The European

VALUEINvESTOR
be Yond the M A I N S T R E A M

NO. 3 | JulY 2008

INVESTMENT STRATEGIEs

To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks Benjamin Graham

Discipline, Focus, Independence: Braun, von Wyss & Mller AG

The goal is sustainable capital appreciation. Since its initation in 1997 BWMs Classical Global Equity Fund has appreciated 224%. Over the same period the MSCI World only appreciated 33%. For almost a decade, the value strategy followed by the Swiss asset management company Braun, von Wyss & Mller (BWM) resulted in a continuous outperformance. Only in the years of the Internet and technology boom did the Classic Global Equity Fund clearly underperform the MSCI World Index. This situation was reversed immediately after the bubble burst. The founders, Thomas Braun (52), Georg von Wyss (43) and Erich Mueller (54) view short periods of underperformance as a necessary consequence of a global investment style. With EVI they spoke about the companies history, their investment strategy and individual stock ideas. p. 2-9
Thomas Braun Founder and Owner of BWM AG

contents
THE CHEST
Braun, von Wyss & Mller AG The Swiss value experts attach great importance to a high safety margin and welcome the opportunity of buying one franc for 65 cents. They currently identify opportunities with Agfa and Avis Budget p. 2-9 ..............

VALUE KnowleDge

On the Contrary! Jim Rogers from A-Z. EVI talked to the commodities expert on current investment ideas, the future of China and his assessment of specic commodities p. 10-13 .............. On the Contrary! Dr. Tito Tettamanti He is considered a pioneer of the activist investment style. However, as one of the most successful investors he also warns of the risks inherent in activist funds p. 14-16 .............. Research What is the performance of companies that own a corporate jet? A survey among German DAX and MDAX companies p. 17-19 .............. VALUE INSIDER Whats up with...? Interview with Fund Manager Tobias Klein p. 20-23 .............. News of the Scene p. 24-25 .............. Editorial: p. 27 .............. Imprint p. 28 ..............

Dr. Tito Tettamanti pioneer of the activist investment style

He introduced the activist investment style in Switzerland and Europe. EVI talked to the financier domiciled in Ticino about the risks and opportunities of this strategy. Dr. Tito Tettamanti, attorney, entrepreneur and financier domiciled in Ticino, is considered a pioneer of the activist investment style in Switzerland and in Europe. Initially, his approach did not find much favour with the financial community. Today he is, inter alia, Chairman of Sterling Strategic Value Ltd. and one of the most successful and respectable investors of our time. EVI talked to him about his investment principles, strategies and perspectives based on a sound activism. p. 14-16

Dr. Tito Tettamanti Entrepreneur and Financier

Stocks in this edition: Agfa-Gevaert, Avis Budget, Avis Europe, BMW, Circuit City, DSG International, Fred Olsen Energy, Fuji, Hertz, Kodak, MBIA, Nestl, Saurer, Siemens, Sixt, UBS, United Airlines, Veolia

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Braun, von Wyss & Mller AG

For almost a decade, the value strategy followed by the Swiss asset management company Braun, von Wyss & Mller (BWM) resulted in a continuous outperformance. Thomas Braun (52), Georg von Wyss (43) and Erich Mueller (54) spoke to EVI about the situation on the stock exchanges, their investment strategy and individual stock ideas. EVI: Your funds suffered two-digit losses in 2007. And the first half of 2008 did not bring any improvement. To which extent are you affected by this slump? Mller: Since all owners of the company are invested with almost 100 percent of their private assets in the companys own investment funds, it goes without saying that we are the most affected by a market that has been moving in an adverse di rection for such a long period. You nevertheless see us calm and relaxed since we know that this trend may reverse very quickly. The amounts of money flowing out of the funds are kept within a certain limit. In the first quarter of 2008, they amounted to a mere five percent. We have no problem with funds of funds that no longer place their trust in us since this group of investors is of almost no importance to us. Nearly all of our clients are private investors, of which around 65 percent are asset managers investing the money of individual persons. This is a rather stable group of investors. von Wyss: However, I have to add that I am irritated by the losses which our clients suffered, of course. Around one third of our portfolio stocks were massacred at the same time and hardly any of the stocks gained in value. This is an extraordinary situation just as extraordinary as in previous phases when the prices of nearly all stocks increased at the same time. We are nevertheless convinced of our long-term strategy. As you can see, the company BWM functions despite a lousy performance. As long as our calculations of a stocks in trinsic value are correct, things are not all that bad.

