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History of Holding:  I first bought this stock during the height of the crisis around $8/share, and sold it in April/May 2010 around $15/share, when I raised money to maintain a cash cushion before buying my first house.  I bought back into it with a 1/2 position in April 2011 at just over $15/share, and since then it has underperformed handily.  I tend to do a 1/2 position based on basic, fairly involved research, and then add to stocks as I do more research and grow more comfortable/knowledgeable, assuming they remain both good and undervalued.   I am now reviewing the status of the company and my plans for the future.

What is it:  Sells location control devices in Isreal, Brazil, and Argentina.  The sell various types of devices; services.  1) They sell GPS systems for trucking fleets, so that a manager can track the speed, stops, location, etc., of trucks en route -- this is mostly about monitoring; 2) They sell a lojack-type recovery system for cars and motorcyles -- mostly about vehicle recovery.  They sell both to fleets that rent cars, and they partner with car dealers who 'upsell' their vehicle recovery systems.  This is a fairly sophisticated device.  It can do things like remote engine disable -- not just a pinging GPS beacon.  They are one of a number of companies in this industry, not the market leader, but one of the market leaders.

Valuation FCF:  I have decided to start posting my very basis discounted cash flow analysis spreadsheet publicly on Google docs, so peole can see my work.  Accordingly, here ya go.  Let's see if I did that right.  FCF has not been terribly consistent.  By my calulation, if it can grow 4% per year for 10 years, plus 2% perpetuity, it's modestly but not exrtremly undervalued, if you count the cash it holds, and assuming a 12% discount rate.  It is about 15% undervalued by that metric.  I'm fairly comfortable with the FCF because depreciation about matches capital expenditure, as it typically should.  I get all of my numbers from Morningstar, by the way.  

A Word on Discount Rates:  Buffett famously was said to apply the rate of a long-term U.S. government bond.  That is what he applied when purchasing CocaCola, for example; that yield a 9% discount rate, because he does not employ an equity risk premium: that is because is buying companies that can easily cover interest on their debts, and that have, in his view, moats.  By that logic, Buffett would be (and maybe is) applying a 4% discount rate in lo-these-crazy times.  Note that if you apply a 4% discount rate to Ituran, you wildly inflate its value: suddenly it is 80% undervalued!  However, Buffett has also stated that as interest rates deline he is apt to be more cautious in applying the risk free rate.  See Hagstrom, The Warren Buffett Way (1994), at p. 94.  Still it is relevant to keep this in mind when deep value folks tell you you always need to apply a 15% discount rate.  Still, it is worth keeping in mind that in this era of low interest rates, the cash flows of companies ARE actually worth more.  It is fine to talk about 10-year CAPE, but the market is not always valued as it is with interest rates as they are.  Some will tell you that interest rates are artificial.  I will tell you the Fed has set them where they need to be based on the state of the economy, like a tightrope walker adjusting his beam to the left to keep from falling.  While one cannot assume that today's rates provide a basis for one's discount rate out to eternity, or even for ten years, one can assume they are valid for three to four years (and absolutely for the next year or two).  This has important implications for valuing stocks based on a discounted FCF basis.

Return on Equity Metrics:  Things have not been peachy for Ituran.  Dupont Analysis shows a company whose metrics have struggled, with 2010 being a tough year.  TTM shows some recent recovery.  I have not fully explored the reasons for Ituran's troubles.

Dividend:  ITRN pays a Euro-style dividend that widely varies each year.  Note that taxation on dividends from Israeli companies is relatively high.  This is a company that pays out a LOT in dividends.  With that in mind note that.... 

Other Issues:  This is a family-run company, where the family owns a lot of shares, and some would say excessive familial control.  Sheratzky was just kicked out of a dual president/board chairman role.  http://seekingalpha.com/news-article/1839248-ituran-location-and-control-ltd-announces-extraordinary-general-meeting-s-results

Hey Look-At-this Category:  Seth Klarman owns it.  http://www.sec.gov/Archives/edgar/data/1061768/000114036111041507/form13fhr.txt  I can't be in terribly bad company then.  His fund owns $23,000,000, a small position.  On the other hand, one of 21 stocks in the guy's portfolio as of August.  Just would like to note I only discovered this today.

Upshot:  I'm holding, I'm waiting and seeing.  I actually do not see this company as the Deep Value that I associate with Seth Klarman.  I see it as modestly undervalued.  I see it as a company that has had a tough couple of years, that has suffered in Brazil, and that may be turning around.  I'm keeping an eye on it, and will be doing more research.  I'm not prepared to sell, but I'm not prepared to commit more money at this time either. 

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FYI.

Years ago I had Ituran around $12. with a 10% dividend. There is a caps pitch in closed picks somewhere. I don't remember why the divi is gone. Also, at the time Brazil passed legislation that required location equipment be installed in cars. Following that might be relevant.

+1 rec

Best wishes,

Steven

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Hi Devoish, thanks for the tip.

DTAF 

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I should note the FCF analysis shows it's modestly undervalued now.  When I bought, over $15, I had no margin of error.  This was wrong, and I have paid the price.  I bought because I though I knew the company, because I had previously owned it and done research.  I failed to look closely enough at its business in the last year, and I did not do a FCF analysis at that time.  This was a mistake.  Best for us all to acknowledge our mistakes as well as our successes.

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This was wrong, and I have paid the price.

...

This was a mistake.  Best for us all to acknowledge our mistakes as well as our successes.

Most people are not good enough at "stock picking" to really make "mistakes". If their "equity analysis" were to somehow produce "better returns" they should make it their profession.

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#4 I am not sure yet whether I have any talent in that arena, hehe ...

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#4 It would be great to find someone making "intelligent" (i.e. non-random) mistakes in stock-picking consistently. If you do find such a source of mistakes make sure he does not "learn from his mistakes" and "do the opposite" of what he does ...

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Hi porte,

Note that when I am talking about mistakes, I am talking about (or mean to be talking about) a mistake in my process, not necessarily as defined by my result. 

Any trader or investor has to accept the extent to which his or her choices may be more random than he or she believes. 

But traders and investors can have a system, and define mistakes by whether or not they adhere to it, as opposed to by the results of their trades.  Some of the most successful traders are only correct in their "calls" 30% of the time.  The key is their process: minimizing the downside result of errors, and maximizing the extent of successes.

I am far from sure I have any talent either; I'm sure I'm even farther from surety than you are.

All best,

DTAF

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