Lululemon: Quality Issues More Extensive Than Reported [View article]
Michael, thanks for the comments. FYI, we are not short at this point. Given recent price action, someone must think that LULU will make positive announcements regarding product shortages soon, maybe with Q1 results. This could result in a price spike / short squeeze. As a result, were on the sidelines.
However, over the long-term I believe the story deteriorates.
Capital Southwest Corporation: $1.00 For $0.61 [View article]
One issue just glancing at the balance sheet is that the company does not record deferred taxes on its unrealized gains as part of net assets (they do have a small amount of deferred taxes related to pension expense). With over $469mm of unrealized gains, an investor would have a tax liability of over $70 million or ~ $18 per share if the company was liquidated (also assuming he only pays long-term capital gains tax of 15%). Combined with the private companies / lack of liquidity of investments, this could at least partially explain the discount (not that the taxes need to be paid today).
Anyways, interesting article and definitely worth exploring further. I think the next analysis needs to be looking at the company's history of where values were marked on unlisted investments vs. where they were sold. A solid track record would definitely help the case.
It is funny how every time an author writes an article that questions LULU's valuation out comes the the take it on faith crowd chanting "two words: international expansion," as if that solves everything.
We admire LULU's meticulous business model / practices... enough to know they have been the key to success. So just because they are beginning to more aggressively expand into these mysterious international markets does not mean suddenly they no longer will have to go through the painstakingly slow process they have always gone through: open up show rooms (btw, they have had a show room in Hong Kong for two!!! years now and are just now opening a store), build relationships with local fitness instructors, build brand awareness, train employees, pick the ideal real estate locations...
In other words, international expansion does not increase the pace, it just potentially sustains it for longer... with increased costs of working in far flung places. But as the base gets bigger the growth comes down because it does not scale that easy. It really is that simple. In fact, what should really worry people is the fact that comps for the 4th quarter, even if higher than guidance, will likely be lower than mid-teens. There is only so much in sales you can push through a 2,800 sf store.
Another key issue not being discussed: a year ago they were saying they would not focus on international markets because they had so much opportunity in the US. Literally 9 months later the story changed. Why?
Regardless, we are neither long or short. We recommend conservative, long-term investors avoid. We will be watching Q4 for:
1) Guidance on SS sales for 2013 - Single digit guidance is really bearish at current prices 2) How many stores are they actually going to open and where - if it stays less than 40 range then growth is not scaling 3) Margin guidance - our guess is op margin leverage is gone as a result of increased costs with expansion. If that is indeed the case that is another bearish sign.
Putting the cash issue and everthing else aside, the dcf terminal value is fundamentally flawed. The tv = roughly 3x his terminal earnings. A simple no growth assumption and 8% discount rate would result in 12x multiple and much different result.
Our Response To Robert Walter Regarding Herbalife And 10b5-1 Plan [View article]
Right or wrong, I have no opinion or position, the logic of this article is faulty. The entire crux of the argument is based isolating the bold text but ignoring the text that comes immediately after it:
Herbalife's future share repurchases, if any, may take place from time to time [at management's discretion] based on market conditions, and shares may be purchased in open-market, privately negotiated or other transactions. (Emphasis added)
Author makes argument that repurchases are "at management's discretion", but then ignores that they may be through "privately negotiated or other transactions." Privately negotiated or other transactions could refer to a lot of things but certainly includes ASRs which can often be structured to result in repurchases through what normally would be a blackout period. Of course, the plan would have to have been put in place ahead of time and be binding as noted.
Again, the authors accusations may or may not be correct, but this particular argument does not seem to benefit the case.
Berkshire Hathaway: Attractive Entry Point For Long-Term Investors [View article]
Matt's explanation is right on. Jameskuwe, note that BRK has gone up ~12% since this article was originally published. It is now trading closer to 1.3x as opposed to what was slightly below 1.2x book.
Dolby does not make vast majority of products using their technology, they just license its use to other. In other words, most competitors understand the technology and many of their customers have their own competing technologies. So as soon as the patents expire, it is challenging for Dolby to charge for it. Customers definitely recognize the Dolby name and Dolby has tried the "Intel Inside" approach to marketing to the customer (despite they do not sell to the end customer). Dolby even tests products to verify that they meet their standards. That said, I believe companies could just label their products Dolby compatible and would not have to pay Dolby for it.
