Coho Partners, Ltd: Crash Protection

Byron King responds to reader mail, and recounts a discussion he had with Peter Thompson, the manager of Coho Partners, Ltd.

“PEAK OIL, PEAK OIL. Dad, how come you talk about Peak Oil all the time?” said my daughter. We were driving along the back routes of Pennsylvania’s scenic Mercer County, and I had just pointed out a couple of old stripper wells that are visible from the road. We were passing a Mennonite man, driving a horse-drawn buggy, and I was commenting upon — what else? — the future of oil production on the backside of Hubbert’s Peak. I do not really talk about Peak Oil “all the time.” For example, just ask me about the Russo-Japanese War. But Peak Oil certainly is a central phenomenon of our age. My daughter (and everyone else on this blue planet) will be living with the effects of Peak Oil for the rest of her (and their) days. Ignore it at your peril.

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“Barrick is buying Placer Dome,” noted one of the associate attorneys in the law firm where I work. “Do you think that gold is still worth buying?” Around the office, I am known — if you can believe this — for peppering lunch conversations with my views on the decline of the dollar, the ineptitude of the Federal Reserve, the inherent worth of gold, and the merits of a gold standard. My reply to the question was to advise the inquiring attorney to think like a lawyer and follow the money. If Barrick believes that Placer Dome is worth over $19 billion at a gold price of $465 per ounce, then somebody with deep pockets, if not some financial savvy, must believe that gold in the ground is still worth buying. If gold in the ground is worth serious money, what does that imply for gold that is already mined?


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“I enjoyed reading your article on the Peloponnesian War,” wrote a retired U.S. Navy admiral from his home in San Diego. “Sparta was more than pleased to see Athens waste its power and wealth fighting a badly executed war against Syracuse, in distant Sicily. Were you being kind or simply deferential to the U.S. national chain of command not to make a direct comparison to the United States squandering its military assets and resources in Iraq? But it was clear to me that our current national blunder was what you were discussing. The analogy is plain. The conclusions are obvious. This Iraq War may well be the worst strategic error that the United States has ever made.” All I will say in reply is that I appreciate receiving thoughtful comments from retired U.S. Navy admirals.

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“Your article about the fall of General Motors and the decline of the U.S. auto industry was right on,” wrote another reader, who says he is a retired autoworker living in Ohio. “Bad management, rabid unionism, poor government policies, and the wreck of the U.S. dollar are killing U.S. manufacturing. This country is getting hollowed out, and we have no one to blame but ourselves.” Thank you, sir, for your great comments. But actually, I did not write about the fall of General Motors and the decline of the U.S. auto industry, etc. That was my Whiskey & Gunpowder colleague Mish. Still, count me as being onboard with the sentiment.

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So dear readers, where do we go from here? It looks bleak, doesn’t it? What with Peak Oil, the declining dollar, the War in Iraq, the demise of U.S. industry and the middle class that it supports things are really looking like a first-class mess.

Coho Partners, Ltd.:”Whatever Is Going to Happen…”

But are we truly lashed to the helm of the Ship of Doom? As I have said before, in other articles and at other times, “Whatever is going to happen is going to happen. Just make sure it does not happen to you.”

In the nature of full disclosure, that line comes from the mouth of a fictional character named Max Detweiler, the musical promoter and supporting player in that great Broadway classic The Sound of Music. Poor Captain von Trapp, pater familia of the brood, was concerned about the looming Anschluss, wherein Hitler’s Germany was going to take over Austria in March of 1938. Max was trying to get the Captain’s kids to sing in the local musical festival. The Captain was furious that Max was worrying about such silliness as a songfest. This is the context of the line. It is such a great line, too. “Whatever is going to happen is going to happen. Just make sure it does not happen to you.”

Sure enough, Anschluss occurred. The kids still sang in the songfest. Captain von Trapp and his young bride Maria and the kids (from the first marriage) all marched over the hills to Switzerland. “Climb Ev’ry Mountain” and all that. It was a happy ending as only Broadway can deliver. But whatever was going to happen, happened. And old Captain von Trapp made sure that it did not happen to him and his clan.

Coho Partners, Ltd: How Do You “Make Sure It Does Not Happen to You?”