The owners of BWM AG (left to right): Thomas Braun, Georg von Wyss, Erich Mller

Aiming at a sustainable asset formation, BWM has posted an average yield of 11.8 percent since 1997 with its Classic Global Equity Fund. The founders of the company, Thomas Braun and Georg von Wyss, met for the first time in 1995 at private bank Rd, Blass & Cie. Thomas Braun was then responsible for the banks research department, which Georg von Wyss joined after returning from the USA. Prior to this, after completing an MBA, von Wyss was introduced to fundamental analysis by experts such as Michael F. Price, the owner of Mutual Series Funds, which is today part of the Franklin Templeton group. Braun was so impressed by von Wyss consistent value style that he did not hesitate for a second when von Wyss suggested to him to form their own company and become partners. The third partner, Erich Mller, is in charge of customer relationship management and administration. When it was decided to form a new company, Thomas Braun was looking for someone with good organizational skills and addressed Erich Mller. Investment decisions are exclusively taken by Braun and von Wyss in a democratic manner, as they underline. They are supported by four analysts, whose exclusive task is to evaluate companies. They are continuously monitoring 150 to 250 securities, of which around 30 are held in the portfolio. The investment process as such is clearly structured. If the price of a stock falls to or below 65 percent of the intrinsic value determined by the analyst team, it qualifies to be added to the portfolio, provided that none of the two decision makers opts against such acquisition. In all cases, the stocks are sold at 100 percent of their Fair Value. Braun and von Wyss do not accept any overvaluations. With their Classic Global Equity Fund issued in 1997, Braun and von Wyss achieved an average annual return of over 20 percent until 2006. Due to losses suffered in 2007 and 2008, the annualised return went down to 11.8 percent. However, with an overall performance of 224.2 percent since its launch, the fund is clearly above the MSCI World Index, which increased by only 33.6 percent in the same period. The founders, Thomas Braun (52), Georg von Wyss (43) and Erich Mueller (54) view short periods of underperformance as a necessary consequence of a global investment style. The New Economy experience proves them right since the underperformance was caught up relatively quickly in the post dot-com era.

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EVI: How did your respective families react when part of your private assets went down the drain? Mller: They reacted in the same way as our clients. They know very well that investing requires patience. In principle, we are now experiencing exactly the situation which we have forecast for some time. As a central element of our marketing, we kept on pointing out that such market breaks may occur. We are therefore looking for investors who have an investment horizon of several years and can thus cope with such situations. Braun: Investors who cannot cope with a loss of 30 percent should not invest in our funds and in principle they should also not invest in stocks. Investors who join the general eu phoria often make the mistake to buy when stock prices reach their peak and to lose their nerves when prices are lowest. Unfortunately, this kind of behaviour is much more common among investors than the other way round. If we were employees of a fund management company, we would probably have lost our jobs. This is exactly the reason why we founded our own company. Being able to consistently apply our in vestment style is of major impor tance to us. We would not want to change our investment style just because our boss, after a few quarters with negative performance, is of the opinion that our investment strategy does not work. EVI: How did you develop your investment style? von Wyss: It was in 1992. I had just read Benjamin Grahams book The Intelligent Investor during my MBA studies. Shortly after, during a stage at Vontobel bank, I had the opportunity of participating in the analyst con ference of Nokia-Maillefer, a Swiss subsidiary of Nokia that manufactures cable production machinery. I identified a classical net-net situa tion as described in Grahams book: The companys market capitalization

