Getting Back Into The Swing Of Things, My Investing Book, Sold $STRT Up 75%, And What Have I Missed?

Since my last post almost two months ago now my brother and I have been working very hard in our business Black Hills Tech Solutions so I have had almost zero time to look at the stock market since then.  We are doing relatively well so far and are working on building a company’s website right now.  Okay well my brother and his buddy are doing the bulk of the website building since I have no idea how to do any of that.

I have also gotten off of my allergy shots, which have made me feel quite a bit better consistently and have also been forcing myself to take time off from things and relax every once in a while.  I do not know which has helped me the most but I have not been sick in about two straight months since I have started the above and have generally felt pretty decent most of the time.

Since I have been feeling better, (i.e not getting sick all the time mainly) and since I have had a bit of free time with less going on at the business I have had some time to fill my want/need to research companies, learn about investing, and work on my investing book in the past week or so.

In the past week so far I have finished up another two chapters in my book and tonight I will start on another chapter.  I also have been looking for a company to start research on but have thus far had no luck.  It seems that the market has continued to get even more over heated in the past couple months as a week ago I took cursory looks through about 250 companies to potentially do research on and the only ones I found to be even a little undervalued or interesting were Chinese nano caps.

If you have been following this blog for a while you know that Chinese small caps terrify me because of the fraud, misreporting, lying, etc and that I lost a lot of money on them when I first started investing.  Suffice it to say that if I am not comfortable buying into Chinese small caps that I won’t consider even looking into Chinese nano caps.

I have also sold out of Strattec (STRT) in the portfolios that I manage due to it reaching the higher end of my valuation range and I sold out up 75% since December when I originally bought into them.  If, and more likely when, the market crashes I will definitely think about buying into them again as I still really like what they are doing now that they have fixed the bulk of their problems and their management.  The portfolios that I manage are now sitting around 55% cash because of how overheated I think the market is.

I will continue to look for a company to do research on and continue working on my book and hope to post again a bit more regularly now that we have slowed down and settled in a bit more at the business.

Having said that I now ask you if there are any links, websites, articles, etc that have come out in the past couple months that you think are fantastic.  I pretty much blacked everything investing related out in that time frame to concentrate on opening and starting the business so I am sure I missed out on some pretty good information.  I would very much appreciate it if anyone has anything to share that you think I would like to learn from and might have missed in the past couple months and would really appreciate if you were able to share some of those with me.

Until next time.

BABB Vs PARF Conclusion Article

This article is the culminating piece that will talk about and compare BABB’s and PARF’s margins, weigh the pros and cons of each company, talk about each companies float, and decide which one, if either of the two companies I plan to buy into.  Originally I had planned to write articles on another two companies but was asked by a fellow value investor who recommended them to me to please not write an article on them since he was planning to.  Of course this is only right since he is the one who mentioned those two companies to me.  I still plan to research both of those companies to see if I would want to invest in either one of them and will let you know if I decide to buy into either of them when I make that decision.

Margin Comparison

BABB Margins PARF Margins
Gross Margin TTM 96.2 28
Gross Margin 5 Year Average 88.64 26.32
Gross Margin 10 Year Average 79.25 26.37
Op Margin TTM 17.9 9.9
Op Margin 5 Year Average -0.76 5.9
Op Margin 10 Year Average 6.75 4.24
ROE TTM 15.51% 8.31
ROE 5 Year Average -2.80% 5.064
ROIC TTM 14.51% 7.59
ROIC 5 Year Average -17.20% 9.278
My ROIC TTM With Goodwill Using Total Obligations 24.39% 11.09%
My ROIC TTM Without Goodwill Using Total Obligations 88.11% 11.29%
Earnings Yield EBIT/TEV 14.15% 19.91%
FCF/Sales TTM 15.02 -5.55
FCF/Sales 5 Year Average 13.296 3.116
FCF/Sales 10 Year Average 15.658 2.828
P/B Current 1.47 0.55
Insider Ownership Current N/A N/A
My EV/EBIT Current 6.58 4.95
My TEV/EBIT Current 7.07 5.02
Working Capital TTM 1 mil 15.62 mil
Working Capital 5 Yr Avg 1 mil 12.2 mil
Book Value Per Share Current 0.43 39.72
Book Value Per Share 5 Yr Avg 0.498 36.254
Total Executive Compensation as a % of Sales 26.17% 6.00%
Total Executive Compensation as a % of Gross Margin 26.17% 21.00%
Total Executive Compensation as a % of Market Cap 15.91% 16.00%
Total Executive Compensation as a % of Total Enterprise Value 19.65% 11.47%
Debt Comparisons:
Total Debt as a % of Balance Sheet TTM 3.05% 10.12%
Total Debt as a % of Balance Sheet 5 year Average 4.88% 2.64%
Current Assets to Current Liabilities 2.17 4.25
Total Debt to Equity 4.84% 12.56%
Total Debt to Total Assets 3.74% 11.70%
Total Obligations and Debt/EBIT 30.36% 98.78%
Costs Of Goods Sold As A % Of Balance Sheet TTM 0 71.98%
Costs Of Goods Sold As A % Of Balance Sheet 5 Year Avg 10.60% 73.54%

Keep in mind while looking at these margins that PARF is an extremely seasonal business so it margins will probably look different in a month when the company reports its full year results, and probably for the better, at least marginally.

Margin Thoughts

  • BABB’s gross margins are phenomenal which should be expected from a company whose only business right now is to sit and collect royalty and franchise fees.
  • BABB has superior operating margins, ROE, and ROIC in comparison to PARF.  Again, this should be expected with its business model in comparison to PARFs.
  • PARFs earnings yield, in this case EBIT/TEV, is superior to BABBs by about 25%.
  • Since this is a new metric I am using I went back and calculated this for the two most recent companies I have bought stock in, STRT and BOBS, and here is how the earnings yields compare: 1) STRT-20.79% 2) PARF-19.91% 3) BOBS-14.80%, 4) BABB-14.15%.
  • As I talked about in both of the previous articles both companies ROIC could be higher if executive pay and overall payroll were not at the excessive levels that they are at currently.
  • Earnings yields is a rough estimate of the kind of return you may be able to expect in the future by buying the company at its current price and is compared to the current 10 year treasury yield.  I have seen prominent value investors say they like to buy companies with earnings yields at least 3X to 4X higher than the 10 year yield.  Current 10 year treasury yield is 2% currently so all of these companies surpass the 3X to 4X benchmark with Strattec leading the way.
  • BABB’s FCF/Sales is exceptional and PARF’s is currently negative but that should change once the full year results are announced.
  • PARF’s P/B ratio is incredibly low as the company is selling for only half of its current book value and this value is likely a bit undervalued which would mean PARF is currently selling at even a lower true P/B.
  • PARF’s current estimated book value per share is around $40 per share and the company is selling at $22 a share currently.
  • Both companies are selling for EV/EBIT and TEV/EBIT ratios fewer than 8 which is again what I want them to be under.
  • Both companies executive pay is excessive in my eyes especially BABBs.  Remember also about BABBs is that its entire payroll structure is inflated and the above calculations are not including overall payroll.  Including overall payroll for BABB and its payroll and executive pay take up more than 50% of the company’s gross margin; absolutely insane in my opinion.
  • Both companies have minimal debt and have stellar balance sheets.
  • PARF’s total obligations and debt/EBIT is too high in my opinion but again this should be at least somewhat corrected when the full year numbers are released.
  • COGS for BABB is completely irrelevant now that they do not directly operate any of its restaurants.
  • PARFs COGS has been coming down over recent years which have been why margins rose in recent years.

Float Analysis Comparison

BABB Analysis

Financial assets: Cash and cash equivalents=1,256+prepaid expenses of 66+ deferred income taxes 248=1,570.

Operating assets: Accounts receivable of 86+inventories of 27+other current assets of 393+net property, plant, and equipment of 11+goodwill of 1,494+intangible assets of 505+other long term assets of 4=2,520.

  • Total assets=4,090

Liabilities:

  • Equity=3,158
  • Debt=125
  • Float=accounts payable of 14+deferred revenues of 71+other current liabilities of 722=807

Total liabilities=923

Float/operating assets=807/2,520=32.02%.  Float is supporting 32.02% of operating assets.

Pretax profits/total assets=ROA

  • 434.15/4,090=10.62%

Pretax profits/(total assets-float)=ROA

  • 434.15/3,283=13.22%

PARF Analysis

For this analysis I used PARFs 2011 full year numbers because of the extreme seasonality of its business and to get an idea of what the company may look like when its 2012 full year numbers come out in March.

Financial assets: Cash and cash equivalents=7,469+deferred income taxes of 235+ prepaid expenses of 295=7,999.

Operating assets: Accounts receivable of 2,579+inventories of 6,197+net property, plant, and equipment of 4,184+goodwill of 413+intangible assets of 566+other long term assets of 223=14,162.

  • Total assets=22,161

Liabilities:

  • Equity=19,734
  • Debt=313
  • Float=accounts payable of 359+taxes payable of 371+ccrued liabilities of 1,218+deferred tax liabilities of 166=2,114

Total liabilities=2,427

Float/operating assets=2,114/14,162=14.93%.  Float is supporting 14.93% of operating assets.

Pretax profits/total assets=ROA

  • 1,929.29/22,161=8.71%

Pretax profits/(total assets-float)=ROA

  • 1,929.29/20,047=9.62%

Float Thoughts

  • BABBs float is supporting more of the company’s operations than PARFs is.
  • Other than the directly above, the companies have pretty similar ROAs and amount of float and neither one a distinct advantage in this area.

Conclusion

Combining the above with the information in the previous two articles I have come to some conclusions and about the companies.  BABB has the better business model that leads to generally higher margins and minimal work for the company.  PARF has dominated its market for years, still does and it has found a small niche that has led to great profitability over the years.  Both companies have excessive executive pay in my opinion that if lowered could help each company’s operations become more profitable.  Both companies look like potentially good investment candidates right now so how have I decided which is the better one to buy into at the current time with the companies being very even overall?