So what does Max Detweiler’s sage advice mean for you and me, dear reader? You can take it a lot of ways, but I had a long and interesting discussion with one of our fellow Whiskey & Gunpowder readers, Peter Thompson, manager of Coho Partners Ltd. of West Conshohocken, Pa. (  Peter’s company, located in suburban Philadelphia, for all of you who have never heard of Conshohocken, let alone West Conshohocken, manages funds for institutions. Coho Partners also manages funds for other individuals and entities of, as Peter so delicately puts it, “high net worth.” Like I told the young attorney, think like a lawyer and follow the money.

According to Peter, Coho manages for the long run. The firm’s goal is to capture the majority of broad market advances, and, more importantly, to protect principal during difficult times. Coho looks for companies that grow earnings and cash flow. Coho also looks for companies that have an above-average dividend yield, with payout ratios that allow for increasing dividends during flat earnings
periods. Coho wants the companies in its portfolio to have a tendency to increase their dividends at least annually. “There is nothing wrong with getting paid to wait,” said Peter. Getting paid to wait? Sounds good to me.

“By comparison with the go-go money runners, we might look like we modestly underperform during the good times. But our strong suit is to avoid the pain during the tough times.” Tough times? We of the Peak Oil persuasion happen to have some opinions on “tough times,” so tell me more. Looking at Peter’s numbers, his firm has made money in the rising market of late. So far, so good. Going
back a few years, Peter’s firm has done well in protecting his clients when the markets fell, particularlyduring the tech crash of 2000. And as far as I am concerned, in this day and age, not losing it is the same as making it.

Here is what Peter said: “OK, so let’s take Peak Oil at face value. And let’s buy into the whole decline-of-the-dollar thing as well. Buy oils. Buy gold. Now what? Sit back and wait for the world to end? What if the world does not end on your timetable? Where is your return? Is there any cash to take down and spend along the way? After all, you typically do not walk into the store and pay for the
groceries with oil or gold. Loading up on oil and gold might be OK for a smaller investor, but you cannot manage a lot of money that way, certainly not over the long term. If you have a lot to lose, you have to diversify and manage it into a broader spread of equity commitments outside of just a few industrial or monetary basics.”

Coho Partners, Ltd: “Safety is No Accident”

Let’s make a long story short. What is one of Peter’s favorite long-term investment ideas outside of the industrial and monetary basics? Autoliv Inc., of Stockholm, Sweden, and many other countries. (ALV and ALIV).

Autoliv is a worldwide leader in automotive safety and safety systems. The company pioneered both seat belts and airbags, and offers the world’s finest technology in the field of automotive safety. All (as in the expression, “all”) of the leading auto manufacturers in the world are Autoliv customers. We will discuss that blue chip list below. Autoliv has 80 subsidiaries and joint ventures in 30 countries. Autoliv tests cars and products at 20 crash test tracks in nine countries, and employs about 40,000 people

My first reaction was a bit skeptical. An automotive products company, during a time when U.S. parts maker leader Delphi has just entered bankruptcy and General Motors and Ford are financial basket cases? “Don’t just think North America,” said Peter. “Think world. And don’t just think in terms of automobile parts. Think in terms of automotive safety.” That is, Autoliv is the worldwide leader
in automotive safety systems. Peak Oil or not, there are about 1 million people killed every year around the world in auto traffic accidents. Thus, there is a compelling need for improved automotive safety.

Let’s follow the logic. Among other things, Peak Oil means higher gasoline prices. People with money will still buy their gas. People with less money will buy less gas. One way or another, however, this will make obsolete much of the world’s automotive stock. This is certainly true in North America, but is just as true in Europe, Asia, and every other region that will ever have to worry about liquid fuel supply.

Close to home, for example, Peak Oil certainly spells the end of most segments of the mass production of large, gas-guzzling vehicles. As The New York Times noted of an October sales slump on Nov. 1, 2005: “General Motors and Ford were hurt the most, with GM sales dropping 25.6% compared with October 2004 and Ford sales down 26.1%. Big SUVs, on which Detroit based much of its resurgence in the 1990s, did even worse, with sales of some of the largest (sport utility vehicles), the Ford Expedition and the Cadillac Escalade XLT among them, falling by half or more.”