Again, these are just my understanding. I am not a technology expert.
Dolby Laboratories Is A Company To Own [View article]
David, thanks for the article. I agree with Max 100%. When looking at Dolby, I must admit I don't know what their future revenue profile looks like. That is why I am on the sidelines. If someone had more insight on this issue, then they could potentially make a lot of money here.
David, a few suggestions on your analysis:
1) the major one is that you do not address the patent cliff and how revenues will evolve with a transition away from optical disk and PC to mobile and TV. TV seems to be coming along but mobile is unclear. Will margins remain at similar rates with new revenue streams etc.
2) Regards to your return on capital calculations, their ROIC is actually much higher than what you are calculating. Let me explain. The company has significant excess cash on its balance sheet that is not earning a meaningful return. If they paid that cash out as a dividend or repurchased shares, you would see their equity capital go down, but earnings of company would not change much. I think if you back out impacts of cash, you will see ROIC closer to 80%. This is not surprising given most of revenues and profits come from licensing technology which would have been 100% expensed as R&D in the past.
3) Small point. GAAP earnings do not determine what taxes you pay, your IRS tax returns do. There can be significant timing and permanent differences between GAAP and IRS income.
Thanks again for the article and analysis. Good luck!
There basic plan is two fold: (1) to try to roll Dolby Digital users to Dolby Digital Plus which has a later expiration date and (2) push their latest technologies into mobile and other new arenas.
They have had some success moving licenses from Dolby Digital to Dolby Digital Plus, most notably Blue Ray is DD+ and latest agreement with MSFT is DD+ as well. However, optical disk including Blue Ray is in decline, and it appears that PCs maybe facing same issue (that, and contract with MSFT actually produces less revenues than it did previously under old Windows 7 contract). So it has been two steps forward, one step backwards in some sense on this front, but there has been progress albeit slow.
On mobile front they have also made some progress, but it is not what they would like. I think the issue they are facing on mobile side is that the rates or what they earn are a lot lower so they are not making up for the decline elsewhere. The trick is can you get someone to pay for something they get for free (i.e. streaming video content). I believe they may get there, but it is far from certain what the end result will be.
Also, note my instablog which I believe shows that the company has at least made some progress on DD+ front, or cynically speaking pays attention to SA. This was a follow up to this article: http://seekingalpha.co...
My Prediction For 2013 - All Other Predictions Will Be Wrong [View article]
Great article. I totally agree with your conclusions regarding predictions. It is impossible to make any concrete conclusions over what is likely to happen in the next 12 months. Investors should stick to places where they can have a high degree of confidence. Coca Cola being the prime example. Predicting the earnings of KO 10 years from now is impossible, however, we can say with a fairly high degree of confidence that earnings will likely be higher than they are today. That is a really powerful statement that many people fail to fully appreciate, because it really limits your downside risk.
Berkshire Hathaway: Attractive Entry Point For Long-Term Investors [View article]
Aqua - I agree, which is my point about interest rates which I believe is driving much of the discount in insurance stocks. I believe that will normalize over a longer period of time, say five years.
Lululemon: Quality Issues More Extensive Than Reported [View article]
Management has said the affected product represents 17% of all bottoms available, but I believe its a much higher % of both pant and total revenues.
Lululemon: Quality Issues More Extensive Than Reported [View article]
However, over the long-term I believe the story deteriorates.
Capital Southwest Corporation: $1.00 For $0.61 [View article]
Anyways, interesting article and definitely worth exploring further. I think the next analysis needs to be looking at the company's history of where values were marked on unlisted investments vs. where they were sold. A solid track record would definitely help the case.
Short The Lemon [View article]
We admire LULU's meticulous business model / practices... enough to know they have been the key to success. So just because they are beginning to more aggressively expand into these mysterious international markets does not mean suddenly they no longer will have to go through the painstakingly slow process they have always gone through: open up show rooms (btw, they have had a show room in Hong Kong for two!!! years now and are just now opening a store), build relationships with local fitness instructors, build brand awareness, train employees, pick the ideal real estate locations...
