Inside this Issue - First Eagle Funds

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extremely large reserve base and extensive refining capacity are being significantly undervalued. The company has generated average annual EBITDA of €25 billion, so even with a low multiple on that of six to seven times, the stock has 50% upside. We’ve been buyers of Total directly as well. You described Cintas [CTAS] recently as a quintessential First Eagle idea. Why? AD: It’s a company that’s very easy to understand, with clear, basic competitive strengths and a cheap stock price. Its primary business is designing, manufacturing and servicing employee uniforms, and over time it has expanded the product line to include things like linens, fire extinguishers and janitorial supplies. It also has a document-management business, not unlike Iron Mountain’s. The key to Cintas’ business is the route density around centralized laundry and warehouse facilities. The more clients serviced within the radius of the facility, the higher the incremental margin earned on each additional client. Drivers are much more than just delivery people, they are customer-service contacts and are at least partly responsible for cross-selling additional services. The Cintas growth story was built around successfully driving the consolidation of a very fragmented industry. As the market leader in a business with significant scale economies, they’ve been able to translate their size into higher margins than their competitors, and have also made it difficult to compete with them on price. For a high-quality business, the share price hasn’t painted a happy picture for a long time. AD: As the business matured, the Street consistently marked down Cintas’ valuation. The share-price damage only accelerated as the economy went south in the latter half of last year. The company has responded by quickly reducing headcount and capital spending, but earnings have still been hit. We know what we’re getting here, which is a high-quality franchise, growing in the mid to low single-digits on the top line, that is trading at a low valuation based on muddle-through earnings power. That may be rather mundane, but we’ve historically done very well with these types of situations. Others have characterized the documentmanagement business as an interesting growth area. Do you agree? AD: There is potential for them to apply the same model to document management that they’ve used successfully in the INVESTMENT SNAPSHOT Cintas (Nasdaq: CTAS) Business: Provider of corporate-identity uniforms and ancillary products, as well as document storage, document disposal and on-site safety-related services. Share Information (@6/29/09): Price 22.93 52-Week Range 18.09 – 33.73 Dividend Yield 2.1% Market Cap $3.50 billion Financials (TTM): Revenue $3.90 billion Operating Profit Margin 13.8% Net Profit Margin 8.0% CTAS PRICE HISTORY 50 June 30, 2009 www.valueinvestorinsight.com 40 30 20 10 INVESTOR INSIGHT: First Eagle 2007 2008 2009 uniform business. But the document business is more competitive and we’d actually prefer they not overspend on it. With the stock trading at just under $23 per share, what kind of potential upside do you see? MM: Based on our normalized estimates, we’re currently paying multiples of just over 10x earnings and 6x EBITDA, and we’re getting a better than 10% free cash flow yield. If you apply a 16% EBIT margin to roughly $25 per share in revenue, put a low double-digit multiple on the result and strip out net debt, we come to THE BOTTOM LINE This is a “quintessential First Eagle idea,” says Abhay Deshpande: a company that is easy to understand, with clear competitive strengths and a cheap stock price. By applying a low double-digit multiple to his estimate of normalized EBIT, he believes the private-market intrinsic value of the shares, after net debt, is around $40. Sources: Company reports, other publicly available information Valuation Metrics (@6/29/09): CTAS Nasdaq Trailing P/E 11.3 34.3 Forward P/E Est. 12.9 19.3 Largest Institutional Owners (@3/31/09): Company % Owned Arnhold & S. Bleichroder 7.9% Fidelity Mgmt & Research 4.4% Vanguard Group 3.9% Fiduciary Mgmt 3.8% Barclays Global Inv Short Interest (as of 6/10/09): 3.3% Shares Short/Float 3.0% 50 40 30 20 10 Value Investor Insight 8