was not more than two thirds of the current assets less the total amount of payment obligations. As a result, the stock was well received by the market and its price increased by a factor of seven. This was a clear evidence that the value investing strategy is effective. Braun: And later on, when we met in 1995 at Rd, Blass & Cie., he convinced me of this approach. Before, I had been a nasty bargain hunter, to put it jokingly. To be serious: In 1986, I met Hans-Peter Ast, who was probably the best analyst in Switzerland at the time. He made me familiar with fundamental analysis. But it was not a purely value-oriented approach, the investment horizon was rather six to twelve months. Ever since we founded our own company in 1997, we have been giving a stock at least two to four years time. And the principle of normalized yields which we apply today was just as new to me at the time. We determine the margins over a complete cycle of seven years, for example, and try to understand what the company is earning under normal circumstances and how much it is worth under the given conditions.

capable of providing a clear answer. We cannot say whether the crisis in the US banking sector has hit rock bottom with the events surrounding Bear Stearns or whether the downward trend will continue. What we do know is that the optimism in the market has suffered tremendously, which is not necessarily a bad sign. Apart from this, it is wrong to say that the real economy is in a state of crisis. If you have a look at the order books in the German industrial sec tor, you will notice that everything is (still) going smoothly. EVI: But the USAs high level of debt is an issue that cannot be ignored. If, starting in Northern America, the global economy slows down, the companies profits will decrease all over the world, which is not beneficial for the stock market. Braun: Absolutely. Profits will of course decrease for some time. In our opinion, the recession in the USA is imminent or has already started. It is also clear that this will have an impact on the rest of the world. The level of profit margins of European companies is similar to that at the end of a super cycle.

However, this has no impact on our EVI: Assuming a seven-year cycle, where do we stand at job. If you compare the moment and what this with the normaspeaks for stocks in lized margins which We are the current market we use as a basis, you stock pickers environment? will notice that this that are not has already been facfollowing Braun: We are stock tored out. We do not economic cycles. pickers that do not use the current top follow economic margins as a basis. cycles. As I said, we Our calculations also only use such cycles for determining include the year 2002 when things did the average margins. In terms of innot go well for the company. When dividual stocks, we presently identify we consider a company to be cheap, much more buy opportunities than we have already largely included in a year ago. our calculations the effects of fluctuating income. EVI: However, many asset managers say that the world economy is on the EVI: Your compatriot Josef Ackerwrong track. Do you completely ignomann, CEO of Deutsche Bank, conre such warnings? siders increasing food prices to be a serious problem for the global ecovon Wyss: This is a question of market nomy and draws a parallel with the timing and we believe that nobody is year 1929. What is your opinion? No. 3 Page  July 08

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von Wyss: Comparing the current situation with 1929 may be slighty exaggerated. However, the problem must by no means be underestimated. We are certainly going to face a structural change, which may have a much deeper impact than we all expect today. However, we must not forget one decisive fact, namely that todays social security systems are very different from those existing in 1929. If you had lived at that time and made redundant, you would have lost your only source of income and you would have been forced to reduce your consumption accordingly. Another important difference compared with the situation in 1929 is that Keynes induced the governments to give up their laisser faire policy. Today, the central banks are pum ping massive amounts of money into the economic system in times of crisis and the politicians are launching public spending programs to increase demand in excess supply situations. EVI: In other words, profits are privatized while losses are allocated to the public, as could be seen in the case of IKB? von Wyss: Though this is certainly worth discussing, economists lar gely agree that governments should interfere to prevent the economy from collapsing. Moreover, the 1929 crash scenario is regularly referred to whenever the economic situation is worsening. This was also the case in 1987 when stock prices on Wall Street experienced a sharp decline as well as in 2002 when the technology bubble burst. And, as we have seen, this was not the end of the world. EVI: Mr. von Wyss, you mentioned a structural change. What do you mean in concrete terms? von Wyss: We mainly identify a structural change resulting from a shortage of natural resources and commodities. There may very well be a longer period with high inflation rates ahead of us.

