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from Outstanding Investor Digest's December 31, 1996 Edition

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CENTURY MANAGEMENT'S
ARNOLD VAN DEN BERG

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OID: Given that this company seems to be cyclical and in a state of flux, this is probably an unfair question. However, based on your knowledge of this company, do you have a sense of its normalized ROE?
Van Den Berg: I don't know if I necessarily agree with your premise that Moore is cyclical. There's nothing in its history other than the last few years that suggest it is.

OID: Really?
Van Den Berg: Really. And, even if it is cyclical, then it's not cyclical in the classic sense - where it goes from making money to losing money, etc. Its earnings may peak out and plateau for awhile before they move on to a higher plateau. But I think this company is capable of having better margins than they've had historically.
Moore just serves so many industries - at least eight to ten different industries. And they're all big industries. So while someone might make the case that this industry is cyclical by definition, Moore is so small that once they get their products and their marketing right and their costs under control, I don't think they need to be cyclical. Their market is big enough that once they start growing, they could keep growing very smartly for quite awhile.

OID: What Rob Friedman of Mutual Series Fund calls a cyclical growth stock.
Van Den Berg: You can do pretty much anything that you want with their numbers.

OID: So you are familiar with our publication...
Van Den Berg: But we figure that they can earn a 15% return on equity and a 5% net profit margin. And both are roughly equivalent in their earnings implications. Either way, that's $3.00 of earnings per share.

OID: And I gather that they've earned those kinds of margins and returns in the past?
Van Den Berg: That's right. For example, between '83 and '87, their net profit margin ranged between 4.5% and 5.9%. And I think they're in a much better position to generate those margins today.

OID: Having spent the R&D.
Van Den Berg: That's right - and having developed their markets. Again, I happen to feel that if this company is well managed - which it may be soon with Hurd - Moore's margins could in fact be even higher. But, given the current stock price, you don't need higher.
And $3 on their current $20.70 book would give them a ROE of about 14% on beginning of year equity.

OID: Roughly what Buffett says is around the historical average for American industry.
Van Den Berg: But don't forget that they have all of these excess assets: all of their excess real estate, all of their excess pension assets, etc.
So if they were to sell some of these excess assets and buy back stock with the proceeds above the current book, they'd raise their return on equity considerably.

OID: In other words, they don't need those assets. And, therefore, they dilute shareholder returns.
Van Den Berg: That's right. So this doesn't look like a very high return business. But, as you can see, appearances can be deceiving.

OID: As can assumptions, of course.
Van Den Berg: That's always possible. But I'm very comfortable with the assumptions we're using here.
And I know we're going to call them earnings. But, as you know, $3.00 of earnings can be $1 in free cash flow or no free cash flow. But, whatever Moore's earnings are, they're also going to be all free cash flow - because their depreciation and their capital expenditures are roughly the same. So this company has the potential to generate $3.00 of free cash flow.

OID: That sounds good.
Van Den Berg: And in these figures, we haven't even factored in anything for share repurchases. Again, they have excess assets in a number of categories. But even if you just take the most obvious ones and the ones that are most easy to verify...
For example, $38 million of excess pension funding is equivalent to $24 million after tax. And, again, there's the $10 million of excess real estate. That winds up being about $6.5 million after tax. And that's not including anything for their LIFO reserve of $6.4 million after tax. But when I add up those two numbers, I come up with about $30 million.

OID: In after-tax proceeds available for share repurchases.
Van Den Berg: And let's say that you pay $30 a share - a 57% premium over its current stock price. That would lower their shares outstanding from its current 2.6 million to 1.6 million and boost their normalized earnings - with only a 4% margin - to nearly $3.50 per share. And if they could get back to a 5% net profit margin, we'd be talking about nearly $4.40 of earnings per share - which wouldn't be too shabby on an $18-19 stock.

OID: And even if they paid $50 per share, we estimate that they could have earnings of $2.75 to $3.50.
Van Den Berg: I'm not suggesting they need to pay that much or even that they should. In fact, I think that they could buy back a very significant number of shares at $25 to $30 by way of a Dutch auction. But those figures illustrate the impact that share repurchases could have.
However, the mindset of the company - up until recently, at least - has been that of typical engineers...

OID: They wear pocket protectors?
Van Den Berg: They do. In fact, they even wear pocket protectors on their financial statements. They're absolutely bulletproof. They don't need remotely as much in the way of assets as they have.
They haven't thought in terms of buying back shares historically. But I don't think the implications are lost on their chief financial officer or Edward Hurd.

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