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PDF Solutions: Contractual Issue Masks 40% Near-Term Upside
- Quality business: strong ROIC, ROA, gross margin, and LT top line growth, growing patent portfolio, tech sector and semiconductor industry tailwinds, strong value offered to and aligned interest with customers.
- Strong, unpromotional management owns ~14% of company and is compensated reasonably. Good Glassdoor reviews, though a limited sample size.
- Recent contractual issue has created opportunity in the stock and optionality for the business.
- Stock is too cheap even without highly favorable potential developments.
Vectrus: Recent Spinoff With 40% Annualized Upside Over 1-3 Years
- Spun out from XLS. Began trading late September. Spinoff enhances VEC ability to execute and resulting forced selling creates opportunity in stock.
- High quality business: variable cost structure, high ROIC and ROA, sound management, competitive advantages created by agility and enduring customer relationships, and large TAM (less than 1% market share).
- Risks overstated. The customer concentration is not as bad as you'd think. Afghanistan revenue phase out has largely already occurred. Business resistant to sequestration.
- Scenario analysis indicates 40% annual upside over 1-3 years.
Fluor: An Unexciting Short-Term Buy
- Uncontroversial and unexciting thesis.
- Attractive qualitative characteristics and equally attractive ROIC/growth profile.
- Overblown oil & gas concerns.
- Acknowledge it is a valuation disagreement-centered idea, but I find valuation attractive and think conditions make a quick <1 year move to fair value very possible, enhancing returns.
Trading At 3x What PE Deemed Reasonable Last Year; Avoid Burlington Stores
- Stock seems expensive on absolute basis at 15x EBIT, 20x FCF, and 25x EPS..
- In IPO last year, Bain and Burlington were willing to price as low at $14/share (37% of current price) at one point and Bain is now trying to dump shares.
- The apparel retail industry is unattractive, economically sensitive, capital intensive, competitive, and risky. Another economic downturn is probably not very far off and BURL will suffer due to excess leverage.
- Market expectations for further improvement in ROIC/growth/operating margin don't seem to be grounded by BURL's 20-year operating history.
- The company should still appreciate in intrinsic value over time and, due to this and other factors, is probably not a very good short. It is best to just avoid.
Drilling For Contrarian Value In Oil And Gas: Consider Oceaneering
- Anything related to Oil & Gas has declined substantially over the last 3 months in a period when the S&P has been flat. There has to be value here somewhere.
- Started my search with those worst hit: offshore drillers. Came away from research on RIG disheartened. Next step was to look down the industry supply chain for an indirect play.
- Enter OII: manufactures ROVs and provides a range of support services to offshore drilling industry.
- A high quality company: strong management and governance, significant competitive advantages, a record of very profitable growth, and generally good prospects.
- The stock looks undervalued at 8x EBITDA. I see upside of 30% to $85. Considering the opportunity costs of my book, though, I am looking for a bit more value.
A Simple Regression Debunks A Simple Short Thesis; Buy Sturm, Ruger And Smith & Wesson
- Firearm demand is simply returning to a 15-year normal trend of growth from inflated post-Sandy Hook levels, NOT going to zero. Shorts are guilty of data point extrapolation here.
- With the above and the unlikely risk of complete prohibition of private gun ownership established, the firearm industry is actually quite attractive from an investing standpoint.
- SWHC and RGR are great companies- high ROIC and top/bottom line growth over long periods, strong and enduring brands, solid and unconventional management, engaged employees, and excellent products.
- Both stocks are cheap. There is a possibility of a short squeeze and/or PE takeout. RGR is slightly more attractive.
- Risk of complete gun prohibition is improbable, but there. Lack of immediate catalyst lends to a gradual position entry.
American Public Education: Best Of Breed And Misunderstood; Put This Baby Back In The Tub
- The major risks APEI faces, namely DOD funding cuts and regulatory/legal challenges plaguing most other FPEs, are significantly overstated by the market consensus.
- It is a high-quality enterprise, as evidenced by strong governance, management, high ROIC, recurring revenue, strong margins, a highly variable cost structure, and a sustainable business model.
- The business is struggling a bit, but the stock looks cheap in a base-case scenario, with optionality for outsized returns if revenue and margins improve within 5 years.
Genworth Financial: Making Sense Of The LTC Troubles
- The company recently reported its Q2 2014 results, which showed continued improvement across the business, besides U.S. Long Term Care, where significant adverse losses were experienced.
- There is still plenty to like about Genworth, mainly the company's outstanding leadership and leading position in various insurance markets, particularly U.S. LTC where the company has >40% market share.