EVI: In how far have you taken this fact into consideration when compiling your portfolio? Braun: Since we do not engage in macro bets but try to identify un dervalued companies, this aspect has not been taken into account in our portfolio. In terms of individual stocks, we have not identified any opportunities in the commodities sector. This is not least because we were not very persistent in our search. As concerns commodities, we have not formed an opinion on the gold or oil prices, for instance. EVI: Is this not grossly negligent, especially when considering the aspect of portfolio diversification? von Wyss: We are convinced that in the long term stocks outperform any other type of investment. For this reason alone we do not enga ge in commodities, which, similar to bonds, do not offer more than a mere compensation for inflation in the long term. If you aim at a profit rate that is above the inflation rate, you will not get around investing in stocks. Every euro invested in instruments other than stocks for a period of more than ten years is invested irrationally. EVI: Nothing against your longterm investment horizon, but you virtually traded the UBS stock (ISIN: CH0024899483).

EVI: Lets talk about your other investments. Your performance was spoiled by US investments that suffered from the weak dollar. Would it not have been wise to take a closer look at the economic situation in the USA? von Wyss: No. These losses are only partly related to the US dollar. The weak performance is mainly due to a too high exposure in the subpri me market. We quite simply underestimated the subprime crisis. We should have identified the problem at an earlier stage, and particularly the effect that a company facing financial difficulties needs to increase its capital, which entails a considerable dilution. Various capital increases were required for MBIA (ISIN: US55262C1009), for example. This affected our performance considerably last year. Anyway, this is history. Now, the decisive question is whether this stock offers new investment opportunities. EVI: Why did you buy MBIA in the first place? von Wyss: The company is active in two business fields, one of which seemed to be relatively risk-free: financing of communal or national infrastructure projects such as schools, embankment dams and hospitals. The other business field concerns mortgage insurances and their derivatives.

Braun: In retrospect, We are convinced this is correct. But it This includes the that in the was not planned this insurance of struc long term stocks way. When buying the tured products such outperform any stock we could not as CDOs. The mo have known that its del which consists other type price would be nearing of separating and of investment. the intrinsic value so bundling mortgage quickly. In addition, loans and the resulwe had to reduce the intrinsic value ting cashflows has been applied in the USA for 40 or 50 years. The oc since the depreciations and thus the extent of the capital increase and the currence of losses from time to time dilution of benefits have indeed taken is part of the business. us by surprise. This made us close the position with a profit when the price What we underestimated is that the increased to over 30 Swiss francs. If directives for credit approval have the price had crashed, UBS would now become less and less strict. In 2005 be one of our large positions. and 2006, many people took an inNo. 3 Page  July 08

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terest in pushing potential home owners to engage in a mortgage loan. As a result, even low-income clas ses were granted loans which they should never have received. The empirical values which MBIA used as a basis for determining default rates failed simply because there were no such values. Thats how the company ran into a problem. And, from todays point of view, we simply do not know to what extent this problem may increase since the impacts will become evident only gradually. EVI: Which are the conclusions you draw from this wrong assessment? von Wyss: For the moment, we keep the stock in our portfolio, of course. The worst-case scenarios are already included in the price. Well, you could always imagine a more dreadful scenario, but when you do a simple calculation you will find that this is already reflected in the price. Even for subprime debtors the default rate is not more than 100 percent of their loans. It is therefore sufficient to write off the subprime rate for CDOs to zero. Even if this was done, which implies that in fact not a single dollar is paid back by subprime debtors, the stock is still favorably priced. This is also true in case of a run-off, i.e. a liquidation of the stock, which might turn out to be the best solution for the shareholder. Braun: Moreover, the situation has clearly improved. There is an in creasing interest in buying assetbacked securities. Such securities are therefore not valueless. They are often acquired by hedge funds specialized in distressed securities. It goes without saying that our in vestment in such securities is kept at a low level. However, for the first time since the crisis broke out, smart money is likely to be invested in these instruments. EVI: Rating agencies assigned companies like MBIA a rating of AAA

despite the problems that had been obvious for a long time. Has this not added to the current confidence crisis?