With these two companies being so even overall, even in terms of overall undervaluation, how did I come to a conclusion about which company was the better buy now?

  1. BABB has a lot of competition in its industry, has been having to close restaurants, and has been losing its miniscule market share to other companies.  Meanwhile PARF has only a few minor competitors and dominates its industry with an estimated 80% share of its market.  Another major positive is that it dominates a very niche industry which should keep competition out of its market further cementing its hold on market share.
  2. PARF owns land, building, and property that are conservatively estimated to be worth about $10.40 per share and partially protects the company’s downside. BABB has no such downside protection and if it continues to lose franchisees shareholders are completely out of luck and could stand to lose all of their investment in the company.

So having stated this you would assume that I would no doubt be buying into PARF at this time right?  Normally you would be right to assume so but I have recently had an epiphany about investing and how that relates to my overall health, which has been horrid for the past four month or so, and I have now realized that I have to make changes to what I am doing or I will end up feeling horrible forever.  I did buy PARF and a not yet disclosed company for a couple of accounts I manage but not for myself and I will explain why in the coming days.

My next post I will be talking about the epiphany I had, what I plan to change in the short term to hopefully fix my horrible health of the last several months, the business my brother and I have started, and the investing book I am writing.

The Float Of The Companies I Own

Originally I was planning on evaluating the float of every company I have written an article on but decided to just focus on the companies whose stock I currently own.  Below I am going to give you an example of the full analysis on one company and then just do an overview and chart of the rest of the companies as the calculations are all the same.

Brazil Fast Food Company (BOBS)

All numbers for BOBS are in $R million unless otherwise noted.

  • Financial Assets: Cash and cash equivalents of 28.4+prepaid expenses of 1.2+advance to suppliers+deferred tax assets net of 6.8=38.5
  • Operating Assets: All other assets such as goodwill, IA, AR, inventories, etc of 89.3.
  • Total Assets=127.8.

Liabilities

  • Equity of 38.3
  • Debt of 21
  • Float-Accounts payable & accrued expenses of 9.7+payroll and related accounts 6.7+taxes 4.6+deferred income tax 0.2+current portion of deferred income 2.5+current portion of contingencies and reassessed taxes 2.1+other current liabilities 0.8+deferred income 2.4+long term contingencies and reassessed taxes 17.9+other liabilities 1.2=float of 48.1

Total liabilities are 69.4

Float/operating assets=53.86%.  BOBS float is supporting 53.86% of operating assets meaning that BOBS float is not completely free.  The float being completely free would mean that the company’s operations are being operated generally by completely free money if the ratio was over 100% and the float is costless.  A situation where float is costless is when an insurance company is earning an underwriting profit.  BOBS still has a pretty good portion of its OA operated by float, as you will see in the chart below, which is always a good thing.

Pretax profits/total assets=ROA

  • 17.4/127.8=13.62%

Pretax profits/ (total assets-float) =levered ROA

17.4/79.7=21.83%

BOBS MAIN CMT STRT VIVHY DOLE
Float/Operating Assets

53.86%

90%

27.27%

60.53%

37.68%

27.69%

Unlevered ROA

13.62%

9.59%

14.23%

10.65%

6.43%

1.29%

Levered ROA

21.83%

9.73%

19.25%

20.59%

9.67%

1.79%

As you can see from the chart, BOBS, MAIN, and STRT all have float supporting more than 50% of each companies operating assets and BOBS, CMT, and STRT’s levered ROA make the companies look even better than I already thought they were.

VIVHY and DOLE, my two spin off companies that I do not plan to hold for as long as the other companies above, have ratios that are generally quite a bit worse than the other four.  Looks like I have been doing a decent job of spotting float in my long term companies before I even knew what it was.

To tie this whole theme up of the past several weeks I am capping it off by analyzing and evaluating an insurance company, the ultimate providers of float and a big reason why Buffett was able to compound his returns at such a fantastic rate over the past four decades.  I started research last night on an insurance company whose market cap is under $75 million and will have the write up written as soon as possible.  It will take me longer than usual to get this article ready because this is the first time where I have truly tried to evaluate an insurance company and need to learn as I am going; the specific terms and best ways to evaluate this type of company.

In the mean time I will probably post some links but from now on I will not be posting updates on what I am doing anymore.  I am constantly reading, learning, and trying to find companies to research and evaluate so if I don’t post for a while, from here on out that just means I haven’t found a company I think deserves a full write up.

Year End Report On The Companies I Wrote Articles On And An Illustration Of How Far I Have Come Since February

Year To Date Performance

Below is a chart on the performance of the companies I have written articles on this year and how they have done since I published my original articles on them.

Article Tilt Date Published Price At Time Of Article Price Now % Gain or Loss
Original Dole Article Bullish 13-Jun $8.96 $11.22 20%
Original Alexander and Baldwin Bullish 15-Jun $24.04 Equivalent after Spin $28.41 15%
Vivendi Bullish 19-Jun $16.50 $22.55 27%
Chiquita Bearish 22-Jun $4.84 $8.12 40%
Fresh Del Monte Bullish 25-Jun $22.66 $26.07 13%
L.B. Foster Bullish 12-Jul $28.94 $42.36 32%
Kirkland’s Bullish 24-Jul $10.70 $10.47 -2%
Altria Bullish 2-Aug ~ $34.00 $31.32 -8%
Aceto Bearish 10-Aug $9.09 $9.77 7%
Core Molding Technologies Bullish 30-Aug $7.35 $6.79 -8%
Jack in the Box Bearish 1-Oct ~ $28.00 $28.63 2%
Stanley Furniture Bearish 18-Oct $4.32 $4.42 2%
Wendy’s Bearish 28-Nov $4.65 $4.70 1%
Strattec Security Bullish 12-Dec $24.00 $24.30 2%
Brazil Fast Food Company Bullish 26-Dec $8.00 $7.95 <-1%

I still trust my analysis of all the companies I have evaluated this year but at least in the short term it looks like I was very wrong about Chiquita as it has gained 40% since I published my article on them.  For the long term perspective I am still very bearish about them unless they have massively eliminated debt.  I generally do not keep tabs on the companies I wrote bearish articles on so Chiquita may have improved its operations since that time.

Also in the short term, it looks like I let the fear of the unknown about L.B. Fosters potential liability claim problems steer me away from a good investment as it has gained 32% since I wrote my bullish article about them.

Bullish and bearish results ended up being pretty comparable due to Chiquita’s big gain.  Excluding Chiquita from the bearish results and they performed much worse than my bullish articles.

Results below are excluding STRT and BOBS since I just bought both of them.  All results in this post are after fees.

122712_0426_2012YearToD1.png

Overall the companies I bought for the portfolios I manage have done very well as I was up 26.20%, including the 66% portion of Dole that I sold to lock in gains in the summer, and excluding Strattec and Brazil Fast Food since I just opened those positions.  The bullish results are only including gains from the time I published my articles to yesterday, which obviously does not include the big spike in Dole during the summer.

For my personal portfolio I only gained approximately 12% in 2012 because of my foolish past buys which I have documented many times on this blog before.  Because of the previous companies I owned, I missed out completely on Dole until after the company had already dropped back to Earth from its previous highs.

Lesson here kids is to know more than what you think you need to know before buying stock in companies so you don’t have the last two years of average results that I have had due to my lack of knowledge.  I would not change buying any of those companies because it helped me learn much faster than I would have by just continuing to read books, but instead of prematurely jumping into buying stock in companies after reading a couple books, I would have set up a portfolio online with fake money to track and learn from my performance.

After getting rid of the last trash companies that I probably should have never bought, and companies that I would have not bought into with what I know now, my personal portfolio whose current structure can be seen here, is up 16.19% still excluding STRT and BOBS.  Quite a bit worse than the other portfolios I manage due to missing out on Dole’s big gains.  Most of that 16.19% gain is from Main Street Capital which is the only company I still own from before doing the amount of research I am doing now and which is up 52.57% since I bought into them.

Going into the new year, now that I have my personal portfolio without any trash companies in it, I think that as I continue to gain knowledge and refine my craft that I will be able to perform as well in 2013, as I did in 2012 with the portfolios I managed to a gain of 26.20%.

An Illustration of How Far I Have Come Since February

Below is my first unedited attempt at an analysis write up that I did in either March or April after truly dedicating myself to becoming a value investor in February.

Vodafone Group PLC, ADR, (VOD) info

All information taken from Morningstar.com, Vodafone’s website, fool.com, or Vodafone’s most recent annual financial report.

Overview:

With 343 million proportional customers (total customers multiplied by its ownership interest), including its 45% stake in Verizon Wireless, Vodafone is the second-largest wireless phone company in the world behind China Mobile. It is also the largest carrier in terms of the number of countries served. Vodafone has majority or joint control in 22 countries and minority or partnership interests in more than 150 total countries. The firm’s objective is to be the communications leader across a connected world. They have four major markets that they break their financials into: Europe, Africa Middle East and Asia Pacific or AMAP, India, and the United States through a partnership with Verizon.

