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Alexander Herbert Hennessy

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  • Xerox A Long-Term Investment [View article]
    Thank you for the write-up,

    I've looked at this company quite a bit and the thing that keeps coming up is the difficulty of evaluating revenue growth and profit margins. Your analysis of those two points boils down to this statement which I find vague and unsupported in the context of the whole article:

    "Despite the stagnation in revenues expected this year, the company's business model reflects promising prospects over the long term."

    Do you have any other insights into growth and margin dynamics?
    Sep 25 12:12 PM | Likes Like |Link to Comment
  • Xerox: Review Of Growth, Buybacks And R&D [View article]
    Hi Tom, I'm a little late on this, but thanks for the write-up.

    You used GAAP earnings with a 12x multiplier to come up with your estimated value. Is there an implication in your assumptions that GAAP earnings are an accurate reflection of XRX's earnings? What about the CapEx-to-D&A discrepancy? Thanks so much.
    Sep 23 12:12 AM | Likes Like |Link to Comment
  • Valuation On Calavo Too Optimistic [View article]
    Jack12345, unlike beer, there's not much you can do to differentiate one avocado from another. Hass avocados are all substantially the same. If someone walked into a store, asked for a Sam Adams, and the guy at the register said all they have is Bud, the guy might walk across the street to get a Sam Adams. That won't happen with an avocado. Brand recognition is a possible element of competitive advantage. Beers can have that, avocados can't.

    I look not only at ease of entry but also at how consumers make purchasing decisions. I pose the question, in my article, as to whether Calavo's value-chain is different from competitors because avocados have little to no brand power. I was looking for a sustainable competitive advantage somewhere else. Thank you for the feedback.
    Sep 17 11:39 AM | 1 Like Like |Link to Comment
  • Valuation On Calavo Too Optimistic [View article]
    Growers sell on price. The game belongs to the lowest cost operator. Because Calavo stands alone as a near pure-play avocado handler, the industry metrics aren't entirely transparent. That being said, my research into Calavo's value-chain as compared to competitors led me to believe there was little distinction between them. Avocado handling is a low-cost operator game. That's why they are getting into fresh-fruit packages. It's a higher margin business in which you might be able to distinguish your brand over time to garner an enduring price premium. As for avocados, consumers distinguish on price, as do growers. Everything is efficiency in this business. To me, this looks like low margin stuff. As for scale, I think it's incredibly difficult to say at what level it starts or stops being an advantage. Thanks for you comment, I'm going to start following you.
    Sep 12 01:20 PM | Likes Like |Link to Comment
  • Booz Allen Hamilton: Unsuitable For Investment [View article]
    matt 703, I couldn't agree more. It's a wonderful company. Over the next few years I have doubts about whether it will be wonderful for common stock holders. Thanks for the comment.
    Jan 2 06:36 PM | Likes Like |Link to Comment
  • RPX Corp. - In Pole Position Of The Patent Arms Race [View article]

    What do you think the actual net profit margins are over the course of this business' lifecycle, expressed in the most accurate terms you think applicable? Do you think net income is reflective of real profit numbers? Do you feel comfortable putting margins within any range for any period?

    Thank you,


    Dec 11 03:04 PM | Likes Like |Link to Comment
  • Booz Allen Hamilton: Unsuitable For Investment [View article]
    *$610-$710 without sequester.
    Dec 11 02:50 PM | Likes Like |Link to Comment
  • Booz Allen Hamilton: Unsuitable For Investment [View article]

    I really appreciate you sharing your information and judgments. I was actually looking at numbers very similar to these. It's a good chart.

    Even though spending increases, the increases are nominal. Just glancing at the graph, I see that the baseline goes from $610B in 2012 to $710B in 2021 (2% CAGR). I have data that conflicts a little with that, but just going by those numbers I interpret that to mean negative real growth assuming 3% inflation.

    Thanks again,


    Dec 11 01:55 PM | Likes Like |Link to Comment
  • Booz Allen Hamilton: Unsuitable For Investment [View article]

    My data shows the defense spending levels are flat from 2012 to 2013 in baseline without sequester. With sequester, defense spending gets over $50B in cuts next year, bringing the 2013 budget to more than 9% below the 2012 budget.

    Link to Comptroller's comments on sequester:
    Dec 10 07:42 PM | Likes Like |Link to Comment
  • Booz Allen Hamilton: Unsuitable For Investment [View article]

    I would draw your attention to the link below on defense spending. I think what it suggests is that baseline defense spending will fall, or stay flat on a nominal basis, when you look at the difference between the 2012 budget enactment and the 2013 budget request.

    Additionally, if you look at the other link to the Priorities and Choices paper put forth by Secretary of Defense Leon Panetta, I think you will see that reductions from current spending levels are a real consideration.

    So when you say that you see no chance that a real cut would be made to the defense budget, I would argue, respectfully, that there is some chance.


    Dec 7 04:05 PM | Likes Like |Link to Comment
  • RPX Corp. - In Pole Position Of The Patent Arms Race [View article]
    Dec 7 03:20 PM | Likes Like |Link to Comment
  • RPX Corp. - In Pole Position Of The Patent Arms Race [View article]

    What I mean to ask is how you see cash flow being generated and used. Are we going to see true excess cash flow? Or, are we going to see an endless build-up of patent portfolio that swallows up earnings from now until the end of time? In other words, how big does the patent portfolio have to be for RXPC to say to themselves that they have a protective moat and don't have to put everything back into the business? Or, is that the wrong way to see it?

    I guess what I'm seeing on the surface is a company that is obligated, in its efforts to exploit the potential network effect advantages of a larger client base and patent portfolio, to continue to put everything back into the business. I'm really not sure what the true profit margins are or will be in the future.