Braun: Yes, of course. In the case of mortgage-backed securities, rating agencies and banks clearly misjudged the situation. The current confidence crisis affects banks in particular. BecauThe new CEO has recognized the se market participants no longer trust problems and implemented first each other, they retain their liquidity measures to improve the situation. to be able to revert Thanks to its solid to internal financing balance sheet, the if the market turns company is in a poSorry, but against them. This, sition to cope well it has never been in turn, intensifies the with low operative part of credit crisis. output. With a current our concept to price of approx. 50 follow Buffett. EVI: Would this not pence, DSG is quoted b e the perfect mo below its book value. ment to increase inIn our opinion, the vestments in classical value stocks stock is considerably undervalued, that are underrepresented in your even if the management should fail portfolio? to fully meet all its objectives and if a strong recession should occur. von Wyss: What do you mean by classical value stocks? EVI: Which other securities would you recommend? EVI: Companies active in crisisproof sectors, in other words: rather von Wyss: We identified an even greater potential with Agfa-Gevaert defensive securities such as Nestl (ISIN: BE0003755692). The company (ISIN: CH0012056047)? is currently traded at a price that is von Wyss: You mean the classical not more than one third to one fourth Buffett sectors. Warren has them of the intrinsic value determined by and this automatically qualifies us. The safety margin seems to be them as value stocks. Sorry, but it more than sufficient. Due to mis has never been part of our concept management of the companys most to follow Buffett. We buy across all important business unit healthcare Agfa-Gevaert is currently facing sectors if the price is right. In this a difficult situation. However, the respect, we are omnivores. On the other hand, we are very greedy and new management has all the qua demand a massive discount on the lities required to get the company intrinsic value determined by us. We back on track. therefore attach great importance to a sufficient safety margin. In this reEVI: When and how did you identify spect, Nestl, for example, is just not Agfa-Gevaert? cheap enough. Of course, there is a certain price at which we would like von Wyss: This is a long story full to buy Nestl, but the safety margin of suffering, to put it that way. Our is not yet sufficient for us. first acquisition of the stock dates back to the year 2002. The company, EVI: And which stocks would you which had just launched a compreconsider buying now? Where do you hensive restructuring program, was see opportunities? considerably cheaper than the other companies in this sector. The comBraun: Among others, the UK leapany did well until the beginning ding electrical retailing group DSG of 1995 when, due to management No. 3 Page  July 08

International (ISIN: GB0000472455) appeals to us. The stock price is currently affected by the consumer reluctance in the UK as well as internal problems such as unsatisfactory client services and a product range that does not fully meet client requirements.

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mistakes and the soaring commodities prices, a loss in margins occurred which was not reflected in our accounts. The increase in commodities prices alone would have reduced the pretax profit per share by two euros if it had not been partially compensated by price increases and efficiency gains. EVI: What makes you feel confident that the situation will improve? von Wyss: In the printing sector, the market is oligopolistic. In the business field of digital printing plates, Agfas share in the global market is approx. 30 percent, which is slight-

ly more than that of Fuji (ISIN: JP3814000000). Though Kodak (ISIN: US2774611097) is still the market leader, Agfa has a market share of only 15 percent in Kodaks home market USA. There is still room for improvement. All three companies struggle with increasing prices for silver and aluminum. Hitherto, they did not want to pass on price increases to their clients, but they might not be able to maintain this policy for long. In theory, they might increase their prices or at least pass on the risk of price fluctuations for aluminum to the printing shops because they have the possibility of selling the used plates. What we find particularly appealing is that printing plates are

consumable products that need to be purchased on a recurring basis. In the healthcare sector, a similar oligopol applies for certain products, in particular printers for digitally generated radiograms, as for printing plates. Moreover, Agfa has identified the end of film-based radiography at an early stage and introduced new information technologies with a performant software. Thus, the company is leading in clinic information systems in Europe. The business unit now has to get its processes and costs, particularly the fixed costs, under control. EVI: Does Agfa have any significant competitive advantages?

