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E-L Financial's stock price discount a tempting value play

If you've never heard of E-L Financial Corp. , you're not alone.

Despite its $14.6-billion in assets, the Toronto-based company doesn't have a website. It lacks a public relations department. The chief financial officer saves the company money by handling media calls along with his day job of overseeing the books.

But for value investors, E-L offers an opportunity to buy a dollar bill at one of the biggest discounts on the Canadian market. The shares last traded around $400, yet they have a book value – a rough measure of their breakup value – of $643.

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E-L shares trade infrequently because the wealthy Jackman family of Toronto and a few institutional investors own most of the stock. Some savvy investors, though, think the company's steep discount from book value represents a bargain.

"It has a good long-term record of growing its book value per share," observes Norman Rothery, who has a position in E-L and is publisher of the website, a value-stock advisory service. Even if the company only got back to book value, "you'd get a nice bump," according to Mr. Rothery.

Other noted value players with positions in the company include Third Avenue Management and Chou Associates, according to Bloomberg.

E-L holds assets that have the potential to rise in a more buoyant economic environment. It owns 100 per cent of automobile insurer Dominion of Canada, 80 per cent of life insurer Empire Life, 25 per cent of shipping company Algoma Central, stakes in two publicly traded closed-end funds, which themselves trade at substantial discounts to breakup value, along with about $870-million worth of corporately owned stocks and other investments.

The company's stated objective is to create value for shareholders through long-term capital gains and dividend income, tasks at which it has had great success. Since 1969, the company's book value has risen more than a hundredfold, and over more than four decades it has suffered only four money-losing years.

To be sure, there are reasons it should trade at a discount to book value. David Hughes, senior vice-president at credit rating firm DBRS, says life and auto insurance are "two relatively stressed industries" at the moment. In addition, corporations, such as E-L, that have a holding company structure typically trade below book value.

Because it has a big stock portfolio, E-L is also "exposed to the full beta of the stock market," Mr. Hughes said, referring to a measure of share price volatility. The company took a big hit during the 2008 stock market panic, when it lost $144.42 a share.

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"It's hard to make the case that it shouldn't be trading at a substantial discount," Mr. Hughes said.

E-L declined to comment, citing the quiet period for executives before the release of quarterly results.

One way to eliminate the discount would be for the company to sell its various holdings and distribute money to shareholders. The Jackman family has shown no interest in doing so, but such a step could give shareholders a staggering $900-million more in value than the market currently assigns the company, if liquidation value were to match book value.

If the company's assets turned out to be more valuable, there would be extra gravy. The auto insurance operation is the likeliest store of unlocked value, given that the industry in Canada needs consolidation and buyers able to eliminate corporate overhead have been willing to pay up for the right assets. Intact Financial, for instance, bought Axa Canada last year for 1.8 times book value.

One additional caveat on E-L stock is that it has few shares available for trading, making it difficult to buy. Mr. Rothery advises placing a fixed-price order and being patient.

He likes another of E-L's quirks: The company doesn't grant executive stock options, a form of compensation that can favour managers at the expense of diluting shareholders. "It's so refreshing" to find a company without a stock option plan, Mr. Rothery says.

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