Pros:

  1. Huge company operating in more than 150 countries making them more diversified and able to withstand drops in revenues and profits coming from a single region or country.
  2. Generates huge free cash flows of at least $8.25 Billion in each of the last 8 financial years. Free cach flow or FCF is basically the money thats left over after expenses, dividends, payments, etc that the Vodafone can use as it pleases. Generally VOD uses their FCF to increase their dividends, buyback their own stock, acquire other companies, or pay down debt.
  3. Current dividend yield of 6.97%, the average company in the S&P 500 has a yield of around 2%. Pays a semiannual dividend in June and November of each year. Also receiving a special dividend from Verizon, $1 billion of which will go to paying down Vodafone debt, $3.5 Billion will go to pay a special dividend to Vodafone shareholders in January or February of 2012.
  4. FCF/Sales ratio over 16% each year since the 2002 financial year. Anything over 5% means they are generating huge amounts of cash.
  5. Interest coverage ratio of 23.4, anything over 1.5 is good. Interest coverage ratio is how many times they can cover the payments of interest on their debt.
  6. Payout ratio of around 50% for the dividend meaning the dividend should be safe for the foreseeable future.
  7. Raising their dividend an average of 7% per year for the next 3 years.
  8. Lower debt/equity than their industy competitors.
  9. Growing a lot in Asia, Middle East, India, and parts of Africa. Also still a lot of room to grow in those areas as they are relatively new to them, especially India.
  10. Paying down debt with FCF.
  11. Gross margin, net margin, and EBT margin all over 17% which is very good.
  12. Still a lot of room to grow their revenue through people upgrading to smartphones and paying for data packages which they make more money off of then regular phones.
  13. Executive pay is linked to how well the company does, and they encourage their executives and directors to own company stock.

Cons:

1. Still a lot of debt even though they are paying it down, around $40 Billion

2. Most of Western Europe except Germany, are having huge economic problems which has led to lower sales an profits in those areas.

3. The fear or actuality of another global recession would hurt their sales and profits.

4. Problems at Verizon which VOD owns 45% of would hurt future payments from Verizon to VOD.

5. Most of their revenue is generated in Europe where as above, there are big financial problems.

6. Since they are in so many countries they have to deal with many regulations and sometimes even lawsuits from other goverments or companies in those countries.

Final Thoughts:

Overall I feel very good about Vodafone’s prospects to be a great investment for the long term. We are buying them when they are valued at a very good price, especially compared to their competitors. They have huge growth potential in India, a country that has over 1.3 billion people, as they have only penetrated that market by around 10%. They are paying down debt, upping their dividends and receiving a special dividend from Verizon. Even if their share price doesn’t go up over the next few years, which I believe it will by quite a bit, then we are still covered by the near 7% dividend that they are going to keep growing at least 7% a year for the next 3 years. Also, with their huge FCF they can maybe pay down debt faster, acquire other companies to keep growing, pay more dividends, or buyback their stock.

 As always if there are any questions let me know. I believe we will all do well with this stock in our portfolios over the long term.

Here is the link to my most recent article on BOBS.  The contrast is kind of startling and exciting at the same time.  I had not looked at this Vodafone write up until recently probably since I wrote it and was very excited to see how far I have come in only 10 months and I cannot wait to see how much better I will get with years more of practice and learning.

Brazil Fast Food Company Is Substantially Undervalued and Has A Moat

In this article I will be talking about Brazil Fast Food Company (BOBS.OB).  Bob’s was founded in 1952 by American tennis player Bob Falkenberg and serves hamburgers and sandwiches with a Brazilian twist, shakes, French fries, and other typical fast food offerings.  BOBS has grown to become the second biggest fast food chain in Brazil with operations in every state of the country, Angola, and Chile.

When I talk about BOBS in all capital letters I mean the company as a whole.  When I refer to Bob’s it means just the fast food burger chain.

A fellow value investor mentioned on my blog that I should research BOBS as a possible investment since I have already researched and written articles on a couple fast food companies; Jack In The Box (JACK) and Wendy’s (WEN).  Also with my recent turn towards concentrating on micro caps he thought I might find this company interesting.

I have found BOBS to be very interesting and it has turned into only the fifth company I have bought into this year as it meets most of my criteria for things I look for in a potential investment.  Some main points of interest are: I have found BOBS to be substantially undervalued, I believe BOBS to have a competitive advantage, or moat that has been growing in the past several years, the company is very small and under followed, and its sales and margins have also been growing in recent years.

Introduction

For the better part of the last 60 years Brazil Fast Food has been operating and franchising only its Bob’s fast food burger chain and expanding the chains reach throughout Brazil.  Here is a history of BOBS up to 2004 that goes over its many struggles and near death multiple times. Very interesting read especially when you consider what they have become now.  After updating its stores, changing the Bob’s logo, enacting cost cutting and efficiency measures, and changing its strategy to become a multi-brand restaurant company with partnerships to bring KFC and Pizza Hut restaurants to Brazil, and through acquiring Doggi’s and Yoggi’s, BOBS has expanded its restaurant count dramatically and expanded from just selling burgers, sandwiches, shakes, and fries, into selling KFC’s chicken related products, pizza’s, hot dogs, frozen yogurt and smoothies to become the second largest fast food chain in Brazil.

As we found out in my Wendy’s article, growth is not always a good thing if your cost of capital is very high due to debt and other costs.  Luckily, BOBS debt is at a very manageable level and BOBS has been lowering its costs over the last few years.  The growth in the amount and type of products along with the growing restaurant count has helped grow revenues and margins at pretty substantial percentages over the last several years.  Most importantly of all, I believe BOBS is growing at less than its cost of capital because as it has grown its store count and sales it has become more profitable.

Also helping to grow BOBS as a whole is that I believe that it has at least some minor competitive advantages which it has had for a while now but has only recently been fully unleashed due to BOBS growing scale as it pertains to its growing number of restaurants, and its cost cutting and efficiency measures over the last several years.  At this point I cannot say for certain whether the small moat I see for BOBS is sustainable for the long term, but this is the first company I have evaluated in a while where I see some kind of very clear moat.

Overview of Operations and Subsidiaries

Before 2007, Brazil Fast Food Company just comprised of Bob’s burger chain which I described above.  In 2007 BOBS as a whole started on its path towards becoming a multi-brand restaurant operation as it agreed with Yum Brands (YUM) to open KFC restaurants in Brazil.  In 2009 BOBS further expanded to include operating some Pizza Hut’s in Brazil and it also acquired Doggi’s hot dog chain.  In 2012 BOBS further expanded as it acquired Yoggi’s frozen yogurt and smoothie company.  Since its beginnings as a regional company in Brazil with the bulk of its operations in the Southeastern portion of the country, BOBS has grown into the second biggest fast food chain in Brazil behind only McDonald’s (MCD) with operations in every state in Brazil.  BOBS has also started to grow outside of Brazil as it now has operations in Chile and Angola.  Below is a chart showing how BOBS has grown its restaurant count since 2007.

122112_0045_NumberofRes1.png

Restaurant count has grown by 7% annually since 2007.  Its growing size and now countrywide operations have enabled BOBS to sign some very favorable agreements with suppliers.  Here are some direct quotes from BOBS 3Q 2012 10Q about the favorable relationship with its trade partners.  Emphasis is mine.

“We enter into agreements with beverage and food suppliers and for each product, we negotiate a monthly performance bonus which will depend on the product sales volume to our chains (including both own-operated and franchise operated). The performance bonus can be paid monthly or in advance (which are estimated), depending on the agreement terms negotiated with each supplier. The performance bonus is recognized as a credit in our Consolidated Statements of Operations (under “Revenues from Trade Partners”). Such revenue is recorded when cash from vendors is received, since it is difficult to estimate the receivable amount and significant doubts about its collectability exists until the vendor agrees with the exact bonus amounts.”

‘The rise in the number of franchisees, from 774 on September 30, 2011 to 916 on September 30, 2012, together with the expansion of the multi-brand concept, has given the Company’s management greater bargaining power with its suppliers. Such increase of point sales did not derived an increase on Revenue from Trade Partners from 2011 to 2012, because the Company had agreements with new trade partners during 2011 and 2010 which originated bonus paid in advance. The bonus recorded during 2012 was from the regular business since no further advances were received during 2012.”

BOBS also has several exclusivity agreements including with Coca-Cola (KO).

“We participate in long-term exclusivity agreements with Coca-Cola, for its soft-drink products, Ambev, the biggest Brazilian brewery company, Farm Frites, the Argentinean producer of French fries, and Sadia, one of the biggest meat processors in Brazil, as well as with Novartis Nutrition for its Ovomaltine chocolate. These agreements are extensive from four to five years. The Coca-Cola agreement was amended in 2008 to extend the exclusivity period to April 2013.”

“Amounts received from the Coca-Cola exclusivity agreements (see note 12) as well as amounts received from other suppliers linked to exclusivity agreements are recorded as deferred income and are being recognized on a straight line basis over the term of such agreements or the related supply agreement. The Company accounts for other supplier exclusivity fees on a straight-line basis over the related supply agreement. The Coca-Cola agreement was amended in 2000 to extend the exclusivity period to 2008.  Later amended and extended until April, 2013. Performance bonuses may also include exclusivity agreements, which are normally paid in advance by suppliers.”

Due to its growing size and economies of scale BOBS has gained a competitive advantage over competitors by being able to receive “bonus payments” in advance from some of its suppliers.  Its size and scale has enabled the company to sign these preferential and exclusive agreements, which have helped expand BOBS competitive position and moat in my opinion.  Another reason I think BOBS has at least a minor moat is because it has been able to raise prices in recent years without losing sales which has helped to raise margins.

BOBS has had these preferential agreements in place for years, and hopefully will be able to continue them for years to come.

Due to BOBS growing store count, the agreements above, and the moat that I think it has, BOBS has been able to improve its sales, reduce its costs, and improve margins in recent years.  Numbers in below charts are taken from Morningstar or BOBS filings.

122012_0603_BOBSRevenue1.png

122112_0359_BOBSCOGSand1.png

122012_1741_BOBSMargins1.png

As you can see in the above charts as BOBS restaurant count has grown, it sales have gone up, costs have gone down, and margins have gone up, substantially so since 2008.  As BOBS continues to grow the same three things should continue to happen as BOBS should continue to compound its economies of scale: More restaurants means more sales, more restaurants means more compact grouping of restaurants which means lower costs and higher margins.  It seems that BOBS has taken some lessons on how to cultivate and grow competitive advantages from companies such as Wal-Mart (WMT).

