Sandy's place

Surefin's Amitabh Singhi on the structural investing opportunities India, current valuations today, and rooting out the underfollowed

noreply@blogger.com (Sandesh) — Sun, 03 Oct 2010 11:12:00 +0000

Amitabh Singhi is Managing Director at Surefin Investments, an India based portfolio management and investment advisory company. Since inception in mid-2001 the fund has returned 29.8% annualized, net of all fees to investors. Mr. Singhi graduated with a B.S. in Economics from the Wharton School at the University of Pennsylvania, with concentrations in Finance and Management.

Brian Arthur – Reinventing the Economy: Combination, complexity and value

noreply@blogger.com (Sandesh) — Mon, 23 Aug 2010 03:34:00 +0000

Value Investing

noreply@blogger.com (Sandesh) — Thu, 06 May 2010 19:52:00 +0000

Investing is so elementary and yet only few people are able to make money over long period of time and survive the vicissitude of the market. Most people try to make a quick buck chasing stock tips from punters in the market and unfortunately end up losing their shirts. For most investors stock symbols are just ticker symbols moving across their computers. However for investors willing to perform a little due diligence before investing I recommend a disciplined path for investors to follow and that is a value investment philosophy which has a long history of delivering excellent results with very limited risk. Value Investing is basically the strategy of buying securities for a price far below their underlying value and trying to minimize their downside risk. Simply put, the cheaper you buy a stock the less one stands to lose and less is the downside risk. So the risk is not in the volatility of a stock but in the price at which you buy a stock. Risk as defined my most value investors is the permanent loss of capital and not the volatility of the stock. There is no reason to be worshipful of stock market
quotes. They are simply prices to be taken advantage of or ignored,as the case may be. This is what the old master Benjamin Graham, the father of value investing meant when he said the average investor would be better off without constant stock quotes — because the average investor makes too much of these prices.One common characteristic of value investors is that they take advantage of the volatility and that enables them to buy stocks at a cheaper price. The cheaper the merrier is the credo, of course the stocks must have a strong underlying fundamentals.
As defined by Graham and Dodd, an investment operation is the one which upon thorough analysis promises safety of principal and a satisfactory return. Operation not meeting these requirements are speculative. The vital parts of the definition are "thorough analysis" and "safety of principal."
Thorough analysis involves studying various quantitative and qualitative aspects of the business and estimating the intrinsic value of the business and then waiting to buy it a significant discount.
In his 1992 letter to Berkshire Hathaway shareholders, Warren Buffet wrote:
"We think the very term ‘value investing' is redundant. What is ‘investing' if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value - in the hope that it can soon be sold for a still-higher price - should be labeled speculation (which is neither illegal, immoral nor - in our view - financially fattening)."

Two Basic Value Investing Tenets
1) Each share of stock is an ownership interest in the underlying business. A stock is not simply a piece of paper that can traded recklessly. Most investors don’t even realize that they are not investing and have become speculators by playing a "greater fool game" buying overpriced securities and then hoping to find a greater fool than you to sell it at a still higher price. Graham used what has become a famous metaphor called "Mr. Market" to explain how the stock market works. It is still the best way to understand how the stock markets work and how one should take advantage of the manic-depressive Mr. Market. The concept of Mr. Market goes like this : Imagine that in some business you own a small share that cost you around 1000 rupees. Mr.Market is one of your partners and is very obliging indeed. Everyday he comes to you to and tells you what he thinks your share in the business is worth and on that basis offers either to buy from you or sell you an additional interest in the business. The catch is that Mr. Market is a very strange dude and does not always price your share of business the way a sensible businessman would appraise. Instead his mood swings from being euphoric some days and the other days he is very depressed. Everyday he comes to you and offers you deal depending on his mood. Sometimes he might want to overpay for a share of your business and sometimes he might offer you an opportunity to sell you his part of the business at a ridiculous price far below its underlying value. Since you know the worth of the business based on fundamentals you are free to accept his offer or ignore him if you don’t like the price. The choice is simply yours. The more manic depressive Mr. Market is the more the more opportunity you will have to take advantage of him. Even though he might have wild mood swings he is a good business partner to take advantage of. In a nutshell, if you find a company that he is offering for less than it is worth, take advantage of him and buy a truckload of those shares as long as you have a strong conviction of what is the company's true worth. Investing is most intelligent when it is most businesslike. This is a quote from Benjamin Graham's "The Intelligent Investor". That is the way most of the legendary investors like Benjamin Graham, Warren Buffet , Charlie munger et al made a fortune, buying partial interest in business at dirt cheap prices by taking advantage of the Mr. Market.

