1. average earnings over a 10 year period = $820K

2. Return on invested capital = 7.0%

3. Utilities, Berkshire Hathaway, & Coca Cola may have a LT cost of capital of 6% but not PARF. Come on, now.

4. PARF’s current P/B ratio is .6, same as the historical: why do you think the ratio reverts to that number? Could it be because the business is not worth its assets?

5. PARF’s business is slowly shrinking, not even keeping up with inflation.

5. Ask the people who invested in PARF 10 years ago, 5 years ago, 2 years ago how they feel about committing their savings to this name.

6. What would you pay to buy this company outright? If you pay NAV, it’ll yield ~7%. Which is about what Oracle, for example, is currently yielding. Which would you rather own at 7% yield? Oracle, I presume. So would everyone else. That’s why its not worth book. Bad companies are never worth their assets unless/until the business is liquidated.

the stock trades at a little over half its tangible book value and is currently under its working capital requirements.

in addition to that, it can earn well over $2.00 per share on an annual basis and has made a profit every year since 1990 except for ’93.

i’m sorry but the unattractive industry argument doesn’t work when a stock is trading at such a large discount to its net asset value before even considering the operational value of the business…

also extremely confused by your comment on PARF not earning its cost of capital. PARF’s cost of capital is 5% max, and even if the business was earning a rate below that, it would not account for the substantial difference in price and tangible book value.

one other thing: PARF’s average historical p/b ratio is over 0.6x. it traded as high as 1x book in 2003, when it was earning only 4% on its equity value.

this is not a value trap: this is 100% pure value. on top of the gigantic discount, management has cut their own pay slightly and improved gross margin on a lower sales base!

strong strong value play here

Red, thanks. It’s good to hear a bear case and some perspective.

I’m still bullish in the short term. The earnings power is the most important factor I think. (A dividend hike seems highly likely this year also.) Based on recent earnings, I like the odds of price appreciation, perhaps by a substantial amount.

Averaged over 10 years, yes. Didn’t mean to jump down your throat, btw :). I’ve read lots of write-ups on PAF over the years and they all say “dominates its niche” etc.

Very big difference between being a winner, on the one hand, and winning at a game no-one wants to play, on the other. After applying the cost of capital, PARF wins because no-one wants to spend capital that costs, say, 8%, to get returns of 7%. Who would want to compete with that? The proof is in the pudding: the discount to the balance sheet has been there forever, and it’s trending down.

PARF is the very definition of a value trap, in my view: the value is apparent but not real.

If you’re not averse to international stocks, you might be interested in Burelle SA: it’s a holdco that’s currently priced at well below 1/2 liquidation value. The principal asset that would be liquidated in that hypothetical scenario is a 56.1% stake in Plastic Omnium (high ROIC, growing, dominant in the fender business), which is traded on the French exchanges. This is the kind of net-net in which one can place one’s faith; time is on one’s side rather than one’s enemy. One doesn’t have to mess around with low quality assets like PARF if one can help it..

Cheers, Jason.

Jim

Nice write up and thanks for the plug! Will definitely be checking out your blog more and hope my readers do too.

Red

I am a bit confused by this. How are you getting a 7% ROIC, averaged over the past decade maybe?

I knew I should have worded that line about the moat differently. I didn’t mean to say that they had a moat I should have said that they have moat like qualities because of the very niche industry that they are in with very minimal competition.

Abandoning an ROIC check is risky, imo. Leads one to believe that a business has a moat when the truth is that no-one wants to be in that industry.