The much awaited 13F filing of Berkshire Hathaway came out yesterday.The most interesting tidbit is the entirely new position initiated in the 4th quarter of 2008. It is NALCO Holdings.
I finished doing a quick reading of the 10K. Here are my thoughts:
At first glance, NALCO is an interesting play on water infrastructure. "Many water and sewage lines throughout the nation were installed decades ago and are in need of repair,” said EPA Regional Administrator Richard E. Greene. A documentary movie trailer about our water systems can be viewed here. This is most probably a Lou Simpson investment and not Warren Buffett because the market cap of 1.6 Billion is small.
They have strong competitive advantages. As outlined in the 10-K, I quote:
Leading Market Positions. We are the #1 provider of water treatment services to industrial and institutional end markets. We are also a leading provider of integrated water treatment and process improvement services, maintaining the #1 position in the petroleum and petrochemical markets and a close #3 position in the pulp and paper market. We believe that our leading positions across our primary markets provide a competitive advantage in retaining existing business and competing for new business. Although our market position in pulp and paper was lowered by the 2004 acquisition of Raisio by Ciba, we believe the proximity of sales between the three market leaders allows us all to operate as market leaders.
They use conservative accounting. They use LIFO for inventory accounting in the U.S. Foreign countries mostly do not allow LIFO accounting. LIFO in an inflationary environment will make the inventories be worth more on the balance sheet. It also reduces net income versus FIFO inventory, saving income taxes. In other words, management is keen on building net worth, not reporting higher net income. They have Net operating losses of 145 Million in the U.S. and as much as 115 Million in the U.K. The debt level seems high. Total Debt to Total Asset is 64%, Total Debt to Common Equity is 819%. The book value is mostly intangibles and goodwill. The stock is not exactly cheap in this environment, trading at 6.5 times Enterprise Value to EBITDA.
The investment thesis, my guess, is that it is a high-quality, conservative-accounting play on the growth of demand for water infrastructure services. It is also exposed to China, Russia and India markets. In China,their business has had 25% compounded annual growth since 1999.
Does this mean Lou Simpson or Warren Buffett believes in Jimmy Rogers' macro thesis of
waste water services in China and emerging markets? Perhaps. But the growth opportunity for our water infrastructure in the U.S. is also just as enormous. In fact, just as Burlington Northern is a play or inflation of the replacement value of the railroad assets, I see Nalco as another way to play on the inflation of the replacement value of our highly critical water systems.
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