Margins

All numbers are taken from Morningstar, Yahoo Finance, or BOBS financial reports unless otherwise noted.

Gross Margin TTM

28.00%

Gross Margin 5 Year Average

24.12%

Gross Margin 10 Year Average

24.53%

Op Margin TTM

8.43%

Op Margin 5 Year Average

7.26%

Op Margin 10 Year Average

5.39%

ROE TTM

31.64%

ROE 5 Year Average

31.35%

ROIC TTM

23.76%

ROIC 5 Year Average

21.43%

My ROIC Calculation With Goodwill

45.10%

My ROIC Calculation Without Goodwill

48.30%

My ROIC TTM With Goodwill Using Total Obligations

15.56%

My ROIC TTM Without Goodwill Using Total Obligations

15.25%

FCF/Sales TTM

-3.54%

FCF/Sales 5 Year Average

-1.43%

FCF/Sales 10 Year Average

-1.39%

P/B Current             2.5
Insider Ownership Current

70.36%

My EV/EBIT Current

2.72

My TEV/EBIT Current

6.75

Working Capital TTM      22 $R Million
Working Capital 5 Yr Avg     0.4 $R Million
Working Capital 10 Yr Avg    -3.1 $R Million
Book Value Per Share Current

$3.17

Book Value Per Share 5 Yr Avg

$1.89

Float Score Current

0.88

Float Intensity

0.6

Debt Comparisons:
Total Debt as a % of Balance Sheet TTM

16.78%

Total Debt as a % of Balance Sheet 5 year Average

16.40%

Current Assets to Current Liabilities

1.56

Total Debt to Equity

1.71

Total Debt to Total Assets

72%

Total Obligations and Debt/EBIT

4.36

Margin Thoughts

Please reference my Wendy’s or Jack in the Box articles linked above to see how BOBS compares to the other fast food companies.  TEV/EBIT and last three debt numbers talked about also include total obligations.

  • Almost across the board BOBS margins have been improving over the 5 and 10 year periods I looked at.  Especially impressive are its ROE and ROIC.
  • In comparison to the other fast food companies I have evaluated, BOBS margins are at worst about at the industry average or better than those companies.
  • My estimates of ROIC make the company look absolutely exceptional as I estimate that without total obligations its ROIC is 45.1% with goodwill, and 48.3% without goodwill.  Even if I count total obligations its ROIC with goodwill is 15.25%, and without goodwill is 15.56%.  Numbers that are close to McDonald’s ROIC.
  • Even if we just count BOBS 5 years average ROIC using Morningstar’s numbers of 21.43%, which is what I used when I evaluated the other fast food companies, its margin is 6.35% points better than the industry average, and better than McDonald’s by 4.05% points.  Its ROIC is only bested by Yum Brands ROIC which is inflated by debt unlike BOBS.
  • FCF/Sales for BOBS is worse than the industry average by 8.78% points and regularly negative over the past several years, and still negative this year.
  • I think that its FCF/Sales margin is negative due to cap ex related to renovating and updating some of its restaurants.
  • BOBS P/B is lower than the other fast food companies by a substantial margin.  The only company with a lower P/B is Wendy’s which as I talked about in my article on them, should be higher.
  • Insider ownership above 70% for BOBS is fantastic, especially in comparison to the other fast food companies.  BOBS is effectively a controlled family run company as four individuals own a combined 63.2% of BOBS as of the 2011 annual report: Ricardo Figueiredo Bomeny; the CEO and CFO of BOBS.  Jose Ricardo Bosquet Bomeny; father of Ricardo and brother of Gustavo, business partner with Romulo and owns 20 of BOBS franchised restaurants.  Romulo Borges Fonseca; owns 22 of BOBS franchised restaurants and business partner with Jose.  Gustavo Figueiredo Bomeny; brother of Jose and uncle of Ricardo.
  • I am estimating BOBS EV/EBIT to be only 2.72 and it’s TEV/EBIT to be only 6.75.  BOBS EV/EBIT is lower than any company I have evaluated thus far and it is lower than the other fast food companies I have evaluated whose EV/EBIT average including Wendy’s is 20.12.  As I have stated before, I like to buy companies that have EV/EBIT and TEV/EBIT ratios lower than 8 so BOBS on a relative basis looks very cheap, especially when you consider it’s very high ROE and ROIC and other margins that have been growing.
  • Book value has been growing and BOBS debt levels look very sustainable to me.

Due to the sales and margin growth mentioned above, working capital has gone from negative for the better part of the past decade to now being solidly positive, BOBS accumulated deficit has almost disappeared and shareholders equity has improved drastically, all of which can be seen in the chart below.

122012_0555_WCSEandAD1.png

Other Things Of Note

  • BOBS intends to focus its efforts on expanding both the number of its franchisees and the number of its franchised retail outlets, neither of which are expected to require significant capital expenditure. In addition, the expansion will provide income derived from initial fees charged on new franchised locations.
  • BOBS franchise agreements generally require the franchisee of a traditional Bob’s burger restaurant to pay us an initial fee of $R 60,000, which is lower for kiosks and small stores, and additional monthly royalties fees equal to 5.0% of the franchisee’s gross sales.  Bob’s fast food burger restaurants make up the vast majority of total restaurants in BOBS system.
  • Lowered franchise fee in recent years from $R 90,000 to $R 60,000 to help attract more franchisees.
  • BOBS has bought back shares recently and is authorized to buy back more shares.  I think management has bought back shares at reasonable prices and I think now would be a good time to buy back even more shares.  On December 5th, 2012 Mr. Romulo Borges Fonseca bought an additional 30,500 shares in the open market.  I love to see buys from insiders who acquire their shares in the open market.  Insiders generally only buy for a couple reasons: They think the company is undervalued, and/or that the company is going to perform well into the future.
  • Operating margin for franchises used to be over 80%.  Recently it has dropped into the mid 60% range and it seems to have stabilized in that area.  It looks like the drop in franchise operating margin is due to franchise related costs rising.
  • BOBS has been an OTC listed company for years, and this year it deregistered its shares with the SEC to save money every year, approximately $300,000.  BOBS management says that it will continue to provide quarterly and annual reports to shareholders and that it will retain its reporting standards at the level they are at now.  BOBS management has been in place for nearly 20 years so these things do not bother me that much as management has done a good job running the company over the years.
  • There are only 51 current shareholders of BOBS stock so the company is very under followed.
  • BOBS has substantial tax loss carry forwards NOL’s: As of December 31, 2011 relating to income tax were R$31.6 million, $1.88 per share, and to social contribution tax were R$57.6 million, $3.42 per share.  Social contribution tax is similar to the corporate tax here in the US.
  • Due to its small size with a market cap around $65 million, only 51 shareholders, and it being a controlled company with 70% of BOBS owned by insiders and/or affiliates of the company, average daily volume is only 2,000 shares, and in the past two weeks about half of the days the market has been open there have been no shares traded.
  • Same store sales have been rising in the 4% range every year since 2007.

Intrinsic Valuations

These valuations were done by me, using my estimates and are not a recommendation to buy stock in any of the companies mentioned. Do your own homework.

Valuations were done using BOBS 2011 10K and 2012 third quarter 10Q. All numbers are in millions of Brazilian Real, except per share information, unless otherwise noted.

Low Estimate of Intrinsic Value

Numbers:
Revenue:

237

Multiplied By:
Average 5 year EBIT %:

7.26%

Equals:
Estimated EBIT of:

16.99

Multiplied By:
Assumed Fair Value Multiple of EBIT:                  8X
Equals:
Estimated Fair Enterprise Value of STRT:

135.92

Plus:
Cash, Cash Equivalents, and Short Term Investments:

28.4

Minus:
Total Debt:

21

Equals:
Estimated Fair Value of Common Equity:

143.32

Divided By:
Number of Shares:

8.1

Equals: 17.69 R$ per share.
Equals: $8.48 per share.

Base and High Estimate of Intrinsic Value

EBIT and net cash valuation

Cash and cash equivalents are 28.4

Short term investments are 0

Total current liabilities are 38.7

Number of shares are 8.1

Cash and cash equivalents + short-term investments – total current liabilities=

  • 28.4-38.7=-10.3/8.1=-1.27 R$ per share=-$0.61 per in net cash per share.

BOBS has a trailing twelve month EBIT of.

5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:

  • 5X21.2=106+28.4=134.4/8.1=16.59 R$ per share=$7.93 per share.
  • 8X21.2=169.6+28.4=198/8.1=24.44 R$ per share=$11.69 per share.
  • 11X21.2=233.2+28.4=261.6/8.1=32.30 R$ per share=$15.45 per share.
  • 14X21.2=296.8+28.4=325.2/8.1=40.15 R$ per share=$19.20 per share.

From this valuation I would use the 8X and 11X estimates of intrinsic value as my base and high estimates of intrinsic value respectively.  None of the above valuations takes into account BOBS $5.30 per share worth of NOL’s or BOBS future growth.

Relative Valuations

  • As I said above, I like to buy companies whose EV/EBIT and TEV/EBIT ratios are lower than 8 and BOBS ratios are at 2.72 and 6.75 respectively.  BOBS EV/EBIT ratio is the lowest I have found out of the companies that I have done full evaluations on.
  • Its P/B ratio is also quite a bit lower than other fast food companies.
  • BOBS P/E ratio of 9.1 is less than half of the industry P/E of 19.8.

I found BOBS to be cheap on an intrinsic value basis and it also looks to be equally cheap on a relative valuation basis.  On an EV/EBIT basis, BOBS is the lowest valued company I have fully analyzed which is a bit shocking considering its high ROIC and other margins, and the moat that I think it has.