AGFa-GEVaERT N.V.
ISIN BE0003755692

Business: Agfa-Gevaert produces and sells photographic and electronic equipments for photographic processes. Stock Information (06/17/2008): Price: 5.02 52 Week Range: 19.60 4.38 Dividend Yield: 0% Market Cap: 635 m

Financials: Revenue: EBITDA Margin: Valuation Metrics*: P/E P/B

3.28 b (2007) 3.21 b (2008e) 8.1% AGFA 10.6 0.7 BEL20 10.6 1.4

Institutional Investors: 1) Franklin Templeton 2) Nordea Investment Funds 3) Classic Fund Management Fair Value: 15.00 - 20.00

12.53% 5.94% 5.14%

* based on 2008 Consensus Estimate

agfa-gevaert N.V. stock price

EURO

Investment thesis The healthcare unit provides good digital products, mainly software, which should soon compensate the decreasing volume in film-based consumables. The print graphics unit is a technological leader in an oligopolistic market. The high price levels for commodities and the euro as well as the poor management of the healthcare unit have put massive pressure on the profit. However, the new management should be able to improve margins thanks to good market positionings.

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von Wyss: Yes. The company has a competitive edge in technology in various business units. In the healthcare segment, this concerns digital radiography technologies. Moreover, Agfa has equipped clinics with its products for decades and is well fa miliar with their requirements. According to the management, Agfas Graphic Systems unit has a competitive edge in technology for nonchemical, digital printing plates. The same applies to Commercial Inkjet Printing, which belongs to the same business unit. They produce machines for prin ting plastics used for packaging, for example, using a drop-on-demand system. Inkjets contribution to the business result has so far been negative, but the unit will transform itself from a loss maker to a profit maker. This should also help bring the latest EBIT margin in the Graphic Systems segment of 3.7 percent up to 6 to 8 percent in the medium term. EVI: The healthcare unit is already operating with margins on this level. Is there also room for improvement in this segment? von Wyss: Oh, yes. Though the EBIT margin in this segment is already at 7.6 percent, it may be expanded to 12 to 13 percent. In various areas of digital image processing, Agfa-Gevaert has a prominent position in the market. Unfortunately, healthcare was the most poorly managed segment in the past, which is why the CEO of this business unit had to leave in summer 2007. His successor is a former member of management of Alcatel and needs to do some tidying up. EVI: Where do you see the Fair Value of the company as a whole? von Wyss: Factoring in the current commodities prices, we estimate the Fair Value of Agfa to be at approx. EUR 15 to 20 per stock. Though the companys valuation on a P/E basis is not lower than that in the Belgium BEL 20 Index, its profit dynamics are clearly above average in view of

the margin improvement which the company strives for and which, in our opinion, is realistic. EVI: Are there any other stocks where you identify such extreme undervaluation? Braun: You may currently buy the US car rental company Avis Budget (ISIN: US0537741052) for appro ximately one third of the intrinsic value. Recession fears have put pressure on the stocks price, which has reached a level that is no longer justifiable. EVI: Why do you give preference to the companys competitor Sixt (ISIN: DE0007231326), which was discussed in edition number 1/2008 of the EVI magazine?

Braun: Avis Budget and Hertz (ISIN: US42805T1051) are the top dogs among car rental companies at airports. Market entry barriers are high since you need a counter at the airport first of all if you intend to start a car rental business there. Normally, the required surfaces go away very quickly. There were fears that the market leader in the non-airport business Enterprise Car Rental would penetrate the market with an aggressive pricing policy. After taking over Alamo and National Car Rental, Enterprise is now represented at airports without having to fight a price war.