2)Margin of safety is the most critical aspect in value investing and is the most widely shared tenet among the value investors. Graham's definition of margin of safety is essentially the discrepancy between price and underlying value of the business. Margin of safety is required not only to limit the downside risk but also because of our inability to predict the future and the inherent biases in the investors which causes them to commit mistakes. Having a margin of safety is critical to a disciplined approach towards investing because it acknowledges the inherent flaws that we as humans have. It is like an insurance policy which helps to mitigate the damages caused to investors by some stroke of bad luck, imprecise and over-optimistic estimates or the vicissitudes of the economy and the stock market. Valuing a business is an art and not science because the value of business depends on numerous factors and cannot be captured by a mathematical equation and one can only come up with a ballpark estimate of the value of a business based on the assets and earnings power of a business.
According to Graham, "The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments. For in most such cases he has no real enthusiasm about the company's prospects. If these are bought on a bargain basis even a moderate decline in the earning power need not prevent the investment from showing satisfactory results,the margin of safety will then have served its purpose."
Buffett describes margin of safety in terms of tolerance. "When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks cross it. And that same principle works in investing.
How large should be your margin of safety? Here's how it works: Suppose you appraise the value of a stock to be around 100 rupees and the stock is trading at 60 rupees then your margin of safety is 40 percent. Now the appropriate size of margin of safety required depends upon the underlying qualitative and quantitative aspects of the business and the level of confidence one has after performing adequate due diligence on the fundamental aspects of the business.
The quantitative analysis involves studying the key financial ratios ushc as return on invested capital, profit margin, debt –equity ratio, earnings power and cash generating capacity of the company. The qualitative aspects cannot be ignored as no business operates in vacuum and therefore it is necessary to study the competitive scenario in which the business operates and the actions of the customers to which the business caters to.
There is no secret to investing as every important aspect of investing is available in the public domain. For more wisdom on the art of investing refer to the book "Security Analysis" by Graham and Dodd, also known as the bible of Value investing. Though to some the book might seem outdated but its wisdom are very much applicable in today's market.

A few cheap stocks

noreply@blogger.com (Sandesh) — Thu, 15 Apr 2010 15:45:00 +0000

Competent Automobiles Co ltd

Competent Automobiles Co. Ltd. is an India-based company engaged in the trading and servicing of vehicles. The Company operates in two business segments: showroom, and services and spares. The showroom segment includes the purchase and sales of new Maruti Suzuki India Ltd. vehicles. The services and spares segment includes servicing and spares parts sale of Maruti Suzuki India Ltd.

Valuation
The market cap is around 30 crores and has 16 crores in cash (net current assets minus long term liabilities) so essentially it is trading at 14 crores. the company pays direct taxes of around 30 percent of the profits. The company has been consistently generating cash flow and the avg cash flow for the past five years has been around 5 crores and this year the company has generated free cash flow (operating cash flow minus capex) of around 5 crores. So one get the business at 2-3 times free cash flow. The promoters hold around 70% of the total shares outstanding. however one cause of concern is that the company has 16 crores of contingent liablities which are letter of credit obtained from banks.

Majestic Auto Ltd

Majestic auto holds 16 lacs shares of Hero Honda motors ltd, valued at 300 cr whereas its own market cap is around 95 crores and apart from this the company has net fixed assets of 65 crores and liabilities of around 36crore. the market cap of the company is 30 percent of its investment in shares of Hero Honda motors ltd.

BNK capital markets

The company provides brokerage services in financial sectors, capital markets and commodities exchanges to individuals, corporate houses and high net worth investors. It has a market cap of 30 crores while the value of its investments in shares of CESC and KEC International is around 140 crores. Also it has net current assets of 25 crores and liabilities of 16 crores.

Competent Automobiles Company Limited.

noreply@blogger.com (Sandesh) — Thu, 18 Mar 2010 03:57:00 +0000

The Company's principal activity is to trade and servicing of vehicles. The Company operates in two segments, namely, Showroom and Services and Spares. The Showroom segment deals with purchase and sale of new Maruti Udyog Ltd vehicles. The Service and Spares segment includes servicing and spare parts sale of Maruti Udyog Ltd. It operates through 9 showrooms situated at New Delhi, Haryana and Himachal Pradesh. The Company's workshops are located at Delhi, Haryana and Himachal Pradesh.
The market cap of the company is around 26 crores and has a net current asset value of around 15 crores. The Net Current Asset Value concept involves identifying companies that are trading at below the level of the current assets on the balance sheet less all liabilities. Current assets consist primarily of cash and cash equivalents, trade receivables, and inventories. These are assets that are either cash or convertible into cash within a relatively short timeframe (usually less than a year). From current assets, one subtracts all liabilities on the balance sheet, not just current liabilities. This value is then compared against the market valuation of the company.
Even though the company is not trading bellow the ncav it seems cheap on an earnings basis. Also even if the company is trading below ncav it might end up destroying shareholder value if it has a negative cash flow however this is not the case with competent automobiles. For the financial year 2009 the company produced 9 crores in operating cash flow and incurred capex of around 3 crores resulting in FCF of around 6 crores. So the company trades at 4 times free cash flow.