Competitors

  • McDonald’s (MCD): The number one fast food chain in Brazil and fast food behemoth around the world always provides stiff competition to smaller companies.  Here is some information on Arcos Dorados (ARCO)the largest operator of McDonald’s restaurants in Latin America and the world’s largest McDonald’s franchisee.  As of its 2011 10K it had 662 McDonald’s restaurants in Brazil.  Arcos Dorados’ margins are quite a bit worse than BOBS margins.  Overall McDonald’s has more than 1,000 restaurants in Brazil.
  • Giraffas: A private company with around 400 restaurants most of which are in Brazil, it has recently started opening restaurants in South Florida.  Serves similar food as Bobs burger chain.
  • Yogoberry: Another private company who has more than 100 restaurants in Brazil.  Will be competing with BOBS latest acquisition Yoggi’s in the frozen yogurt and smoothie arena.
  • Various other fast food offerings including from Japanese, Middle Eastern, and other typical fast food restaurants.

The fast food service industry is very competitive in Brazil as it is here in the US with peoples income being sought after by a plethora of restaurants and fast food companies.  I think the major threat is of course McDonald’s as BOBS other local competitors are generally quite a bit smaller than it.  I think that due to the moat I see within BOBS, along with its growing size, and expansion into pizza, frozen yogurt, and chicken, that it can compete very well with the competition it has in Brazil, and continue to grow its store count profitably.

Pros

  • BOBS is cheap on an intrinsic value and relative value basis.
  • I think BOBS has a small and growing moat that should continue to grow as BOBS restaurant count gets bigger.
  • BOBS margins generally have been growing over the past five years.  In some cases by multiple percentage points.  Some of BOBS margins are even better than McDonald’s and quite a bit better than Arcos Dorados’ run McDonald’s restaurants in Latin America.
  • BOBS has signed exclusivity agreements with several companies including Coke, and also enjoys preferential agreements with its suppliers.
  • BOBS has $5.30 per share worth of NOL’s that are not even counted in any of my valuations.
  • BOBS has a low and sustainable amount of debt.
  • Its book value per share has been growing.
  • BOBS has almost eliminated its accumulated deficit, made its working capital positive after it being negative for most of the last decade, and substantially increased shareholders equity.
  • COGS and total restaurants costs and expenses as percentages of sales have been lowered by multiple percentage points in recent years.
  • The company is effectively controlled by four individuals who have thus far done a very good job of running the company.
  • BOBS has bought back some shares and has the authorization to buy back more shares.
  • BOBS can grow its restaurants through franchisees at minimal cap ex expenses.  Franchise operating margin has been in the mid 60% range recently.
  • Brazil has a growing middle class that should help grow sales further.

Cons

  • Although I think BOBS has a small and growing moat, it may not be a long term sustainable competitive advantage due to competition and possible loss of exclusivity and preferential trade partner agreements.
  • BOBS does not create consistent positive FCF.
  • BOBS FCF/Sales margin is below the average of the other fast food companies I have evaluated and it is also negative.
  • Franchise operating margin has dropped from over 80% to the mid 60% range in recent years.
  • Stiff competition including McDonald’s in Brazil.

Potential Catalysts

  • Confederations Cup in 2013, FIFA World Cup in 2014, and the Olympics in 2016, all of which are in Brazil, will bring millions of tourists to Brazil which should help grow BOBS revenues further in the short and medium term.
  • BOBS growing franchise store count will help grow BOBS moat as margins are very high and cap ex is very low when opening new franchised restaurants.
  • BOBS moat may not be sustainable over the long term due to competition and possible loss of exclusivity and preferential trade partner agreements which would most likely hurt the company.
  • Brazil’s growing middle class should also help grow sales.

Conclusion

Brazil Fast Food Company, BOBS, has turned out to be a very interesting company to me. From its near death experiences in the mid 90’s and early 2000’s, to now being the number two fast food chain in Brazil, its growing store count and margins, and the various other things I have talked about in this article I have come away very impressed with BOBS as a whole and its management.

I think that BOBS is very undervalued on an intrinsic value and relative value basis and I think that it should conservatively be valued somewhere between $11.50 and $16.00 per share, not including the $5.30 per share in NOL’s that it currently has.  Adding the NOL’s to my estimates of value would take its estimated value up to between $16.50-$22 per share which is the range that I think BOBS should be selling at, and what I think its private market value is.  Even leaving the NOL’s out of the equation, BOBS is selling currently at only $8 per share which is a 32% discount to the absolute minimum I think BOBS is worth at $11.50 per share.  I think that BOBS has a moat that could possibly grow over time, and that the company has catalysts in the short and medium term that could help unlock some of its value.

Warren Buffett always says that if you buy good companies that have some kind of moat at fair prices, that you will do very well investing over the years.  I think BOBS is a good company with a moat that is currently selling at a very cheap price and I think I will do very well holding it over the years as I have bought its shares in my personal account and the accounts I manage.

Vivendi Update

Vivendi CEO says that its future lies in its content and media businesses and that it may announce the sale of its telecom units at its next annual shareholder meeting in April.

Also of note from this article is that the CEO estimates SFR to be worth 20 billion Euros by itself, or approximately $26.22 billion.  That estimate is 5 billion Euros more than the 15 billion Euros I estimated SFR to be worth in my latest sum of the parts valuation on Vivendi.

I think the CEO’s estimate of what SFR is worth is a bit optimistic, but if true that means that with Vivendi’s current market cap at $28.2 billion that the market is currently recognizing that Vivendi’s other assets are only worth a combined $2 billion.  We know this cannot be true because Vivendi’s 60% stake in $ATVI is currently worth $7.44 billion just by itself.  If SFR is really worth 20 billion Euros that means that the market is massively undervaluing Vivendi as a whole.

If I were to apply the CEO’s estimate of SFR’s value to my sum of the parts valuation that brings the value per share of Vivendi up to $42.45 per share, or $28.66 per share after subtracting debt and still not including UMG.

Vivendi’s new CEO may think that SFR is worth 20 billion Euros and as a shareholder I hope they are able to sell it for that price, but I am not counting on it, and I still think Vivendi is undervalued.

A Portfolio Update And Two Powerful Insights Every Serious Investor Should Read

Portfolio Update

Yesterday I made some adjustments to my portfolio and the portfolios I manage and I just wanted to update those positions.

Personal Portfolio and Portfolios I Manage:

  • Bought Strattec Security Corporation $STRT

Personal Portfolio:

  • Sold Altria $MO up 18%.
  • Sold Philip Morris $PM up 24%.
  • Sold Intel $INTC up < 1%, could have sold a while ago up 30%, doh!

All sold positions are after fees but before taxes.  I never bought any of the above three positions for the portfolios I manage and I bought Altria, Philip Morris, and Intel before doing any kind of valuations or any kind of in depth research so I am a bit fortunate to end up anything in those positions.

I said a couple months ago that I planned to hold the above positions for the foreseeable future because I felt that I could have my results compound well over time in all of the three companies.  I still think that is true for all of the above companies but have still decided to sell them all.  Lately I have been gaining confidence in my abilities to analyze companies, and I now think that I am at the point where I am getting pretty good at analyzing companies and think I can find better opportunities in the smaller mid to nano caps that I am concentrating on now.

Also as Red reminded me of the other day, why would I try to compete with the millions of people who are invested in and analyze those massive companies when I can find less competition, potentially less efficiency, and more upside, in the much smaller companies.

After selling those companies to free up cash for future opportunities, my current portfolio stands as follows, ranked by position size.  Portfolio does not add up to 100% because of rounding:

  1. $VIVHY.PK-28% of portfolio.
  2. Cash-26% of portfolio.
  3. $STRT-16% of portfolio.
  4. $MAIN-11% of portfolio.
  5. $CMT-8% of portfolio.
  6. $DOLE-8% of portfolio.

Two Powerful Insights Every Serious Investor Should Learn From and Reread.

Fundoo Professor-Presentation On Moats And Floats.

The Red Corner Blog-Kfaftwerk; A look at economies of scale and how Wal-Mart changed its industry and made a ton of money.

I hope you enjoy the above links as much as I have.

I have already started researching another company and tomorrow I will post some links and ask your advice on something I have been thinking about quite a bit lately.

Strattec Security Corporation $STRT: Potential Double From Today’s Stock Price

Introduction, Overview of Operations, And Brief History

The company I will be focusing on in this article is Strattec Security Corporation (STRT).  Strattec is a nano cap with a current market cap around $75 million and it is in the very boring and shunned automotive parts industry.  The company has expanded to become a worldwide auto parts supplier through its various joint ventures and alliances.

The company makes and sells various automotive parts such as: Keys with radio frequency identification technology, bladeless electronic keys, ignition lock housings, trunk latches, lift gate latches, tailgate latches, hood latches, and side door latches.  With its acquisition of Delphi Corporation’s Power Products in 2009 it is now also supplying power access devices for sliding side doors, lift gates and trunk lids.

In 2001 Strattec formed an alliance with Witte-Velbert Gmbh.  The alliance allowed Strattec to sell Witte’s products in the US, and allowed Witte to sell Strattec’s products in Europe.  In 2006 the alliance expanded to include ADAC plastics and a joint venture with all three companies owning 33% was formed called VAST or Vehicle Access Systems Technology.  ADAC makes such products as door handles.  The VAST Alliance has helped Strattec become a worldwide auto parts supplier as the alliance allows all companies involved to market and sell each other’s products in various jurisdictions around the world including in the US, Europe, Brazil, China, Japan, and Korea.  The VAST Alliance should have its first profitable year as a company this year which would help Strattec’s bottom line.  Full complement of VAST’s products can be viewed here.

VastPlacemat

Picture taken from ADAC Plastics which shows how the VAST Alliance is structured.

ADAC and Strattec have formed a separate company, ADAC-Strattec de Mexico, ASdM,  whose operations are in Mexico due to cheaper labor prices, where the two companies separate expertise are combined to manufacture some of the above products for sale. In Strattec’s fiscal years ending 2012 and 2011, ASdM was profitable and represented $31.0 and $25.2 million, respectively of Strattec’s consolidated net sales.

