(B)(N) FDML Federal-Mogul Corporation

Deal Book. Federal-Mogul Corporation is one of the kingpins in the Icahn Enterprises portfolio and its stock price is up an astounding +160% this year from $8 in December to the basement at $5 in April and now to the current $20 to $21. Please see Exhibit 1 below.

The company has sales revenues of about $7 billion per year and is on track for that amount this year but has lost money in four of the last five years and in the first quarter of this year but has returned some profit since then (The Associated Press, October 23, 2013, Federal-Mogul posts $38M 3rd-qtr profit, reverses year-ago loss, shares rise).

 Its hard to understand how $38 million of profit (actually down from $56 million in the second quarter) can turn a $1 billion company into a $3 billion company by market value but it’s evident from the Risk Price Chart below that investors who are slaves to the “Power Law“, [SF] = [P/E] × EPS, invite whiplash and ought to get a harness.

However, the deal of the year was a “rights offering” of $500 million completed in July in which Mr. Icahn upped his stake from 78% to 81% of the company at $10 per share (New York Post, August 9, 2013, Wheelin’ & dealin’) and that price was a bargain because it was still $6 to $7 below the price of risk at $16 to $17 which it is now and has been for the last three years despite the industry and stock price drama.

The “price of risk” can be described in several different ways depending on how sophisticated or rigorous we need to be, and we have used them all at one time or another in these Posts.

In this context, the most pleasant description is that the “price of risk” is “the least stock price at which the company is likeable” (Goetze 2006) and the property of “likeability” is not one of colour, taste or fashion, but do we have reason to believe (whether true or not) that our money invested in this stock is “as good as cash and better than money” meaning that we believe (for whatever reasons) that the stock will provide a non-negative real return.

However, it’s not just our belief that moves the stock price. The “price of risk” resolves a Nash Equilibrium between “risk seeking” and “risk averse” investors within “the demonstrated societal standard of risk aversion and bargaining practice”.

The stock became eligible for inclusion in the Perpetual Bond™ at prices above the price of risk and it’s trading now at $20 to $21 as a “free good” which means that there is an excess of demand over supply where, in this case, we’re not talking about “free goods” such as the air that we breath (which is priceless but has no specific price at the present time), but the “good” that is “the demonstrated societal standard of risk aversion and bargaining practice” which we can talk about and is meaningful in the context of thousands or tens of thousands of investors who might be interested in buying and holding the stock in contradistinction to those who, for one reason or another, or perhaps necessity, want to sell the stock.

Our estimate of the downside in the stock price due to the demonstrated volatility is minus ($4.25) per share so that it could be trading between the current $20 and $16 to $24 without surprise and we will continue to buy and hold it at demonstrated prices above the price of risk at $17 but sell it otherwise (absent taking profits now and then).

It’s also clear that investors who bought the stock at $5 to $10 got a good deal. But then, it could have ended up as zero absent other investor interest and those investors are often inclined to “take profits” early not understanding the reasons for their good fortune.

Exhibit 1: (B)(N) FDML Federal-Mogul Corporation – Risk Price Chart

Federal-Mogul Corporation is a supplier of technology and innovation in vehicle and industrial products for fuel economy, emissions reduction and safety systems. It operates in two segments namely Powertrain and Vehicle Components Solutions.

(Please Click on the Chart to make it larger if required.)

From the Company: Federal-Mogul Corporation supplies various components, accessories, and systems in the United States and internationally. The company operates in two segments, Powertrain and Vehicle Components Solutions. The Powertrain segment provides various products, including pistons, piston rings, piston pins, cylinder liners, valve seats and guides, engine bearings, industrial bearings, bushings and washers, ignition products, dynamic seals, bonded piston seals, combustion and exhaust gaskets, static gaskets and seals, rigid heat shields, element resistant sleeving products, flexible heat shields, sintered engine and transmission components, fuel pumps, power and lighting systems, interior and exterior lighting components, and metallic filters. The Vehicle Components Solutions segment offers light and commercial vehicle disc pads, railway disc pads, light vehicle drum brake linings, commercial vehicle full length linings, commercial vehicle half blocks, railway brake blocks, combustion and exhaust gaskets, static gaskets and seals, and wipers, as well as chassis parts, such as ball joints, tie rod ends, sway bar links, idler arms, and pitman arms. This segment provides its products under the Abex, Beral, Ferodo, Necto, ThermoQuiet, Wagner, MOOG, National, Fel-Pro, Goetze, National, Payen, AE, Carter, FP Diesel, Glyco, Nural, Sealed Power, ANCO, and Champion brand names. The company serves original equipment manufacturers and servicers of automotive, light, medium and heavy-duty commercial vehicles, off-road, agricultural, marine, rail, aerospace, power generation, industrial equipment, and transport markets, as well as a range of distributors, retail parts stores, and mass merchants. Federal-Mogul Corporation was founded in 1899, has 45,000 employees and is headquartered in Southfield, Michigan. Federal-Mogul Corporation operates as a subsidiary of Icahn Enterprises Holdings L.P.

For more information on the Chart Elements, please see our recent Post, The RiskWerk Company Glossary.

For more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
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For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.