- The adverse LTC losses have resulted in another review of the business, the results of which will be released prior to Q3 results and could include significant value impairments.
- Valuing LTC and the rest of the business separately based on a range of potential outcomes, I came up with a weighted average price target of $16.06 or 19% upside.
- This also accounts for additional 8-10% annualized returns. It seems attractive on average, but an estimated 35% chance of substantial permanent capital loss is outside my risk profile.
Strayer: Business Clearly Turning And Stock Remains Cheap
- The premise that Strayer will avoid most regulatory/legal damage that other FPEs are being hurt by seems to be holding true.
- The company's Q2 results offer clear evidence (starts, bad debt expense, RPS guidance) that the turnaround is picking up.
- The stock remains cheap when considering the likely ROIC, multiple, and EBIT margin reversion.
- I am not investing now due to the lack of share repurchases and chart which seems to indicate an imminent pullback.
Liquidity Services: Solid Business And Valuation, But A Few Concerns
- A top pick of Joel Greenblatt's Magic Formula Screener.
- Niche focus on the surplus/salvage market and professional qualification and trade clearances of buyers and sellers create competitive advantages.
- Benefits from the continued shift of world economy online and further, seems to make the surplus/salvage market more efficient than existing processes.
- Significant relationships with DoD and WMT are a testament to legitimacy of such a small business, but also present significant customer concentration risks.
- 58.4% pre-tax ROIC and 15%+ growth should not equal 5.8x EV/EBIT and 8.9x EV/FCF.
Booz Allen Hamilton: Textbook Quality At A Discount
- This article serves as a more comprehensive follow up to my initial research - Booz Allen Hamilton: A Sustainable Excellent Business At A Discount.
- Concerns over the impact of US government budget cuts are overblown and much of the financial impact for BAH has already been realized.
- I believe the firm is of outstanding quality for a variety of reasons, including its durable competitive advantages from security clearances, longstanding client relationships, etc.
- Stock seems significantly discounted under 15x adjusted EPS and closer to 10x FCF.
- $1 special dividend should bolster stock over next month.
Booz Allen Hamilton: A Sustainable Excellent Business At A Discount
- Competitive advantages associated with century-old brand and longstanding customer relationships.
- Consulting is an excellent industry involving a highly-intangible service, limited price competition and benefiting from value-based management and enterprise technology trends.
- The details above and BAH's excellent management make BAH an excellent business and I believe sustainably so.
- 46.5% ROIC plus ~10% growth for some time plus excellent business quality deserving a premium plus 2.07% dividend yield, should not equal <10x EBIT, 13.7x EPS, and 14.4x FCF.
- Backlog decline, management transition and tough FY15 guidance present challenges that I believe are temporary and causing this phenomenon.
Activision Blizzard: A Low-Risk Business Model In A Risky Industry - Compelling Value Here?
- ATVI's focus on existing, strong franchises makes the company's business model lower risk (less hit-and-miss) than the gaming industry at large.
- The company's 10 year "Destiny" partnership with Bungie creates valuable optionality.
- The gaming industry is growing 12% annually, but much of this growth is coming from mobile apps, where ATVI is less active.
- High ROIC 25% pre-tax. 10-15% forward growth seems reasonable.
- Shares seem slightly discounted but far from the 12-13x after-tax multiples of FCF, EPS and NOPLAT where I'd really be interested.
Capital Southwest: A BDC To Believe In?
- Became interested in the stock through various mentions in Martin Whitman's "Modern Security Analysis.".
- The company's investment strategy is unique as far as concentration and time horizon and generally aligns with my own. I did not find any qualitative deal-breakers and was generally impressed.
- Operating valuations do not apply here. NAV/share and growth in said metric matter. NAV is somewhat arbitrarily-determined but seems reasonably representative of fair value in this case.
- A return in stock price to NAV/share, NAV/share growth, and the small dividend make a 100% total return in 5-6 years reasonable, or 13.4% annually.
- Sympathize with the long case, but am not investing because some of the firm's holdings don't seem to be excellent businesses and upside is insufficient for me.
Phillip Morris: Will Collateral Damage From Reynolds American Judgment Create Opportunity?
- Reynolds American being hit with $23.6B in punitive damages should pull down all cigarette stocks in the week ahead, yet Phillip Morris is not exposed to the US legal/regulatory risks.
- The cigarette industry is slowly declining, but the super-low cost of manufacturing cigarettes enables sustainably high ROICs across the industry and the customer base is extremely 'loyal.'.
- PM in particular earns a fantastic 58.1% ROIC.
- At 14.9x FY14 adjusted EPS guidance for 4-6% earnings growth and a 4.37% dividend yield, PM would be a clear buy for me without the legal/regulatory risks.
