The beauty of Holding Company stocks

Holding companies are entities that don’t manufacture anything, sell any products or services, or conduct any other business operations. The purpose of a Holding Company is to hold the controlling stocks or membership interests in other companies.

There are many Holding Companies out there on the stock market. The most prominent Holding Company is certainly Berkshire Hattaway with an amazing portfolio of stocks of businesses like Apple, Coca Cola, etc., but Berkshire Hattaway also owns whole companies (see also article How bulletproof is Berkshire Hattaway).

For value investors, in particular, having a look at Holding Companies can be very interesting as their strategic focus involves picking stocks that appear to be trading for less than their intrinsic or book value.

With Holding Companies, that’s usually the case, their market value is often much lower than the sum of their parts due to the so-called Conglomerate discount.

There are several reasons that can lead to that Holding discount, complex structures are often perceived as less transparent. The discount can also happen when the Holding Company has an unclear competitive advantage and market participants are unconvinced on the ability for different sub-units to work together to take advantage of synergies.

Often, investors just don’t know that through Holding Company stocks they can directly or indirectly take a stake at fine businesses as well for a discount.

For instance, through investment in Berkshire Hattaway, you indirectly take a stake in the holding’s huge Apple stock position. With an Investment in consumer staple stock Nestlé Holding, you participate in one of the world finest portfolio of leading food businesses, in coffee (Nescafé, Nespresso, etc.) and drink business (Nestea, Ice Tea, multiple mineral water companies, etc.) and furthermore, you also indirectly take a stake in the French cosmetic giant L’Oreal. Just think of this, it’s like buying shares of PepsiCo plus Estée Lauder but for a nice discount, as the sum of all parts of Nestlé Holding is not always fully recognized or appreciated by the investor community.

One more example. Dutch beer giant Heineken has an amazing portfolio of leading brands. What’s interesting is that there is two kinds of stocks: Heineken NV and Heineken Holding. The difference is that Heineken Holding’s only asset is the holding in Heineken NV. Its income consists mainly of the dividends received from Heineken N.V. The dividend payable on the two shares is identical, Heineken Holding distributes all the dividends it receives from Heineken NV. You can easily find an attractive entry price on the Heineken Holding, as most of the time, there is a discount compared to Heineken NV.

It’s a bit like the issue with common stocks, preferred stocks, etc. which companies issue. Sometimes, you can get the same for less money.

Always keep in mind that a Holding Company is of course only as good as the investments it has made and how good as its financial position is. What good is there when high-quality assets are acquired through an overleveraged balance sheet?

It’s important to understand that with Holding Companies, the discount to Net Asset Value may take a long time to close or indeed never happen to close. If you decide to invest, you need to be very patient, in particular with Holding Companies. It requires a bit more research, you should also have a closer look at the structure, the management, etc.

But definitively there are very nice opportunities out there worth a closer look. Let’s get at two interesting Holding Companies in Europe.

Porsche Automobil Holding S.E. is like a car companies funds

Porsche Automobil Holding S.E. is the major shareholder of the German car giant Volkswagen Group with over 30 % of the bearer shares and of the majority of its voting rights. In addition to that stake, Porsche Automobil Holding S.E. has a very nice cash pile of around Bn. 1 USD. The holding company has practically no debt and literally no overheads.

The company’s income derives from dividends it receives from the Volkswagen Group and of which a portion is returned to its own shareholders.

The Volkswagen Group is huge, besides the core brand Volkswagen it includes:

  • Porsche
  • Audi
  • Lamborghini
  • Bugatti
  • Bentley
  • SEAT
  • Daccia
  • Ducatti
  • MAN
  • Scania

Prosus is an unknown Tech Giant

People often think that tech is always overvalued and that in Europe there are no hidden gems. Well, let’s look at Prosus.

Prosus is a Dutch holding company with an amazing portfolio of tech businesses. The most important participation is the 31 % stake in Chinese tech giant Tencent.

Yes, exactly, almost one-third of Tencent belongs to Prosus.

Tencent owns the social media network WeChat with over one Billion users – one of Facebook’s largest competitors. Tencent is also the world’s largest video game company. Tencent is just a massive giant. Its services include social networks, music, web portals, e-commerce, internet services, payment systems, smartphones, etc.

But there is much more. Tencent is one of the world’s largest venture capital firms. For instance, in 2017, Tencent acquired 5 % of Tesla and also took a stake in the photo app company Snap.

So, via Prosus, indirectly investors take multiple stakes in leading businesses in the tech sphere.

Just check out their homepage showing their participation in other businesses (besides its Tencent stock holding), it’s amazing: you find there Delivero Hero, an online food ordering and delivery marketplace, and many more interesting companies in which Prosus has stakes.

So, for tech interested investors and of course for value investors in general, Prosus is definitively worth a look.

Disclaimer
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

About Savy Fox

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