In other words, international expansion does not increase the pace, it just potentially sustains it for longer... with increased costs of working in far flung places. But as the base gets bigger the growth comes down because it does not scale that easy. It really is that simple. In fact, what should really worry people is the fact that comps for the 4th quarter, even if higher than guidance, will likely be lower than mid-teens. There is only so much in sales you can push through a 2,800 sf store.
Another key issue not being discussed: a year ago they were saying they would not focus on international markets because they had so much opportunity in the US. Literally 9 months later the story changed. Why?
Regardless, we are neither long or short. We recommend conservative, long-term investors avoid. We will be watching Q4 for:
1) Guidance on SS sales for 2013 - Single digit guidance is really bearish at current prices
2) How many stores are they actually going to open and where - if it stays less than 40 range then growth is not scaling
3) Margin guidance - our guess is op margin leverage is gone as a result of increased costs with expansion. If that is indeed the case that is another bearish sign.
Apple Is Worth $265 [View article]
Let's all move on. It's busted analysis.
Our Response To Robert Walter Regarding Herbalife And 10b5-1 Plan [View article]
Herbalife's future share repurchases, if any, may take place from time to time [at management's discretion] based on market conditions, and shares may be purchased in open-market, privately negotiated or other transactions. (Emphasis added)
Author makes argument that repurchases are "at management's discretion", but then ignores that they may be through "privately negotiated or other transactions." Privately negotiated or other transactions could refer to a lot of things but certainly includes ASRs which can often be structured to result in repurchases through what normally would be a blackout period. Of course, the plan would have to have been put in place ahead of time and be binding as noted.
Again, the authors accusations may or may not be correct, but this particular argument does not seem to benefit the case.
Berkshire Hathaway: Attractive Entry Point For Long-Term Investors [View article]
Accidentally Speculating In Dolby? [View article]
Again, these are just my understanding. I am not a technology expert.
Dolby Laboratories Is A Company To Own [View article]
David, a few suggestions on your analysis:
1) the major one is that you do not address the patent cliff and how revenues will evolve with a transition away from optical disk and PC to mobile and TV. TV seems to be coming along but mobile is unclear. Will margins remain at similar rates with new revenue streams etc.
2) Regards to your return on capital calculations, their ROIC is actually much higher than what you are calculating. Let me explain. The company has significant excess cash on its balance sheet that is not earning a meaningful return. If they paid that cash out as a dividend or repurchased shares, you would see their equity capital go down, but earnings of company would not change much. I think if you back out impacts of cash, you will see ROIC closer to 80%. This is not surprising given most of revenues and profits come from licensing technology which would have been 100% expensed as R&D in the past.
3) Small point. GAAP earnings do not determine what taxes you pay, your IRS tax returns do. There can be significant timing and permanent differences between GAAP and IRS income.
Thanks again for the article and analysis. Good luck!
Accidentally Speculating In Dolby? [View article]
Accidentally Speculating In Dolby? [View article]
They have had some success moving licenses from Dolby Digital to Dolby Digital Plus, most notably Blue Ray is DD+ and latest agreement with MSFT is DD+ as well. However, optical disk including Blue Ray is in decline, and it appears that PCs maybe facing same issue (that, and contract with MSFT actually produces less revenues than it did previously under old Windows 7 contract). So it has been two steps forward, one step backwards in some sense on this front, but there has been progress albeit slow.
On mobile front they have also made some progress, but it is not what they would like. I think the issue they are facing on mobile side is that the rates or what they earn are a lot lower so they are not making up for the decline elsewhere. The trick is can you get someone to pay for something they get for free (i.e. streaming video content). I believe they may get there, but it is far from certain what the end result will be.
Also, note my instablog which I believe shows that the company has at least made some progress on DD+ front, or cynically speaking pays attention to SA. This was a follow up to this article: http://seekingalpha.co...
My Prediction For 2013 - All Other Predictions Will Be Wrong [View article]
Berkshire Hathaway: Attractive Entry Point For Long-Term Investors [View article]
Berkshire Hathaway: Attractive Entry Point For Long-Term Investors [View article]
Lululemon Athletica: Great Company, Terrible Investment - Here's Why [View article]