a private-market intrinsic value of around $40 per share. Are the biggest risks here cyclical? AD: The health of the business is closely tied to employment, so continued rising unemployment would likely not be a positive for the share price. That could be partly offset – or exacerbated – by the direction of fuel prices, which are a big cost component. A more structural risk is that attempts to unionize the Cintas workforce gain steam with the advent of new labor laws and regulations proposed by the current administration. The company today has 34,000 employees, of which around 400 are unionized, so any significant shift toward a more unionized employee base could have a highly negative impact on margins. They’ve been successful in avoiding unionization so far, but it’s clearly an issue we have to keep a close eye on. You’ve spoken about the general merits today of exposure to gold. Describe the specific merits of your holding in South Africa’s Gold Fields [GFI]. MM: In addition to owning gold in a vault, we are also more than willing to own it in the dirt if we get the right price. In buying shares in a company like Gold Fields, we believe we’re effectively buying the metal at a discount to its market price. The company is one of the largest global gold miners, producing around four million ounces per year from mines in South Africa, Peru, Ghana and Australia. Our valuation of gold producers basically consists of going mine by mine and looking at the reserves in the ground and the costs to extract them, taking into account things like labor cost escalations and tax leakage. In Gold Fields’ case, it has close to 85 million ounces of proven reserves overall, and its cash costs of extraction average around $500 per ounce. One thing we may do a bit differently in our analysis is that we don’t significantly mark down the value of long- June 30, 2009 lived reserves, which is effectively what people do when they discount the estimated cash flows from future reserves back to today. Over long periods of time, the price of gold has gone up in nominal terms at CPI plus a little, so we’d argue that the real value of reserves ten or twenty years out is not that different from the value today. As a buyer of Gold Fields’ stock [at a recent price of $12.40], you’re paying $500 per ounce in extraction costs, plus a premium that is the market cap of the company. As we calculate it, then, you’re able to buy the gold in the ground here at a price in the high-$700s per ounce. That INVESTMENT SNAPSHOT Gold Fields (NYSE ADR: GFI) Business: Exploration, mining and processing of gold from mines in South Africa, Ghana, Australia and Peru. Proven ore reserves are nearly 85 million ounces. Share Information (@6/29/09): Price 12.39 52-Week Range 4.64 – 13.99 Dividend Yield 0.5% Market Cap $8.73 billion Financials (TTM): Revenue $3.52 billion Operating Profit Margin 22.1% Net Profit Margin 9.6% GFI PRICE HISTORY 25 20 15 10 5 0 www.valueinvestorinsight.com INVESTOR INSIGHT: First Eagle 2007 2008 2009 compares with paying $900-1,000 on the spot market. Are you making any explicit assumption about the price of gold in your analysis? AD: No. We believe exposure to gold adds value to the portfolio as a potential hedge. With gold, we’re relative rather than absolute value investors – our buying bullion versus buying gold stocks is a function purely of what’s offering us the best price at the time. How do changes in the price of gold and changes in the prices of gold stocks correlate? THE BOTTOM LINE Relative value investors when it comes to gold, Matthew McLennan and Abhay Deshpande buy gold stocks when they’re priced to offer the underlying reserves at a discount. With Gold Fields, they estimate they’re buying the company’s gold reserves at a price in the high-$700s per ounce, some 15% less than the spot-market price. Sources: Company reports, other publicly available information Valuation Metrics (@6/29/09): GFI S&P 500 Trailing P/E 24.3 35.4 Forward P/E Est. 12.8 15.6 Largest Institutional Owners (@3/31/09): Company % Owned Arnhold & S. Bleichroder 5.5% Tradewinds Global Inv 4.5% Van Eck Assoc 2.9% Paulson & Co 2.8% Deutsche Bank Short Interest (as of 6/10/09): 2.0% Shares Short/Float n/a 25 20 15 10 Value Investor Insight 9 5 0
Page 1 and 2: ValueInvestor June 30, 2009 The Lea
Page 3 and 4: Is it harder - or even ill-advised
Page 5 and 6: Is patience a key with this investm
Page 7: AD: We have had a lot of success ov
Page 11 and 12: Disclosure Average Annual Returns a
Page 13: Average Annual Returns as of 06/30/

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