Braun: We have to be careful here. These companies are not necessarily comparable. Avis Europe (ISIN: GB0000658053) is an for approx. independent UK comEVI: What makes one third of the Avis Budget attractive pany and a competitor intrinsic value. of Sixt in Europe. On compared to Enterthe other hand, Avis prise and Hertz? Budget (ISIN: US0537741052) ge nerates most of its business volume Braun: Enterprise may be an inte in the USA, where Sixt has little or resting company, but it is not listed no importance. on the stock exchange. Its core business is to rent out cars to clients of In turn, the largest part of the turnoinsurance companies whose own vever which Avis Budget generates in hicles are no longer roadworthy after Northern America is related to car an accident. As concerns the rental rentals on airports. Here the market business, there is no big difference between Hertz and Avis Budget. Basiimplies that air traffic may decrease due the economic slowdown in the cally, this is a standardized process USA. In the past, there was a high with similar cost structures. correlation between the number of airline passengers and car rentals. There are two reasons why we prefer Avis Budget: First of all, we like the In our opinion, the number of pastwo-brand strategy which the company applies in a perfect manner. Avis sengers will decrease to a lesser extent than feared since the USA have and Budget present themselves to become an attractive destination for the client as individual companies. foreigners thanks to the low US dolAvis focuses on business travel while lar. Car rentals for tourists should at Budget mainly provides its services to private clients. However, anything least partially compensate a possible decrease in business travel. that the client does not see is shared, including the vehicle fleet. On the EVI: What is the competitive situaother hand, we may well do without Hertzs construction machinery busition in the USA? No. 3 Page  July 08

The three companies Hertz, Avis Budget and Enterprise now share over 90 percent of the US airport business. In this almost oligopolistic market, nobody has an interest in ruining You may currently the prices since they buy the US car rental all wish to operate company Avis Budget with a profit.

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ness. Renting out construction machinery is a highly cyclical business. EVI: How come the price of Avis Budget has suffered such a tremendous loss? Braun: One of the reasons might be the concerns about the economy as mentioned before. In our opini on, these concerns are exaggerated. Our analyst Markus Kaussen found out that 70 percent of the costs are variable. Car rental companies are able to respond to decreasing turnovers with only a short time delay by simply buying less new cars. Cars remain in the fleet for nine to ten months on

average. They may be kept for another three or four weeks in order to significantly reduce costs. Please bear in mind that even after the terrorist attacks of 11 September 2001, when US airports remained closed for four days, the car rental companies posted favorable quarterly results. This sector is thus highly flexible as regards the cost side. Another factor having put pressure on the budget of Avis was the pro blem of refinancing the business. By nature, car rental companies operate with a high level of leverage. In view of the credit crisis, we were wondering for some time if and at

which conditions Avis Budget would be able to acquire new capital after the maturity of certain bonds. How ever, these doubts have disappeared. The new bonds could be placed in the market without any problem. The slightly higher risk premiums were more than compensated by the tre mendous decrease in interest rates. EVI: Which are the expansion opportunities? Braun: Avis Budget intends to become more independent from the airport business and is fully capable of doing so. To this end, rental stations need to be opened in city centers. This is not very cost-intensive since the company can revert to the existing

AVIS BUDGET GROUP InC.

ISIN US0537741052

Business: One of the leading car rental companies worldwide Stock Information (06/17/2008): Price: $ 12.05 52 Week Range: $ 30.50 - $ 9.00 Dividend Yield: 0% Market Cap: $ 1.22 b

Financials: Revenue: EBIT Margin:

$ 5.98 b (2007) $ 6.30 b (2008e) 6.8% AVIS 9.5 1.2 S&P 500 14.5 2.5

Institutional Investors: 1) Shapiro Capital Management 2) Axa 3) OSS Capital Management 4) Classic Fund Management
* Source Bloomberg

11.6% 8.3% 8.1% 5.2%

Valuation Metrics*: P/E P/B

* based on 2008 Consensus Estimate

Fair Value: ca. 30.00

AVIS BUDGET Stock price

Investment thesis Recession fears and the refinancing risk (the fleet comprising approx. 400,000 vehicles is financed through debt) put pressure on the stock price. The management is highly experienced and knows how to navigate a car rental company through a difficult market. Around 70 percent of the cost is variable, for instance. Avis Budget aims to bring the EBITDA margin back to the long-term range of 10 to 12 percent. The company should be able to achieve at least 10 percent. In this case, the stock is worth USD 30.