With the help of VAST and its other joint ventures, Strattec’s export sales have risen to 37% of total sales which amounts to $107 million.  In 2001 exports only accounted for 14% of its sales which amounted to $29 million, which illustrates Strattec’s worldwide growth since then.

During the recession three of Strattec’s biggest buyers filed for bankruptcy protection, and the overall auto industry went to the brink of death before being saved by the US federal government.  Because Strattec’s major buyers were having so many problems, it also faced some very serious problems and had its only unprofitable year in 2009, lost more than $40 per share in value during the recession, about 2/3’s of its share price in total, and its share price has not recovered since.

Since that time Strattec restructured, improved its operations and expanded its product lines, signed various joint venture and alliance agreements which have allowed the company to become a worldwide auto parts supplier.  The restructuring, expanded product lines, and worldwide operations have helped Strattec become a more diversified auto parts manufacturer and has grown its sales and margins in the ensuing years.  With the help of VAST and its other joint ventures Strattec is a truly worldwide company with operations now in the US, Europe, Brazil, China, Japan, Korea, Canada and Mexico.

Strattec was spun off from Briggs & Stratton in 1995 as an independent company.  After Strattec was spun off from Briggs & Stratton, and through most of its entire history, it enjoyed massive market share of over 60% in the US and a 20% market share of the world’s vehicle lock and key operations.  With its huge hold of the market the company was able to dictate high prices to its buyers which enabled the company to enjoy a competitive advantage for a long period of time.

However, shortly after Strattec was spun off there were massive changes in the lock and key industry which deteriorated the company’s market share and competitive advantages. Due to Strattec’s managements excellent foresight and planning, it was well prepared for the change from basic locks and keys and the diminishing of the amount of locks and keys needed per vehicle, and has transitioned into the electronic key arena as well as expanding its operations into various fields though its partnerships with the VAST Alliance including: Door handles, power doors, trunk latches, lift gate latches, tailgate latches, hood latches, side door latches, ignition lock housings, sliding side doors, lift gates and trunk lids.  Since Strattec’s restructuring during the Great Recession, along with its VAST Alliance and other joint ventures, improved operations, and expanded product lines, Strattec’s sales and margins have both been growing and improving.  The trend of growing sales and margins should continue unless another recession hits.

Excellent Management

Due to the excellent leadership of Harold Stratton II, former CEO and current chairman, current CEO and board member Frank Karecji, and the other members of Strattec’s management team and board of directors, it has been able to adjust its original lock and key operations and changed massively to become a truly worldwide auto parts supplier with the products listed above.

Normally I do not talk much about management in my articles because I usually deem management to be either average or subpar, and as Charlie Munger says I want the business to be simple enough to be able to be run by the proverbial “idiot nephew” so management is generally not a factor in my analysis unless they are doing things that bother me quite a bit.

In this case I wanted to point out that I believe Strattec’s management to be excellent and I think that will continue now that Mr. Stratton has transitioned out of the day to day operations and handed the handling of those over to Mr. Karecji.  For the full view of why I believe Strattec’s management to be excellent I recommend reading its annual reports from 1999 to the present to get the true view of why I think its management has been fantastic, and to get a glimpse of the obstacles management has helped the company overcome to become an even stronger company.  Here is a profile of Mr. Karecji, Strattec’s new CEO from 2010 right after he joined the company.

For those who do not want to read all that information I will list a few pluses from management in recent years that I have not already talked about.

  • Strattec has bought back and reduced its shares outstanding by 3.66 million, or more than 50% of its original shares outstanding after being spun off, at a cost of approximately $136 million.
  • Most purchases have been at what I think are good prices to do buy backs.  I think now would be an even better time to buy back more shares (Strattec management has authorization to buy back more shares) because of Strattec’s current undervaluation which I will get to later, but I understand that it wants to put money into expanding its operations and product lines.
  • Another reason Strattec has not bought any shares back in the past couple years as it has been concentrating on reinstating its dividend and expanding its VAST Alliance operations. The company currently only has 3.3 million shares left that are outstanding.
  • Management compensation is fair and straight forward in my opinion which is another plus for management.

Insider and Fund Ownership

  • GAMCO Investors-Collectively Mario Gabelli’s Funds-Own 18.6% of Strattec.
  • T. Rowe Price and Associates through its Small Cap and Small Value funds own-15.5% of Strattec.
  • FMR-Fidelity Management and Research Company own-12.2% of Strattec.
  • Vanguard Horizon Funds own-6.2% of Strattec.
  • Dimensional Fund Advisors, a Small Cap Value Fund, owns-5.8% of Strattec.
  • Insiders Own-7.82% according to Reuters.
  • The above insiders and funds own a combined 66.12% of Strattec which partially explains why there is a very low average daily trading volume of around 2,000 shares per day in the stock.

Like I have said in my various other articles I love to see high insider and value oriented fund ownership of the companies I invest in so this is another plus for me.  Another possibility that might arise in the future is that due Strattec only having 3.3 million shares outstanding, its small overall size as a company, and some of the other factors I will mention or have mentioned in the article, I think that Strattec could be taken private or become a potential buy out target for one of the bigger automotive supply companies.

Competitors

The company faces stiff competition from the following three companies.

  • Magna International (MGA)-I talked about Magna a bit in my Core Molding Technologies (CMT) article and how I did not think that Magna was a major threat to CMT’s area of operations.  The story as it pertains to Strattec’s operations is different however.  Magna competes with Strattec in several of its product lines including the power access area and Magna appears to be a major player in those areas.  In 2009 Strattec bought the Power Access portion of Delphi’s business segment after it went bankrupt and renamed the unit Strattec Power Access.  For fiscal years ending 2012 and 2011, Strattec Power Access was profitable and represented $62.7 and $62.8 million, respectively of Strattec’s consolidated net sales.  Just for comparison Magna did $1.2 billion in sales just in its closure systems (power access) business in 2011.  Magna could present a problem for future growth of Strattec’s product lines as it will have to compete vigorously on price and quality for contracts.  It could also present a potential opportunity as with CMT, I could see Magna possibly buying out Strattec to expand its operations into more product fields.  This makes further sense since Strattec is such a small company in comparison to Magna and it being an $11+ billion market cap company.
  • Huf huelsbeck & fuerst-Huf and its various subsidiaries including Huf North America is a privately held company with operations worldwide and whose product lines compete directly with Strattec’s on almost every product around the world.  This company presents the same problem as Magna does to Strattec, but the same potential buy out opportunity exists as well.
  • Tokai Rika-This is a Japanese publically traded company who competes directly with Strattec on several products and who also has operations around the world.  Tokai Rika, like the two companies mentioned before, also dwarfs Strattec in size which could present problems to Strattec’s growth.

Strattec faces much stiffer competition from multiple much bigger competitors, sometimes directly on the same products than CMT did, who I thought carved out a bit of a niche in its industry.

Strattec’s Margins

Gross Margin TTM 18.50%
Gross Margin 5 Year Average 15.32%
Gross Margin 10 Year Average 18.25%
Op Margin TTM 6.20%
Op Margin 5 Year Average 0.44%
Op Margin 10 Year Average 5.18%
ROE TTM 12.11%
ROE 5 Year Average 3.59%
ROE 10 Year Average 9.91%
ROIC TTM 11.90%
ROIC 5 Year Average 3.49%
ROIC 10 Year Average 9.85%
My ROIC Calculation With Goodwill 25.90%
My ROIC Calculation With Goodwill If EBIT% Reverts to 3 Yr Avg 15.41%
My ROIC Calculation Without Goodwill 25.82%
My ROIC Calculation Without Goodwill If EBIT% Reverts to 3 Yr Avg 15.37%
FCF/Sales TTM 2.25%
FCF/Sales 5 Year Average -3.49%
FCF/Sales 10 Year Average 1.71%
Cash Conversion Cycle TTM 54.43 days
Cash Conversion Cycle 5 Year Average 48.97 days
Cash Conversion Cycle 10 Year Average 42.42 days
P/B Current 0.9
Insider Ownership Current 7.82%
My EV/EBIT If EBIT% Reverts to 3 Yr Avg 5.77
My EV/EBIT Current Unadjusted 3.43
My TEV/EBIT If EBIT% Reverts to 3 Yr Avg 8.09
My TEV/EBIT Current Unadjusted 4.81
Working Capital TTM $46 million
Working Capital 5 Yr Avg $48.6 million
Working Capital 10 Yr Avg $60 million
Book Value Per Share Current $25.25
Book Value Per Share 5 Yr Avg $24.54
Book Value Per Share 10 Yr Avg $24.78
Float Score Current 0.53
Float Intensity 0.77
Debt Comparisons:
Total Debt as a % of Balance Sheet TTM 0.88%
Total Debt as a % of Balance Sheet 5 year Average 0.66%
Total debt as a % of Balance Sheet 10 year Average 0.33%
Current Assets to Current Liabilities 1.79
Total Debt to Equity 45%
Total Debt to Total Assets 22%
Total Obligations and Debt/EBIT 2.1
Total Obligations and Debt/EBIT If EBIT Reverts To 3 Yr Avg 3.53

All numbers were taken from Morningstar or Yahoo Finance unless otherwise noted.  Final four debt calculations are including total debt and obligations.

