Buhler creating shareholder value
"Market Trends" by Larry MacDonald
June 23, 2005
www.moneysense.ca
An unusual insider trading pattern is unfolding in the shares of Winnipeg-based Buhler Industries Inc., the only Canadian company still manufacturing tractors. According to insider reports filed with regulators, 72-year-old chairman and CEO John Buhler is buying and selling his company's stock almost daily.
Sometimes the buying and selling occurs on the same day, as on June 1 when he bought 600 shares and sold 1,500, and on June 2 when he bought 1,500 shares and sold 9,000.
He must have made over 200 trades in the past year, usually involving just a few thousand shares. Once in awhile a big trade goes through, like the 65,000 shares purchased on April 7 and the 31,000 shares purchased on March 3. Does this mean anything?
Ink Research Inc., a specialist in Canadian insider data, offers a possible explanation. Its Web site notes that insiders at smaller companies may transact frequently in their company's shares in order to support the price and improve liquidity.
Shares in small companies are often thinly traded, so the bid and ask spread can be wide and prices volatile.
Through his frequent trading, Mr. Buhler seems to have taken on the role of registered trader or market-maker. He apparently wants to massage the ups and downs of his company's stock price and keep the spread between bid and ask prices reasonable.
A chart of the share price marked with Mr. Buhler's transactions provides some confirmation. The selling is concentrated on the rallies and the buying on the dips. His trading is smoothing out the fluctuations around the underlying trend, which, as it turns out, happens to be upward — from $5 three years ago to the current $7.30.
One might consider watching Mr. Buhler's holdings, currently 377,300 shares, as a possible leading indicator of price changes. Selling pressure that would normally cause a price drop might show up first as a rise in Mr. Buhler's position and, vice versa, buying pressure might appear initially as a decline in his holdings.
If so, the rise in holdings since mid-April could presage some price weakness. For the first three months in 2005, the range was just under 300,000 shares but now it is closer to 400,000 and this increase has occurred on a flattish price trend.
But this thesis might be simplistic, or at least require very careful application. There was a spike in holdings to over a million shares in February of 2004. But that was due to exercise of options, not to a surge in selling pressure.
Those elevated holdings were then sold off quickly in the following weeks into a strong price rally brought on by some good news. So Mr. Buhler's option exercise (at market prices) was just building an arsenal in response to a wave of buying. The hypothesized inverse relation between holding changes and future price movements did not kick in until after the exercise of options.
Meanwhile, Mr. Buhler has a major investment holding in another account. Through Highland Park Financial Inc., he owns 13.4 million shares. The family is involved too: his son, Douglas Buhler, has over a million in his account.
Trading in these accounts is rare. Such large, infrequently traded investment holdings further attest to a close alignment of management's interests with those of shareholders. Indeed, one might say Buhler Industries is a paragon of a company in pursuit of shareholder value.
The company is also on Mergent Inc.'s list of Canadian Dividend Achievers — companies that have raised their dividend in each of the last five years. The dividend, now yielding close to 2%, has been raised 12 times over the past 10 years.
In 1993, the year after Buhler's IPO, an investor could have bought the stock in a range from $1 to $2 and received a dividend of $0.03 per share for an average yield of 2.25%. With the steady rise in dividends to $0.13 a share, those early buyers are now receiving (in addition to the price appreciation,) an average yield of 9.75%.
It's always dangerous to extrapolate historical trends into the future and to invest just on that basis. After all, fiscal 2004 was a tough year that saw slippage in company margins and profitability because of rising steel prices and Canadian dollar.
But steel prices in fiscal 2005 are easing and Buhler put through price increases on its products in January. And the impact of the Canadian dollar is mitigated by a natural hedge — the purchasing of most inputs (steel, engines, and tires) in U.S. dollars. The company also has the option of transferring more of its production to its Fargo, North Dakota plant.
But valuation has many of the analysts covering the company saying Buhler is just a hold right now. Its price-to-earnings ratio of 15 is at the upper limit of its historical range and above its peer group average of 13. Along with the rise in Mr. Buhler's holdings in his market stabilizing account, this might be grounds for biding one's time before buying.