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vehicle fleet a huge advantage for Avis for this kind of expansion. Such an experiment does not cost more than USD 20,000 to 30,000 per rental station. If all goes well, fine. If not, the rental station is closed and the loss is kept at a low level. EVI: And all of this makes you conclude that the stock has the potential to triple its price? Braun: Almost. The highly expe rienced management announces an EBITDA margin of ten to 12 percent in the long term. In our opinion, ten percent should be achievable. Discounted according to our DCF model, the Fair Value of the stock, based on 2011 profits, would be above USD 30. By the way, the companys CEO bought stocks worth one million US dollars six months ago at a price of USD 16. Currently, the stock is traded at slightly more than USD 11. EVI: Management is a good keyword. What importance do you attach to talking to Executive Board members of your buy candidates? Braun: This is very important to me since I need to assess whether the companys management is capable and willing to achieve the standard margin estimated by us and to invest the companys capital where it ge nerates value for the shareholders. We visit companies and also invite them to our premises. It is absolutely normal that companies try to appear in a good light at all times. It is important to maintain a critical attitude and to not be charmed by the companys representatives. It goes without saying that wrong assessments are possible even with this approach. The management of Circuit City (ISIN: US1727371080), an electronics chain domiciled in the USA, made the mistake of firing all employees with a high salary. What was not taken into consideration was that these staff members were not only

expensive, but also good. As a result, the companys crisis intensified. Our initial assessment of the management was clearly too positive. EVI: Where and how are you looking for buy opportunities? Braun: Among other measures, we effect screens in Bloomberg to browse the market for securities with a low valuation. But the main element in our search process is to read the newspapers. We want to know if and where there are any problems that are presented to the public in an exaggerated manner. This has now become more exciting compared to the situation a few years ago. And it inspires our hunting instinct. EVI: You do not go hunting in emerging markets. How come you miss out on this opportunity? von Wyss: We restrict ourselves to Western Europe and Northern America since we do not claim to understand the other markets. Hunting grounds are big enough in the markets we know, and it makes therefore no sense to familiarize with other markets, also in view of our lack of time. Other market participants have the capacity and the experience to analyse the Asian and South American markets on site and they are much better at this. A cobbler should stick to his last! EVI: Thanks to your highly transparent quarterly reporting, your search process is more or less public. Do you not fear imitators? von Wyss: What we worry more about is a certain schadenfreude since prices normally fall shortly after weve bought a stock. To be serious: There is in fact a tendency among investors to copy our ideas, especially in Switzerland. This becomes problematic when such investors call us to ask for more research material on an individual stock. For reasons of time, we cannot and do not want to provide such a service. We do not communicate the intrinsic No. 3 Page  July 08

values which we determine for individual shares and do not comment on them at least not during one-to-one conversations with clients. If at all, this is done in individual interviews with the press. Therefore, we do not provide quarterly reporting. We strive to conclude the acquisition of positions by quarter-end before the reports are available. This generally works out well, though not in all cases. EVI: On the other hand, do you monitor what others are doing? For instance, many investment funds take an interest in a stock once Tweedy Browne invests in it. von Wyss: We steal ideas from time to time, but in general we develop our own ideas. If there are overlappings, they are usually purely accidental. We do not want to be a short version of the Tweedy Browne funds. EVI: With only 30 securities, your portfolio is rather concentrated. Have you ever thought of reducing the risk by a higher degree of diversification? Mller: Never. Since we have a longterm investment horizon, we accept the high volatility which a concentrated portfolio brings about. We will continue to move in this field since we explicitly want to see an impact of the individual securities on the overall performance. EVI: Thank you for this open and inspiring interview!
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Contact: Braun, von Wyss & Mller AG Brandschenkestr. 150 8002 Zrich Switzerland T: + 41 44 2064080 F: +41 44 2064085 info@bwm.ch www.bwm.ch