Stock Selling Below NCAV

noreply@blogger.com (Sandesh) — Fri, 13 Feb 2009 15:12:00 +0000

Ricoh India Ltd

The first on my list would be Ricoh India, not only its trading below net current asset value but it also exhibits high ROIC and in the past has shown signinifcant amount of growth in sales and earnings without deteriorating the incremental return on invested capital, though this growth has been achieved largely becoz of its merger with Gestetner India in 2004. I havent studied the competitive landscape in much detail but it seems that it has abt 30% market share after Xerox and Canon in India. It has held a strong presence in the Government and commerical segments.

Free Cash Flow = EBIT+depreciation-Capex = 298mn

Return On Invested Capital = FCF/(Net Working Capital +PPE) = 36%

Market Cap= 555 mn (zero Debt)

Net Current Assets = 696 Mn

The Stock is trading at a signinficant disocunt to the NCAV of abt 21% whereas the rest of the PPE and the earning power of the business is available for free. Now thats wat I call a pure graham type bargain.

Credit default swaps in India

noreply@blogger.com (Sandesh) — Sat, 22 Nov 2008 10:56:00 +0000

Credit default swaps, a financial intrument which insures creditors against default on loans owed by them is likely to be introduced next year. A credit default swap (CDS) is essentially a financial instrument that allows a bank or a financial institution to insure a loan or a debt investment it has made by paying periodic fees to another institution called a protection seller, which is willing to take the risk.The CDS seller, in turn, guarantees to pay the buyer a pre-determined amount if the company that has borrowed money defaults on repayment.
Worlds largest insurance company was in trouble bcoz of these instruments.it had sold CDS worth $440 billion on subprime and other securitised financial papers. Once the subprime borrowers started to default on their loans, investors who had invested in these securitised loans found their securities turn wothless and so they turned to CDS seller AIG to recoup their losses. AIG couldnt make good their losses, as every invstor turned up to demand their repayments at the same time.So it defaulted on $14 billion of CDS.

Myths about Branding

noreply@blogger.com (Sandesh) — Wed, 09 Jul 2008 07:45:00 +0000

Often people misconstrue brands as a form of competitive advantage but this is not true. Firstly,What is competitive advantage? it means that it allows an incumbent firm to do what its competitors are not able to do or it deters them from emulating the incumbent firms strategy.it is an effective barrier to entry.So, basically barriers to entry and competitive advantage are the same thing. Only incumbent competitive advantage has value and not entrant competitive advantage bcoz entrant competitive advantage implies absence of barriers to entry for the incumbent firm. By definition, a successful entrant becomes an incumbent and then is vulnerable to the next entrant and the process continues with the every new entrant replacing the previous incumbent and this implies that are no competitive advantages neither for the incumbent nor for the entrants.
Now lets consider brands which are often mistaken to be a source of competitive advantage. Branding is like any other asset of a company which requires investment in form of marketing and advertising. By branding a firm can only make its presence felt in the market. It is an important asset of the company and cant be taken in a a loose manner but at the same time it doesnt deserve so much hype it gets compared to other assets. Its just an important asset of the company and by itself it will not drive excellent returns for the business. It wouldnt protect a lousy business. A competitive advantage is something which enables a business to earn high return on invested capital and keeps the rival at bay. It enables it to take away a disproportionate share of the market. A high return on invested capital and a disproportionate share of the market is a tell-tale sign of presence of competitive advantages or barriers to entry. Not many branded products show high returns and dominate their markets. they might show high returns in the short-run but not in the lon-run
It is not branding per se which drives the returns of the business but economies of scale with high customer captivity. Most of the branded products are in a market called monopolistic competitive market where in the long-run they dont tend to be highly profitable because there arent any effective barriers to entry. A monopolistic competitive market is defined as the one where there are large no of firms selling similar but differentiate products which means that the products sold by different firms are close but not perfect substitutes of each other
For example : soft-drink market,apparel market and various other brand oriented markets. Theoretically, in the long run in a monopolistic competitive market firms are not highly profitable and their profitablity tend towards zero.
For instance, consider the soft-drink market where there are a number of brands which differ slightly from each other in terms of taste and to some extent in color. In a study of demand for colas which used a simulated shopping experiment to determine how the market share of a Royal crown and Coca-cola changes in response to its price. In other words how elastic is the demand for a brand.

