Is way below market value and the growing AUM that are not a balance sheet asset that are the catalyst for unlocking the severe undervaluation
Moreover, management does think about its shareholders. Below is the dividend record of the past ten years.
3/11/04 75
3/19/03 15
3/25/02 .13
3/23/01 .12
3/23/00 12 .
3/25/99 .10
6/ 1/98 3 for 1 Stock Split
3/20/98 08
4/ 7/97 .056667
3/29/96 .04
3/27/95 033333
3/18/94 .026667
catalyst:
1. Value will out for the patient investor, It always does
2. GCG’s. price chart shows a close fit to that of BMO. I would think that insiders who hold stock
or stock options may well feel that the GCG the share price while reflecting the long-term upward
market move of BMO does not reflect the value of the fruits of their efforts in growing the money
management business. This must be a cause of some frustration and management concern. A
remedy may be considered at some point. Meanwhile, the intrinsic value of the growing asset
management business is itself growing.
3. The BMO is from time to time rumored to be a takeover candidate. Perhaps it will be so and
perhaps maybe even for cash. In any event takeovers are normally at a market premium –- creating yet more value for GCG shareholders. Tax on a sale of BMO would be minimal, perhaps only 15% on gain given tax law and the high basis accorded BMO means most will go untaxed.
4. Management of Guardian is capable, smart, experienced and the and the Chairman founder is certainly so. Nobody here had a mother who had a stupid child. They have been and continue to build the business, the value of which I imagine all readers are well acquainted with.
5. It is entirely possible (probably when it is least expected) that a distribution, sale, monetizing or
other value creating event would be employed or forced upon the Company at some point with
respect to the BMO stock position.
6. It is said everything comes to he who waits. Also it is said and I belive that patience is a virtue. Thus long-term patient investors should be amply rewarded for the waiting, and as the business grows and the investments grow, the underlying assets and intrinsic value grow too.
Catalyst
1. Value will out for the patient investor, It always does
2. GCG’s. price chart shows a close fit to that of BMO. I would think that insiders who hold stock
or stock options may well feel that the GCG the share price while reflecting the long-term upward
market move of BMO does not reflect the value of the fruits of their efforts in growing the money
management business. This must be a cause of some frustration and management concern. A
remedy may be considered at some point. Meanwhile, the intrinsic value of the growing asset
management business is itself growing.
3. The BMO is from time to time rumored to be a takeover candidate. Perhaps it will be so and
perhaps maybe even for cash. In any event takeovers are normally at a market premium –- creating yet more value for GCG shareholders. Tax on a sale of BMO would be minimal, perhaps only 15% on gain given tax law and the high basis accorded BMO means most will go untaxed.
4. Management of Guardian is capable, smart, experienced and the and the Chairman founder is certainly so. Nobody here had a mother who had a stupid child. They have been and continue to build the business, the value of which I imagine all readers are well acquainted with.
5. It is entirely possible (probably when it is least expected) that a distribution, sale, monetizing or
other value creating event would be employed or forced upon the Company at some point with
respect to the BMO stock position.
6. It is said everything comes to he who waits. Also it is said and I belive that patience is a virtue. Thus long-term patient investors should be amply rewarded for the waiting, and as the business grows and the investments grow, the underlying assets and intrinsic value grow too.