In my book, Put Your Money To Work - What you Need to Know to Invest in Stocks, I wrote a chapter about the characteristics of a great business. The two main characteristics include having a strong franchise or brand that can allow for years of longevity and sustain pricing power and margins; the second being that the company has a strong management, which can best be judged by how much money is earned on the capital employed or simply earnings as a percentage of assets.
Premier Exhibitions (NASDAQ:PRXI) is the company that does the "Bodies" exhibition as well as other exhibitions including "Titanic: The Artifact Exhibition," "The Universe Within;" "Sports Immortals and The Traveling Exhibition;" and "Dialog in the Dark." It has operations in the United States, Canada, Germany, Norway, France, Greece, Japan, Switzerland, Chile, Argentina, China, Mexico, Hungary, South Korea, and England.
During its fiscal year ended Feb. 29th, 2008, it had earnings of $12.309 million on a total of $37.7461 million in assets when goodwill and intangible assets are taken out. That meant that the management of Premier Exhibitions earned 32.61% on its assets in fiscal year 2008. That's super impressive, in my opinion.
Premier Exhibitions has $0 long term debt and approximately $18.14 million in cash as of Feb 29, 2008. At a time of a credit crisis, it's nice to see a balance sheet with zero leverage and $0 long term debt.
Thur far, Premier Exhibitions has some of the characteristics that make a great business.
The next test an investment needs to pass, and this is more important, is price. No matter how great the business may be, if the price isn't right, it is not going to be a good investment.
At yesterday's closing price, a share of Premier Exhibitions was 4.23 a share. With 29.1 million shares outstanding, the entire company cost $123.093 million.
If you have $123.093 million, would you: (1) buy the company, or (2) put it in a safe AAA corp. bond?
Using the worksheet found in my book and class website, I can see how much the bond would earn in 5 years and how much Premier Exhibitions is estimated to earn and compare.
A 5-year AAA corp bond is currently yielding 5.2%. At that rate, you would make approximately $35.5 million before tax in the next 5 years.
Premier Exhibitions is estimated to earn $0.45 per share in the current fiscal year ending Feb 28th, 2009 and grow earnings 21.25% per year over the next 5 years. If they can meet those estimates, they would earn a total of $99.87 million over the next 5 years. That's nearly triple what the near risk free bond would return!
Let's assume that in 5 years, Premier Exhibitions meets the current expectations and would be earning $28.5 million in net profit. If a price to earnings multiple of 12 were to be put on the stock in 5 years, that would give it a market cap of $342 million in 5 years.
Depending on how confident I felt that Premier Exhibitions would meet its estimates would determine the discount rate I would apply to figure a fair present value. I'm not that confident, so I will suggest a return of 5% more than the bond is currently paying, so I want 10.2% return on my investment. (What price today, if it were to grow 10.2% per year over the next 5 years, would become $342 million.)
A fair present value would be $223 million, or $7.23 per share. At today's price of $4.23, it's selling at a discount to my fair value calculation by 42%. This to me is what makes it a good buy, along with it having characteristics of a great business.
Premier Exhibitions reports its first quarter results on July 8th. I will be reading diligently to best make a judgment on the likelihood of it meeting its earnings expectations. Anything is possible and Premier Exhibitions, like any company today, has its risks.
Disclosure: I currently own shares of Premier Exhibitions, symbol PRXI, for clients.