It was found that Royal crown is much less price elastic than coke i.e its demand is not much reponsive to price increases. The study seems to suggest that consumers are more loyal to royal crown and it has more brand loyaly than coke. But even because of higher brand loyalty it is not more profitable than coke. Profits depend on fixed costs and volume, as well as price. Coke will generate more profit beacause it has a much larger of market. Its the economies of scale which enables coke to spend heavily on advertising,marketing and distribution and this practice over a long period of brand reinforces the brand and keeps new brands at bay. Competitive advantages are supposed to protect profits and brand loyalty doesnt pass on that terms. Its the inherent characteristic or nature of the product which makes the customer more loyal to it than brands. people in america are habituated to coke and that is because of the first-mover advantage for the coke and the scale which enables it to sells at such a low price- the price difference between coke and any other brand is few cents and that prevents its consumer from switching to alternate brands just for price difference of a few cents.
Being a first mover in the market is more important thand brands.
At the end of the day brands are just necessary cost of doing business and making a presence in the market , nothing more and nothing less.

Complexity of the CDOs Demystified

noreply@blogger.com (Sandesh) — Thu, 08 May 2008 16:16:00 +0000

In early April the megabillionaire Warren Buffett hosted 150 students from the University of Pennsylvania's Wharton School and offered to have a Q&A session with him. One of the students asked the following question related to CDOs and the answer to it by Mr. Buffett really clarified the complexity and the blunder of the CDOs.
here is one of the excerpts from his question-and-answer session with the students.

Do you find it striking that banks keep looking into their investments and not knowing what they have?

I read a few prospectuses for residential-mortgage-backed securities - mortgages, thousands of mortgages backing them, and then those all tranched into maybe 30 slices. You create a CDO by taking one of the lower tranches of that one and 50 others like it. Now if you're going to understand that CDO, you've got 50-times-300 pages to read, it's 15,000. If you take one of the lower tranches of the CDO and take 50 of those and create a CDO squared, you're now up to 750,000 pages to read to understand one security. I mean, it can't be done. When you start buying tranches of other instruments, nobody knows what the hell they're doing. It's ridiculous. And of course, you took a lower tranche of a mortgage-backed security and did 100 of those and thought you were diversifying risk. Hell, they're all subject to the same thing. I mean, it may be a little different whether they're in California or Nebraska, but the idea that this is uncorrelated risk and therefore you can take the CDO and call the top 50% of it super-senior - it isn't super-senior or anything. It's a bunch of juniors all put together. And the juniors all correlate.

Direct Link to the Q&A session

Charlie Munger's Wesco Financial Corp. (WSC) Annual Shareholders meeting on Wed, May 07, 2008 in Pasadena, California

noreply@blogger.com (Sandesh) — Thu, 08 May 2008 16:12:00 +0000

Charles Munger, Vice Chairman of Berkshire Hathaway will host Wesco Financial Corp. (WSC) Annual Shareholders meeting on Wed, May 07, 2008 in Pasadena, California. Charlie is the Chairman, Chief Exec. Officer and President of Wesco, which is 80% owned by Berkshire Hathaway.

Charlie himself is very intelligent businessman and investor just as smart as Warren Buffett.

Link to some of the quotes by Charlie Munger

Notes from Berkshire Hathaway Annual Meeting 2008

noreply@blogger.com (Sandesh) — Thu, 08 May 2008 16:01:00 +0000

Berkshire Hathaway Annual Meeting, Omaha NE 2008
May 3, 2008
Typewritten notes courtesy of Peter Boodell(As is standard, no recording equipment was used to reproduce these notes. As a result, these notes are recollections only – not quotes, and should not be relied upon. –PB)

Link to the Annual Meeting notes

noreply@blogger.com (Sandesh) — Sun, 27 May 2007 14:30:00 +0000

Gandhi Special Tubes

Market Value: 7.34 million shares outstanding*130= 954 million
Industry: Steel – Tubes/ Pipes
Performance: Underperformed sensex by 25% for last 5 yrs
Dividend yield: 4/129 = 3% (moderate)
Institutional Ownership: Virtually No MF Holding
p/e ratio: 129/21=6.1 (cheap)
Market/Book value: 129/66=1.95 (moderate)
The stock is cheap, obscure and cheap
Enterprise Value=954 million+11.35 million=965 million