- With the tough circumstances, I'd really feel comfortable paying 12x or ~$70. Doubt the stock will get there despite the negative catalyst, but I will continue to watch.
Does Catamaran Stack Up To Express Scripts?
- Much of my ESRX thesis applies here and Catamaran is an excellent company in its own right.
- 21.7% ROIC is awesome and supports my qualitative conclusions.
- At 20x the company's FY14E adjusted EPS guidance, shares seem slightly discounted but insufficiently so for my liking.
- I am moving on and setting a price alert at $39 where I would reevaluate the stock.
Coach: A Business And Industry I Hate, But A Valuation I Love
- Coach possesses some decent business qualities, but I have a very strong distaste for softlines retail and the company's recent management turnover and sales troubles in the U.S. compound that.
- Fantastic ROIC of 39.9%.
- Really, really cheap at 10x NOPLAT and 12x FCF. Never have I seen a comparable ROIC business selling so close to single digit after-tax multiples.
- Wealth creation opportunities through financial leverage. A 2x EBITDA net debt position is not unreasonable and would mean $3.6B in additional funds for share repurchases or a buyout.
- Just cannot bring myself to invest in a business I qualitatively dislike so much. Serious opportunity for investors less negative on retail and Coach's business.
WABCO: High Quality Enterprise, But Is The Price Right?
- High quality industry leader selling a somewhat intangible product that benefits from trends in technology, safety, and regulation.
- Strong ROIC >20%.
- Seemingly fairly-valued at this point at 31x LTM EBIT(1-t) and 19x FY14E earnings.
Hershey: Outstanding Company, Rich Valuation
- Obviously excellent business with numerous competitive advantages and attractive business qualities.
- Sustainably high 27.5% ROIC is a real rarity.
- Rich valuation intuitively and as indicated by the 'tao of corporate finance' equation.
- Will continue to watch stock in case it becomes discounted over the next few years.
Graco: A Great Company Now And 10 Years Hence?
- Manufacturing business that seems globally-diversified, deeply-embedded in economic supply chain, and in a market niche, but manufacturing is not typically a high ROIC industry, partly because pricing is very tangible.
- ROIC calculation using NOPLAT rather than EBITDA less Capex due to recent acquisitions. Also excluded excess cash and goodwill and came up with a very impressive after-tax LTM 22.1% ROIC.
- Stock does not seem obviously discounted. Based on ROIC, growth and dividend, shares would be very attractive under 15x NOPLAT and FCF, but trade at 23-24x.
- Shares don't seem obviously expensive either though. If there is good execution and sustained 20%+ ROIC over the next 5-10 years, 23-24x is fine now, but those are big IFs.
- Avoiding the stock for now due to the above and other miscellaneous factors.
Accenture: In The Search For Sustainable Business Quality, A Winner Here?
- Looking for a high quality business that I can envision remaining so long into the future due to both industry and business-specific factors.
- Positives: expect continued increasing popularity of VBM, industry ripe for high margins, strong brands, differentiation, etc., benefits from continued tech shift, should intuitively be well-managed and seems to be.
- Lots of IP, strong financial position, compensation and attrition look good, value creation credibility, tax advantages, high ROIC, and a highly diversified revenue stream.
- Negatives: primary asset is people, high quality competition, stock seems pricey without perspective, and significant lumpiness in performance.
- Still very interested and will likely perform further research on ACN and companies in peer group, but not a buyer at this point.
Polaris Industries: Execution Risks, Industry Uncertainty And Price Keep Me Away
- Positives: Best-of-breed market leader, very strong ROIC, strong brand/reputation, consolidated industry with barriers to entry, somewhat diversified revenue stream, somewhat timely, strong balance sheet, and value creation credibility.
- Negatives: Cyclical/unpredictable industry, industry prone to recession, and a pricey stock.
- Clearly a high-quality company, but did not see enough to consider the stock a conviction buy.
Growth-Centrism Is Flawed
- On average, growth is meaningless and thus, growth-centric analysis and strategy is flawed.
- Focus should be instead on ROIC and WACC, which informs of implications on corporate value of growth and gives quite a bit of other qualitative information about the business.
- There is still a place for growth in corporate strategy and investment research, but definitely after ROIC and WACC.
Panera: Opportunity In The Broken Growth Story?
- Panera looks like an obvious broken growth story from a distance and I've found that high quality businesses can occasionally be found at discounts to fair value in such situations.
- Positives: secular tailwinds, strong ROIC, under-utilized balance sheet, tight leash on franchisees, strong brand, strong historical performance, and timeliness.
