# Guardian Capital (GCG.A) Value play



## CPA Candidate (Dec 15, 2013)

Here is an interesting value play investing idea, Guardian Capital, who operate in the wealth/asset/portfolio management space.

Why value? Because they own a large portfolio of securities that represents most of their stock price. Years ago they sold a portion of their wealth management business to BMO, in exchange for BMO shares. By my calculation they currently hold about 4.7 million BMO shares, and as of Sept 30, 2014 had a securities portfolio with a fair value of 524 million, mostly consisting of BMO shares (385 million).

My back of napkin calculation has the value of their portfolio at $16.35 per share and shares closed today at $17.71. As an investor you are paying the price of a cup of coffee for their active business.

They earned 94 cents in the first nine months of 2014, annualizing I get a 1.25 EPS and P/E of 14. Trading a 1.2x book value with a 1.41% yield. This is a cheap stock. You can think of as an investment in BMO with very cheap upside potential.

Downsides: rather thin, choppy trader


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## OptsyEagle (Nov 29, 2009)

I looked at this one myself a while back. The problem I had is that the great deal that you talk about is so fully disclosed to any potential investor who might read a quarterly report, that it would be almost impossible to miss. So I asked myself, why does it exist, if so many people can plainly see it...or does it exist at all.

My investigation was not completely exhaustive but I will give you my results. I cannot guarantee that I am reading it correctly, but it does seem like the stock market is reading it the way I read it, so I will give you my investigative results.

The first thing you need to understand, when buying a holding company that owns other publicly traded companies, is that the stock market will always value those holdings at a discount. You see this, for example, in Power Financial (PWF). If you add up all the shares they own of Great West Life and Investors Group and calculate the market value of those shares, as well as adding a reasonable valuation on the rest of their holdings, you will find that the stock market will value PWF at around 70% of the value of it's underlying holdings. The reason for this, is if they sold all these holdings and paid an applicable tax on the gains and then paid out the resulting proceeds as a big whopping dividend to the shareholders, you would be lucky to end up with 70% of what all this was worth before they sold it all. Remember you are paying after tax money for the shares of this entity, but will end up with a big taxable dividend in my scenario, when your money comes back to you. So how many after-tax dollars would you pay for these pre-tax assets? Probably the same, maybe 70 cents on the dollar.

So with all that being said, with Guardian you need to assume that the $16.35 per share value of their investment portfolio would only be worth maybe $11.50 to you on an after tax basis, if they sold it and paid it out to the shareholders. Plus or minus a little, but that is approximately how it will work out.

So, if it traded at $17.71 today, then you are paying around $17.71 minus $11.50 or $5.21 for the rest of the company. Now, the question arises, what is the rest of the company worth.

You should take a very close look at note 11 in their recent quarterly report or any other quarterly report.

https://www.guardiancapital.com/documents/quarterly-reports/quarterly-report-Q3-2014.pdf

They have three business segments that earned them $29 Million in the last 9 months, or as you say $0.94 per share. However, one of their business segments, is Corporate Activities and Investments. In that segment, they earned $13.2M in dividends/interest and $6.2M in gains for a total of $19.4 Million. They buried some corporate expenses in there as well, however, assuming those corporate expenses would still be there if they sold all their investments, one needs to back out $19.4M, or $19M after tax, from the $29M, which leaves them earning only $10M in 9 months or around $0.32 per share. Annualized that would be around $0.43 per share.

So, as I saw it, today's market price allowed you to pay $$5.21 for $0.43 per share of earnings which is a PE of 12.1

This research made me feel that the stock market was probably fairly valuing this stock, but perhaps I am missing something. That is how I saw it anyways.


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## CPA Candidate (Dec 15, 2013)

The holding company discount is in effect here to be sure, but the potential tax burden from the sale of the investments is not as high as you estimate. At the full corporate rate capital gains would have 19% tax. Anyway, don't suspect there is any desire to sell the shares when the dividends are always growing. I suspect that Guardian will raise their dividend a nice rate over the coming years.

The reason I think the apparent value is real is the propensity of the investing public to shun anything smaller and illiquid. I do not believe Canadian equity market efficiency is very high once you get past the big companies.


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## oob (Apr 4, 2011)

If you look in the past 2-3 years, the value gap has narrowed significantly. Their active business also earnings the vast majority of its revenue from sub-advising bmo funds.


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