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Net current asset value investments usually find a way to generate value for shareholders by following one or more of these paths:
1. Industry economics improve? Unlikely in this case. Both industries are very competitive and will remain so. Any exit by rivals is likely to be followed by entry of new competitors
2. Management become so brilliant that they overcome the poor competitive positions selling commoditised products? Unlikely. As Warren Buffett says:
“My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad). Some years ago I wrote: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” Nothing has since changed my point of view on that matter. Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” (1985 BH letter)
3. A takeover by another……
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