- Negatives: retail is tough, operational headwinds, hidden debt, high quality competition, uncertainty, personal preference, and a pricey stock.
- Will continue to follow stock but have seen enough to rule out an investment for now.
Tim Hortons: A High ROIC, High Quality Canadian Powerhouse Worth Considering
- A high quality company worth considering for Buffettesque investors.
- Positives: personal preference, diversified revenue stream, dominance in Canada, small format stores, strong ROIC, somewhat timely, strong LT growth and value creation, shareholder-friendly, reasonable compensation and good incentives.
- More positives: decent recent performance, reasonable price, history of innovation, and secular tailwinds.
- Negatives: high quality competition, heavy debt load, retail is tough, and saturation in Canada.
- Would like to see stock a bit cheaper. Will continue to follow over the next few months and give more thought.
AutoZone: 38% ROIC, Talented Management, Creditworthiness; Starting To Look Like The Full Package
- Outstanding and improving ROIC - 38% most recently.
- Talented, seasoned, reasonably paid, and relatively young management.
- Strong credit rating and low cost of debt despite considerable financial leverage.
- More confident than I was a month ago when I last wrote and seriously looking to initiate a position on a decent dip.
Express Scripts: M&A Activity Blurs A Profitable Enterprise
- My initial article on ESRX fell short in addressing the company's history of acquisitions and their implications.
- The acquisitions and the resulting goodwill, intangibles, and stock dilution create challenges in trying to calculate ROIC.
- Alternative methods such as analysis of the 2012 Medco acquisition, use of maintenance FCF/share, Warren Buffett's value creation test, and ESRX's long-term stock performance all suggest a profitable enterprise.
Destination Maternity: An Optimal Destination For Value/Contrarian Investors?
- DEST seems to have a strong competitive position through its scale and brand portfolio and decent industry prospects as total US births resume a century long trend of growth.
- Company pays a nice dividend, is well-managed, and stock is exceptionally timely.
- However, the company faces high quality competition, operates in a tough retail industry, and is vulnerable to an e-commerce shift and a culture of maternity apparel exchange in the US.
- Stock trades at a low multiple of 14x 2014E EPS, but this implies growth in line with that the company has done historically.
- In addition to issues mentioned above, hidden debt in operating leases and purchase obligations and a large comps decline of 5.6% in Q2 keeps me from investing.
Annie's: M&A Target And High-Quality Business On Sale?
- High-quality business that seems to be differentiated and advantaged through its strong, 25 year old brand, loyal customer base, wealthy and health-conscious demographic, and international expansion opportunities.
- Poised to benefit from the nature and continued high growth rate of the organic food industry.
- Some concerns such as customer concentration risk, high-quality competition, commodities pressuring margins, many tapped growth avenues, and an auditor resignation red flag.
- However, company still has plenty of growth potential, stock is exceptionally timely, and catalyst through potential as an acquisition target.
- Stock seems fairly valued at current price and high implied growth along with above concerns keeps me from buying at this price.
Arctic Cat: Market Is Skeptical Of Aggressive Long-Term Targets
- ACAT seems to have an OK competitive position in a consolidated but surprisingly competitive market.
- The stock seems extremely timely and very cheap relative to the company's long-term guidance.
- I'm skeptical of this guidance however as it implies growth far in excess of what the company has done historically and even recently.
- Risks associated with the recent unexplained management transition are the icing on the cake for me to avoid the stock.
Target: Sometimes The Market Consensus Is Right
- Bad press related to recent data breach and management turnover along with a steep share price decline makes TGT an intuitive contrarian pick.
- However, contrarianism alone is flawed. There must be other elements to the thesis.
- There are some positives in the form of positive reversion in performance, strong competitive position, and reasonable prospects.
- Valuation seems to reflect this though, and the negatives related to the data breach do hold some weight.
- The market is right, and TGT is fairly valued.
GNC: A 'Strong' Pick, But A Few Concerns
- Surprising competitive advantages through scale, brand, and loyal customer base, but I'm highly skeptical of retail. Company seems to have a narrow moat.
- Will benefit from rising healthcare costs and estimated 7.1% vitamin & supplement growth in next few years. Hit especially hard by weather, but temporary headwind and comps are already improving.
- Below moving averages and far off 52 week high, stock is extremely timely. If you're contemplating buying, now is the time.
- Should be able to grow 13-17% going forward, and if so the stock is very cheap. Even at 10-12% growth, the stock is probably fairly valued.
- Excessive debt load magnified by operating leases for a retail business is concerning. This and opportunity costs of other ideas keeps my on the sidelines, but I am definitely bullish.