Friday, September 30, 2016

Stealing from Steel Partners

I own shares of Steel Partners (SPLP) at a price that makes me feel like a thief. I've followed this company for a few years, but finally got it into the portfolio as the company's discount to its assets has risen, in my opinion.

Steel is run and controlled by Warren Lichtenstein, who is a value investor who says all the right things (you can read his letter here) and has backed it up with results. He has put up these numbers over the course of a few decades:

Nevertheless, Steel trades at a 35% discount to its book value, which is mostly made up of its investments. Some of the investments are public and are carried at market value, but others are not and so I suspect book value represents an underestimate of the company's intrinsic value. The best example of this is probably a company called Webbank. Steel owns 91% of Webbank, which had earnings of $31 million in 2015. Webbank is carried on the balance sheet for only $60 million! Steel Partners itself only trades for $378 million!

Steel has some energy exposure, which is probably why the discount has widened so. Maybe that's a bad sign: someone who's supposed to be a good capital allocator should probably know better than to have been invested in energy when the general consensus was that oil was in short supply. On the other hand, Lichtenstein doesn't seem to sell his businesses often, so he might have a longer outlook than a single cycle. My outlook is generally only one cycle, keeping me away from energy companies most of the time, but Lichtenstein may be playing a longer game than that.

Because Lichtenstein doesn't sell much, there are few catalysts on the horizon. When a company is headed in the right direction, however, that doesn't really matter to me; as long I believe the intrinsic value of the business (per share) will increase in the long-term, I don't much mind if there is nothing forcing the discount to close. Steel does appear to have accelerated its share repurchases, however, as the company has bought back about 7% of its shares in the first half of the year.

Disclosure: Author has a long position in shares of SPLP


juan said...

Very interesting write-up, Saj. Thanks for posting.

The company does looks cheap.

The annual letters, though, seem somewhat disorganized and sloppily written. That's always disconcerting. It makes one wonder whether the CEO is a careful and methodical guy. If he's a bad writer, is he also a bad thinker? And why doesn't he ask a friend to edit his letters?

I don't give much weight to such speculations, though, and so am long SPLP too. But I'd very much like to hear what you do when the annual letters of a company you otherwise like turn out to be a dog's breakfast (I wouldn't call SPLP's that).

Saj Karsan said...

Hi Juan,

If I were to come across such a situation, it would probably make me think twice. However, I can't think of a case like that. I didn't notice any problems with SPLP's letter, so maybe I'm not discerning enough.

One of the most disorganized reports I read is from Glacier Media, but I still own it despite my opinion.

Anonymous said...

Do you know the tax consequences for owning SPLP?

I don't want to trigger US tax filing requirements if I don't have to.