Margin Conclusion Thoughts

  • The very first thing that popped out to me from the above margins is that across the board Strattec has improved its margins, sometimes by multiple percentage points, in comparison to its 5 year and 10 year averages.  Looks like the restructuring that took place during the recession, the various joint ventures including the VAST Alliance, and branching out to new product lines has helped the company immensely.  Improvements in operating margin, ROE, and ROIC have all been especially impressive
  • My ROIC calculations make the company look even better as even if Strattec were to revert to its 3 year average EBIT, which I don’t think it will unless another recession happens, I am estimating it to have an ROIC of 15.37% without goodwill.  If Strattec is able to keep up its EBIT margin to current levels I estimate that without goodwill its ROIC is 25.82%, an astounding ROIC margin.
  • Also positive as it pertains to ROIC is that in Strattec’s case it is not being artificially inflated by high amounts of debt.
  • The cash conversion cycle has gotten worse over the years, meaning less efficiency in the company, which I generally do not like.  That is to be expected in a company that has expanded operations overseas though so no red flag there.
  • Its P/B ratio at 0.9 is less than half that of its industry P/B at 2 which means that at least on a relative basis Strattec is undervalued in comparison to its industry.
  • My current unadjusted EV/EBIT ratio estimate for Strattec is 3.43.  Unadjusted TEV/EBIT estimate is 4.81.  Generally I like to buy companies selling at an EV/EBIT ratio of 8 or less so again Strattec appears to be undervalued.
  • Even if Strattec’s EBIT margin were to revert back to its three year average, which as above I do not think it will do unless there is another recession, its EV/EBIT ratio is 5.77 and TEV/EBIT is 8.09, again undervalued or about fairly valued at worst.
  • Book value per share has grown slightly over time, and should grow further with its improved operations.
  • The company has minimal debt and even if we include its total contractual obligations and debt its total obligations/EBIT ratio is a paltry 2.1.  Much improved from some of the other companies I have evaluated and its current total debt and obligations should be nothing to worry about going forward.

Below numbers in graphs are taken from Morningstar.

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121012_2114_1.png

121012_2115_1.png

121012_2115_1.png

As you can see in the above graphs Strattec’s share price has not improved as its operations and sales have.  The last year Strattec had comparable margins to what it had this year is 2006, when Strattec was selling for between $33 and $50 a share. As I found after doing my valuations, which I will show below, I think Strattec should be selling somewhere in that range now.  Sales are actually almost $100 million more than they were in 2006, and margins should continue to improve as Strattec’s now worldwide operations and expanded product lines become more efficient.

Valuations

These valuations were done by me, using my estimates and are not a recommendation to buy stock in any of the companies mentioned.  Do your own homework.

Valuations were done using 2012 10K and 2013 first quarter 10Q.  All numbers are in millions of US dollars, except per share information, unless otherwise noted.

Low Estimate Of Intrinsic Value

Numbers:
Revenue:

284

Multiplied By:
Average 3 year EBIT %:

3.77%

Equals:
Estimated EBIT of:

10.71

Multiplied By:
Assumed Fair Value Multiple of EBIT: 8X
Equals:
Estimated Fair Enterprise Value of STRT:

85.68

Plus:
Cash, Cash Equivalents, and Short Term Investments:

12.94

Minus:
Total Debt:

1.5

Equals:
Estimated Fair Value of Common Equity:

97.12

Divided By:
Number of Shares:

3.3

Equals: $29.43 per share

Base Estimate Of Intrinsic Value

Assets:                  Book Value:                    Reproduction Value:
Current Assets
Cash And Cash Equivalents

16.3

12.94

Accounts Receivable (Net)

45.1

38.34

Inventories

25.5

15.3

Other Current Assets

17.1

8.6

Total Current Assets

104

75.18

Deferred Income Taxes

9.7

4.9

Investments In Joint Ventures

8.4

4.2

Other Long Term Assets

0.5

0

PP&E Net

47.6

28.6

Total Assets

170.6

112.88

Number of shares are 3.3

Reproduction Value

  • 112.88/3.3=$34.21 per share.

High Estimate Of Intrinsic Value

Cash and cash equivalents are 12.94

Short term investments are 0

Total current liabilities are 57.8

Number of shares are 3.3

Cash and cash equivalents + short-term investments – total current liabilities=12.94-57.8=-44.86

  • -44.86/3.3=-$13.59 in net cash per share.

Strattec has a trailing twelve month EBIT of 18.

5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:

  • 5X18=90+12.94=102.94/3.3=$31.19 per share.
  • 8X18=144+12.94=156.94/3.3=$47.56 per share.
  • 11X18=198+12.94=210.94/3.3=$63.92 per share.
  • 14X18=252+12.94=264.94/3.3=$80.29 per share.

From this valuation I would use the 8X EBIT+cash estimate of intrinsic value of $47.56 per share.

I discounted the cash a bit in the above valuations because about 55% of Strattec’s cash is in Mexico so if Strattec wanted to bring the funds to the US it would have to pay taxes on that portion of cash.

  1. Strattec is undervalued by 23% using my low estimate of value, which assumes that Strattec will revert back to its 3 year average EBIT margin, which as I stated above, I do not think will happen unless there is another recession.  This is the absolute minimum I think Strattec should be selling for.
  2. Strattec is undervalued by 33% using my base estimate of intrinsic value on a pure asset reproduction basis.
  3. Strattec is undervalued by 52% using my high estimate of intrinsic value with EBIT and cash at current levels.  Now that Strattec has restructured itself and made itself a worldwide company with expanded product lines and improved operations I actually think that EBIT should rise over time meaning Strattec’s intrinsic value could continue to grow and it would become even more undervalued.

Pros

  • Strattec has excellent management.
  • The company is undervalued by every one of my estimates of intrinsic value above and relative valuation estimates such as P/B, EV/EBIT, and TEV/EBIT.
  • Strattec restructured before and during the recession to cut costs, expand product lines, and became more efficient and less dependent on one single product line.
  • Strattec signed joint ventures, and created the VAST Alliance with two other companies that now allow Strattec to compete on a global scale.
  • Strattec’s margins have improved across the board in comparison to its 5 and 10 year averages and margins should continue to improve.
  • Sales have also been improving along with margins.
  • Strattec has almost zero debt.
  • Strattec management owns just fewer than 8% of the company.
  • Most importantly as it pertains to management is that I trust that they have shareholders best interests in mind.
  • Various value and small cap oriented funds own more than 50% of the company, including Mario Gabelli’s funds.
  • The VAST Alliance as a company should have its first profitable year this year which should help Strattec’s profitability even more.
  • My personal estimates of ROIC show that Strattec is even more profitable than I originally thought while looking at Morningstar’s numbers.
  • Strattec has a $25 million revolving credit facility if it wants to do any acquisitions, which the new CEO has said he will look into, or the $25 million could be used in an emergency situation if one arises.
  • Margins are not artificially inflated by debt so margins show a true picture of how Strattec is running.
  • Strattec has drastically reduced its share count in the past decade at what I think were good prices to be buying at.
  • Strattec is currently authorized to buy back more shares if it chooses to.
  • Strattec recently reinstated its quarterly dividend.

Cons

  • Strattec is highly dependent on only a few customers for its orders as General Motors, Ford, and The Chrysler Group combine for 68% of sales.
  • Strattec is highly dependent on how well the automotive industry and the overall economy as a whole are doing which can be seen in the above graphs.
  • Due to the cyclical nature of Strattec, if there is another recession or major problems in the auto industry again, its sales and profitability will be highly affected.
  • The company has some very stiff and much bigger competition.  The competition could possibly mean further price cuts on products in Strattec’s product lines if some kind of price war starts.
  • Due to competition and the overall cost reduction plans put into place by the big automotive companies, Strattec has had to drop prices on its products in recent years.
  • At this point I do not see any kind of long term sustainable competitive advantages within Strattec.

Catalysts

  • Since Strattec is very small in comparison to its competitors it could become a potential buy out candidate.
  • Strattec’s margins should continue to grow which could lead to the unlocking of value.
  • The new CEO Frank Karecji has said that he would like to do some kind of acquisition in the short term.
  • Strattec is authorized to buy back more shares.

Conclusion

With all of the above taken into account, I think that the absolute minimum Strattec should be selling for is $29.43 per share which assumes that Strattec’s EBIT margin will revert to its 3 year average.  I think that Strattec’s true intrinsic value is somewhere between $35 and $45 per share.  None of that is even taking into account that its sales and margins should continue to grow which would also grow the company’s intrinsic value.

The company does face some headwinds to future growth as I outline above, the biggest ones in my opinion is that Strattec has to compete with various bigger companies and I do not see any kind of long term sustainable competitive advantages within the company.

Normally I would want some kind of sustainable competitive advantage within a company that I am buying as a long term value hold, but at current valuations, with Strattec’s good and rising margins and other factors listed throughout the article, I think the risk/reward is in my favor by a substantial margin and I have already bought shares for my personal account and the accounts I manage making this only the fourth company I have bought into this year.

Dole Is Still Undervalued: Updated Valuation And Analysis Article After Sale To Itochu

Earlier this year I completely dedicated myself to learning the techniques, process, and proper mind set to become an excellent value investor.  I wrote my first full article back in June about Dole Food Company (DOLE).  Here are my thoughts on Dole back in June, and my conclusion thoughts after comparing Dole to Chiquita (CQB) and Fresh Del Monte (FDP).  Due to its big change since that time I have been asked by a reader what my thoughts about New Dole are now that it has eliminated what was its biggest problem; its debt.  Here is just one of the many articles outlining the sale to Itochu for $1.7 billion that is expected to close by the end of the year.

The reader wants to know what I think about New Dole’s prospects going forward, if I still think the company is undervalued, or if I would think about selling now if I find it to be overvalued.

The reader also asked me about the 2009 Dole Food Automatic Common Exchange Security Trust which I talk about here.

Since the transaction has not closed still, most of the information in the above articles remains intact as it pertains to margins and debt levels about Dole’s current state.  I will first value the business as I see it after the sale of its worldwide operations and then comment on what I think about New Dole’s prospects after the transaction closes.  When I refer to Dole as a whole I mean Dole before the sale of its worldwide operations.  New Dole is in reference to my estimates of Dole’s operations after the sale of its worldwide operations.  I have a call into Dole investor relations to get exact revenue and EBIT numbers for New Dole, but to this point I have not received a call back.  I am estimating that New Dole will lose about 36% of its EBIT after the sale of its worldwide operations.  I came to that estimate from looking at Dole’s sale to Itochu presentation from September which can be viewed here.