    Management could decide to turn all of their profit into dividends, for example. This might prove unwise if it turns out that their clients interpret the outcome of this practice as a poor service offering. On the other hand, management could decide to pour every penny of profit into the patent portfolio and prove of maximum benefit to their clients, though of little use to shareholders.

    Where is the balance here? How can I understand how much of the profits are available for distribution at the end of the day?

    What I mean by standard for evaluating your answer to this, I mean to ask what type of investor you are in this concept. Are you focused on staying with the company long term and realizing an increasing share of distributed or retained profits, or are you focused on capital gains from a company that will be larger in the years to come?

    For example, and you can probably tell this from my questions, I am focused on the earnings available for distribution over a long period of time. I am close to certain that this company will grow. I'm just not sure how to create a reliable metric for earnings available for distribution.

    Thank you for your response.


    Dec 7 02:44 PM | 1 Like Like |Link to Comment
  • RPX Corp. - In Pole Position Of The Patent Arms Race [View article]

    I see that you used an asset valuation standard. I was wondering if you could share your views on the issue of excess free cash flow long-term and short-term, and what standard you might use in deciding how to interpret those views. Thanks for the wonderful report.

    Dec 6 03:24 PM | Likes Like |Link to Comment
  • Booz Allen Hamilton: Unsuitable For Investment [View article]
    Thank you for your comments. This is my first submission to Seeking Alpha and I am glad to know that it is being read. Your comments make the submission all the more worthwhile, especially because of the time you’ve taken to share your thoughts on a matter of mutual interest.

    Reflecting upon your comments, I believe I should qualify the standards which I’ve used to come to the conclusion that BAH is unsuitable for investment.

    Firstly, I subscribe to the Graham-Buffett philosophy of value investing. I side with Buffett on the matter of portfolio management. That is, I believe a concentrated selection of highly researched business interests espouses a superior risk/reward profile to a widely diversified approach.

    The meaningful weighting of each selection in a highly concentrated portfolio necessitates a high threshold for investment because the adverse development of a single issue could skew the performance of an entire portfolio. In other words, the more selective the portfolio, the higher the threshold for investment.

    The higher threshold rests on two standards, categorically expressed as return and certainty of return. The standard of return depends on the investors cost of capital. As you know, this factor varies by individual, business, etc. The standard of certainty is what I’ve concerned myself with in the BAH report.

    The standard of certainty I use is such that the return must be a near certainty. As a percentage I might express this as greater than 90% certainty that I can predict the minimum threshold return scenario. Additionally, I want to be confident that inasmuch as I am not certain of the expected outcome, I can at least feel confident that an unfavorable outcome would not be detrimental in any material way to the selection. I wouldn’t want to gamble on a valuation using an expected value approach where one of the scenarios is zero, nor anything near it.

    I have found that the expected value approach is a dangerous method to use for a concentrated portfolio. Let me give an example.
    In the most recent Powerball lottery, the expected value of a single ticket was approximately $250. ($500,000,000*0.000000... At $250, the expected value of a ticket promised a 250x return on a $1 purchase. Yet, you would have to look far and wide for a rational mind to argue that staking 25% of your life-savings on Powerball because the expected value exceeded the ticket price was a good idea.

    Perhaps a less extreme example is in order. Take China Automotive Logistics (CALI), an automobile sales and trading business in mainland China. A year ago, the last time I looked at their numbers, you could have bought shares at a small fraction of intrinsic value. That is, if you believed their numbers. At that time, a multitude of Chinese companies that had gone public through reverse mergers were embroiled in rampant fraud regarding the numbers on their SEC filings. Using an expected value approach, you could have assumed that there was an 80% chance that CALI’s numbers were fabricated and that shares would go to zero, and still you would be buying dollars for a quarter. But yet again, there would be an 80% chance of permanent loss of capital. I don’t know about you, but to me, those four words, permanent loss of capital, are more than a little unsettling.

    That brings me to BAH. If everything goes right, this company may be worth a lot more than it is selling for now, even as much as ten times more. That leaves ample room for return on less than perfect performance. If you were to put a gun to my head and make me decide what will happen, I would say, without hesitation, that I expect a positive outcome. But there is no gun to my head, and I’m waiting for a fat pitch I can be more certain of hitting.

    Government spending is a tough nut to crack and I just can’t do it. If discretionary spending sees negative growth over the next decade, margins could shrink and revenues could stagnate as competition increases for fewer contracts. Growth areas could see a glut of supply if they become obvious targets for too long; especially if they become the only targets. Could cash flow shrink by 50%? I think it’s a possibility, and I really don’t know how great a possibility that is.
    Of course, a speculative issue could become investment worthy at the right price. But I don’t think the price, with a margin of safety included, is right for a chance at significant decreases in cash flow.

    I would concede that some people may truly have a better feel for the direction of government expenditures and the consequent effects on BAH’s business than do I. If Buffett himself were to buyout BAH tomorrow, I would not be altogether surprised. I would only assume that he has a basis for judgment that I do not have. I would assume such basis would be derived from a superior depth and breadth of inputs. After all, the business has some outstanding qualities which I have attempted to attribute to it in my report, and which led me to study it in the first place.

    In regards to dividends, it is true that BAH has made major distributions over the last couple of years, but as a result of leveraged recapitalization rather than performance outstanding prior periods. On an outstanding debt base of $1,750 million, excess free cash flow could be dramatically decreased in a higher interest universe. Borrowing rates are historically low and have little place to go but up. When refinancing comes about 4-6 years from now, this factor could weigh heavily on the overall valuation of BAH. That’s a point where Carlyle could permanently retire debt with an equity raise (at potentially depressed prices), all the while maintaining full control of the company.
    Nov 30 04:12 PM | Likes Like |Link to Comment
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