This is just the beginning of the bad news for America’s traditional Big Three. Things will probably get worse for U.S. automakers, particularly if the U.S. economy goes into a recession next year, as many economic forecasters predict. But the fuel-efficient segments of the auto market are going strong, with long waiting lists for smaller cars with innovative drive systems. And auto markets are still
holding their own in Europe, and they are cranking out product in Asia.

Peak Oil is as much a cultural a phenomenon as it is a geological certainty. It is not a discrete event, but instead is one that will take decades to unfold. Peak Oil does not mean “no oil.” Oil from oil wells will be scarcer, and certainly more expensive. Liquid fuel from hydrogenated tar or heavy bitumen will become more common, and be more costly. Hand in hand with this, the world has an installed infrastructure that accommodates internal combustion motor vehicles. So it is important to keep in
mind that nothing is going to disappear overnight. Yes, there will be a long period of transformation from what we have today to something else that will be very much different. I have written about this to some extent over the past year here in Whiskey & Gunpowder, and I have a lot more to say on the subject.

But during the impending post-Peak Oil transformation, people will still drive cars. The cars may be smaller; have less steel content; and have smaller engines, if not entirely different powertrains, based on hybrid technology or batteries. There might be smaller seats, less legroom, less headroom, or smaller trunks and weaker air conditioners. But when you think about it, there will be more safety, and
almost certainly not less safety, built into cars. In fact, smaller cars will in all likelihood be required to include a higher “safety” content. Customers will want it and governments will mandate it. Thus, people will pay for safety. And this gets us back to Autoliv.

Autoliv is a world leader in a basic commodity known as seat belt webbing. Autoliv has just announced plans to expand its seat belt webbing capacity in Shanghai, China, and to construct one of the world’s largest plants for manufacturing seat belt webbing. Eventually, the Shanghai plant will manufacture over 100 million meters of seat belt webbing per year. That is enough, by my calculation, to circle the world almost eight times.

When it comes to high technology safety systems, Autoliv invented the side-impact airbag for chest protection, the “inflatable curtain” for head protection in side impacts, and the anti-whiplash seat, to mention just a few of the company’s latest contributions to automotive safety. Autoliv is currently developing rollover protection systems, night vision systems, and pedestrian protection systems.


Autoliv’s customer list includes General Motors, Ford, and DaimlerChrysler. It also includes European makers Volvo, Volkswagen, BMW, Mercedes, Peugeot, Porsche, and Fiat. In Asia, Autoliv sells to Toyota, Honda, and Hyundai and is involved in joint ventures with several up-and-coming
Chinese makers. In short, Autoliv sells to everybody who is anybody.

Much of Autoliv’s pricing and business base is conducted in currencies other than the U.S. dollar, particularly the euro, which constitutes about 50% of gross sales. And Autoliv has a strong business base denominated in powerful Asian currencies such as the Japanese yen and Chinese yuan. Thus Autoliv’s dollar exposure is mitigated under this book of accounts. One could say that there is an
element of a foreign currency “play” in Autoliv, because so much of its business is conducted outside of the declining-dollar sphere.

Autoliv has a market capitalization of about $4 billion. Three years ago, it sold on the Big Board for under $20 per share. It is currently trading in the range of $44. Its yearly high was $51.76, back in March. Its yearly low was $38.43, back in September. The stock declined during the third quarter 2005, but the company saw it as an opportunity to repurchase shares and spent about $133 million doing so, at an average price of about $44 each. Autoliv earns $3.50 per share, for a price-earnings ratio of 12.5. Autoliv has increased its dividend regularly since 2002 and just announced a quarterly increase to 32 cents per share, for a current yield of 2.9%. Autoliv debt is rated “A-, with a stable outlook” by Standard & Poor’s.

So here it is. We have a $4 billion international company that manufactures and sells automotive safety. Much of its business is nondollar denominated, with about 50% in euros alone. This company is very efficient and well managed and is a technology leader in a world that will be redesigning and replacing its transportation fleet in the coming years due to Peak Oil. The company is profitable, a good credit risk, and makes money and pays a dividend. Its stock is selling at a discount compared with the recent past, but management is buying back shares at and above the current market price.

Sound interesting? Buckle up.

Until we meet again…
Byron W. King
November 5, 2005


P.S. And many thanks to Peter Thompson and Coho Partners Ltd. for taking the time to call and discuss the idea.

The Daily Reckoning