These valuations were done by me, using my estimates, and are not a recommendation to buy any stock in any of the companies mentioned. Do your own homework.

All numbers are in millions of U.S. dollars, except per share information, unless otherwise noted. Valuations were done using Dole’s 2011 10K, second quarter and third quarter 2012 quarterly reports and presentations, and Dole’s presentation of what it should look like after its asset sale.

The main thing I was worried about with any asset sale is that Dole would have to unload some of its very valuable land assets.  Thankfully after the transaction is completed New Dole will still own 113,000 acres of land including some very valuable land in Hawaii.  All assets below are being kept by New Dole.

Sum of the Parts Valuation

Land Holdings

Dole owns 25,000 acres of noncore land in Oahu valued by Dole at $500 million or $20,000 per acre.  Dole also owns 22,100 acres in Costa Rica, 3,900 acres in Ecuador, and 25,500 acres in Honduras.  Only part of each countries acreage are being used for growing fruit: 8,200 in Honduras, 7,300 in Costa Rica, and 3,000 in Ecuador meaning the rest could presumably be sold without interfering with current operations, about 33,000 acres.

  • All Costa Rica land valued at $5,000 per acre equals $110.5 million.
  • Al Ecuador land valued at $3,500 per acre equals $13.65 million.
  • All Honduras land valued at $3,500 per acre equals $89.25 million.
  • Remaining 36,500 acres valued at $5,000 per acre equals $182.5 million.

Adding total land value estimates up equals $895.9 million just in land value or $7,928.32 per acre, which comes out to $10.18 per share in total land value.

Estimated value of unused noncore land 33,000 acres in the above three countries at $5,000 an acre for Costa Rica and $3,500 for Honduras and Ecuador land is $75.7 million.

Total noncore land assets that could be sold valued at $575.7million total, or $9,925.86 per acre; $6.54 per share in land assets that could be sold.

Ship and Ship Related Equipment

Dole owns 13,300 refrigerated 40ft containers at a very conservative $5,000 each equal $66.5 million.  This is a very conservative estimate as these containers can sell for as much as $50,000 a piece.  I am using $5,000 per unit as my estimate because I want to be extra conservative and because I have not been able to find an exact break down on how many of the 13,300 container units are the 40ft refrigerated units as Dole’s also has some 20ft refrigerated, and completely unrefrigerated containers, so I wanted a very conservative estimate of price to be safe.

Dole also owns 11 ships which I am very conservatively valuing at $1 million each.  I found a few container ships selling for under $1 million but most were well over that price, with some reaching prices over $100 million.  I am again just being conservative here because I do not have vast knowledge on the prices of Dole’s ships.

Adding all of the land, ship, and container value up gets us to a total of:

  • All land, ship, and container value=$973.4 million, or $11.06 per share.
  • Only noncore land that could be sold, ship and container value=$653.2 million, or $7.42 per share.

None of Dole’s operations, cash, debt, or any of its building or other equipment is counted in the above calculations.  I will include Dole’s cash in the below valuation.

I did not include any of its buildings or other equipment in the above valuation because I could not find any concrete information and again did not want to speculate on numbers.

Now I will value Dole’s operations.

EBIT and Net Cash Valuation

Cash and cash equivalents are 82 and it has 0 in short term investments.

Dole as a whole has a trailing twelve month EBIT of 180.7 for its entire current operations.  Per Dole’s sale to Itochu presentation I am estimating that it will lose approximately 36% of EBIT after the sale of its worldwide operations which leads to a trailing twelve month EBIT estimate of 115.65 for New Dole’s operations.

5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:

  • 5X115.65=578.25+82=660.25/88=$7.50 per share.
  • 8X115.65=925.2+82=1007.2/88=$11.45 per share.
  • 11X115.65=1272.15+82=1354.15/88=$15.39 per share.
  • 14X115.65=1619.1+82=1701.1/88=$19.33 per share.

Combined Valuation Of New Dole

All values are per share values.

Total Land, Ship, and Container Value Only Non Core Saleable Land, Ship, and Container Value
5X EBIT $18.56 $14.92
8X EBIT $22.51 $18.87
11X EBIT $26.45 $22.81
14X EBIT $30.39 $26.75

The only thing the above values are not containing is the debt.  The reason I am not including the debt in any of the estimates of intrinsic value is because Dole as a whole now has total debt of $1.4 billion but will be able to pay off all of it if it chooses to after it receives the $1.7 billion from Itochu.   Thus making the above very good estimates of what New Dole should be worth after selling its worldwide operations and ridding itself of the debt.

I had an additional two paragraphs written about Dole’s TEV/EBIT and ROIC margins but those had to be scrapped since I have still not heard back from Dole investor relations about New Dole’s exact numbers and I did not want to speculate.

New Dole is also forecasting that after the sale is finalized it will be able to save around $100 million in cap ex and corporate expenses by the end of fiscal 2013 which supposedly are going to be yearly savings going forward, and to be able to improve its overall business operations.  Even leaving improvement in operations, possible future acquisitions, and money savings out of all my calculations, New Dole should be selling at a very conservative minimum of $14.92 per share, and I actually think quite a bit higher.  Current share price for the whole of Dole is $10.70 per share, a 29% margin of safety.

Dole management has also stated that after the sale to Itochu is finalized that it may look to sell or spin off further assets, or make some acquisitions to bolster its operations within New Dole, any of which may help unlock further value in its shares.  This is pure speculation, but I could see Mr. Murdock who owns around 40% of Dole, possibly looking to take the New Dole private again now that its major problem has been eliminated so he can control its operations again, which would also help unlock shareholder value.

Why after all of the above has Dole as a whole been dropping in price lately?  My guess is that people have been selling for a combination of the following reasons:

  • That Dole just released bad quarterly numbers that missed analyst estimates and which sent the herd running.
  • Before that people were probably selling some personal shares that they owned to lock in profits since the stock has run up from around $8.50 a share to over $15 a share at one point.
  • A lot of it may also be that people are still treating this as a highly indebted, risky, poorly operated, and marginally profitable company that it is without looking deeper at the assets that it will still hold after receiving the $1.7 billion from Itochu, and how New Dole will now be a much healthier and less risky company.

However, even if you do not count any of its operations at all, Dole as a whole is selling now for less than JUST a conservative value of the land, ship, and containers that it owns.  Meaning the downside is covered by hard saleable assets even if New Dole’s operations were to become massively unprofitable, which I think is very unlikely.

New Dole looks to be massively undervalued, will still hold very good high value assets, especially saleable land, has some future potential catalysts that could help unlock value, it should be able to compete better with Fresh Del Monte and Chiquita, and New Dole will now be freed up to make acquisitions and improvements to its business and operations after the transaction with Itochu closes as it will not be burdened by the massive amount of debt that it has carried for years.

I plan to buy shares for my personal account and add more shares back into the accounts I manage after selling some Dole shares up 70% in September.

Here is a last minute update as Dole has set the shareholder meeting for December 6th to approve this transaction.

An Updated Sum Of The Parts Valuation of Vivendi, Buying More Shares, Also a Brief Update on $CMT

While I am waiting for Dole’s next quarterly report to come out so I can finish my updated valuations and analysis of it, I have been researching some new companies and reanalyzing Vivendi and Core Molding Technologies since new information has come out about both.

After revaluing CMT with updated quarterly numbers it is still selling at a very good discount to my estimate of intrinsic value and I may buy more shares at any time after hearing specifics from CMT management about how Navistar’s problems are affecting it.

When I did my first sum of the parts valuation of Vivendi in July I had no information or very limited information about the values of its subsidiaries: GVT, Canal+, SFR, and Universal Music Group.  Since that time some information has come out about three of those, which has helped clarify the sum of the parts valuation quite a bit.

Vivendi is still seeking to spin off or sell some of the below companies to unlock value in its shares.

  • An estimated sale price for SFR if Vivendi were to find a buyer is at 15 billion Euros
  • Canal+ 20% estimated price that Vivendi does not own has a conservative estimated IPO price of $900 million.  Vivendi owns 80% of Canal+ meaning conservatively its estimated stake in Canal+ has a price of $3.6 billion.
  • Vivendi is seeking 5.5 billion Euros for its 53% stake in Maroc Telecom.  Vivendi’s current 53% stake market price in Maroc Telecom is worth 4.72 billion Euros or $6.02 billion.
  • Vivendi owns 60% of Activision Blizzard which is currently worth $7.44 billion at market.
  • Vivendi is seeking at minimum 7 billion Euros for GVT.
  • I still cannot find any reasonable estimate of value for Universal Music Group so at this point I will still leave this out of my estimates.

Adding all of the above together and converting everything to US Dollars gets us to a total estimated price of $46.13 billion.  Vivendi’s numbers of shares are still 1.242 billion.

  • $46.13/1.242=$37.14 per share.

For the sake of being conservative and assuming that Vivendi will not be able to get the prices it wants from some sales or spin offs of some of the subsidiaries, which is already the case in a couple instances, I will knock off $7.14 from the per share estimate which gets us to an extremely conservative, probably too conservative, value of Vivendi at $30 per share, which still does not even include UMG or Vivendi’s cash and debt.

Here is my original Vivendi article from June for a comparison of the values then and now.

The $30 per share price is an absolute worst case estimate of value.  Today I bought more shares at $19.22 per share for all portfolios that I manage, meaning there is still a 36% margin of safety to my absolute lowest case value of Vivendi, and an almost 50% discount to my more reasonable estimate of value.  Neither of the two estimates even take into account Universal Music Group, Vivendi’s cash, or debt.

Vivendi now makes up about 25% of my personal portfolio.