A Large-Cap Swiss Luxury Net-Net

I’ll be honest: I’m not usually too interested in net-nets. They’re usually bad businesses burning cash. They can be great investments as a basket, but predicting the forward returns of any single net-net is too tough for me.

This one is different though (famous last words). It’s in the luxury space, and that means pricing power. Luxury businesses aren’t immune from cycles, but they often have the tools to weather them and emerge stronger. This business has pricing power, virtually zero debt, and products that have been in demand since the 1700s. It remains profitable, though profits are down substantially from their peak.

Ben Graham coined the term “net net” to refer to businesses trading below their net current asset value (NCAV). NCAV is the value of liquid assets that could be turned into cash in less than a year minus all liabilities. It's a proxy for the short-term liquidation value of the company.

In theory, a company should always be worth more than NCAV unless there is good reason to believe that future NCAV will be lower. Most net-nets are losing money and funding the losses by consuming cash or increasing debt, both of which reduce NCAV. That’s not what’s happening here.

Another risk is that assets like inventory are carried on the balance sheet at more than their fair market value. As Charlie Munger would say, the assets are only good until reached for. That’s also not the problem here. Most likely the inventory is carried at a discount to its fair value.

Last but not least, net nets traditionally suffer from poor capital allocation at the hands of a controlling shareholder. While this situation does have a controlling shareholder, I don’t see any blaring problems with their capital allocation. They’re deliberately keeping production high despite cyclically low demand to preserve jobs and capacity for the inevitable cyclical swing higher. They’re playing the long game and ensuring they’ll be there for their customers when they're needed. Its short-term sub-optimal but long term optimal.