Refer http://www.myiris.com/shares/company/financial.php?icode=GANSPETU&select=3

Net Asset Value = 490.87 million
Net asset value per share = 66.7

Ratio Analysis

As on
31-Mar-06
31-Mar-05
31-Mar-04
OPBIT/Prod.cap.empl.(%)
40.94
52.99
33.37
PBIT/Cap. Employed (%)
41.32
40.50
28.20
PAT/Networth (%)
32.89
27.10
20.38

WACC= 10% the company is generating value by showing roic of about 41 %

Total Cash= 28mn+90mn=118mn
Total liabilities= 92 mn
Net current assets= 26mn
Net current assets per share=3.53

EPS+ Net Current assets per share=21.9+3.53=25.43

Real p/e ratio = 129/25.43= 5.07 (earnings yield = 20% pretty good)

4 yr avg growth in PAT= 48.5%
4 yr avg growth in Invested Capital= 20.2%

Showing good growth rate without much addition in invested capital
Return on tangible assets=76%

with real good growth rates and high roic the company surely looks very attractive. the stock is pretty cheap compared to the assets. It shows good returns on capital without much addition to the total invested capital

Operating Margins

2006 2005 2004 2003 2002
OPBDIT/Sales 32% 33% 30% 31% 29%

Very Stable and High Margins

Earnings Power
The value of a debt free company has to be substantially more than the amount of debt it can comfortably service. It's a principle which was first laid out by Ben Graham in Security Analysis.

OPBDIT=210 million

DEPRECIATION ADJUSTMENT

5-yr average fixed assets/sales= 274million/630million=0.43

5-yr average growth in sales= 100 million

5-yr average growth capex= 100 million*0.43= 43 million

5-yr average actual capex= 55 million

5-yr average maintainance capex= 55-43= 12 million

5-yr average depreciation = 34 million

excess depreciation= 22 million

add excess depreciation back to OPBDIT we get OPBDIT= 232 million
using a 5-yr average tax rate of about 28 %
we get PAT=167 million

Weighted Average Cost of Capital = 10%

Amount of debt the company can finance without gaining any growth in earnings in the future = 167 million/0.10= 1.67 billion rupess

Debt-capacity =1.67 billion
Net asset value= 490 million

The earnings power of the company is far greater than the asset value of the company but without any barriers to entry or sources of competitive advantages the company might lose its current earnings power. dont know whether any competitive advantages such as economies of scale do exist. The earnings power might equal the asset value in the next five to eight yrs if doesnt have any competitive advantages like economies of scale which is very less likely to exist in this siutuation so would buy the stock for less than the earnings power of the company.The company shows high return on Invested capital so it might suggest some franchise value. without giving much consideration to the growth in the the earnings of the firm. According to my calcualtion the company is atleast worth 1.67 billion rupees which is 227 rs. Presently the stock is highly mispriced relative to its intrinsic value and provides margin of safety of about 43% relative to the earnings power of the company. without using any high earnings projection rate i calculated the intrinsic value of the company for the next 5 yrs to be around 227 rs.
Using a discounted cash flow the intrinsic value of the stock might be much higher but i would be comfortable holding the stock for the next five yrs without considering any growth factor . but by looking at its previous five yr financial records it seems that the company might continue to show great growth rates without much addition in the invested capital

Cherokee Inc.

noreply@blogger.com (Sandesh) — Sun, 18 Mar 2007 16:27:00 +0000

Company Overview

CHEROKEE is an innovator in global consumer brand management and
pioneer of the “Retail Direct Licensing” concept:
• Markets, licenses and manages brands in multiple consumer product
• categories (i.e. apparel, home and entertainment)
• Unique business model with no inventory exposure or manufacturing risks
• Consistently profitable with increasing free cash flow and no debt
• Lean corporate structure –18 employees on $42+ million revenues (FY 2006)
• CHEROKEE owned Brands’ retail sales exceed $2.5 Billion
• CHEROKEE represented Brands’ retail sales exceed $1.5 Billion

Cherokee has an interesting and unique business model. The company, once a manufacturer of Cherokee brand apparel, has found a niche as a licensor of this brand and others to large retailers. No longer do they design, manufacture, market, and sell apparel, but instead they simply license an array of brands and let retailers and wholesalers do the leg work. This way, the retailers utilize their economies of scale
to produce the branded apparel cheaply, and CHKE enjoys high margins and eliminates inventory risk.

They license a portfolio of their brands to strong and growing retailers such as Target stores and TJX Companies in the U.S., Tesco and Carrefour in Europe, and Bolderway in China, who work in conjuction with the Cherokee group to develop merchandise for their stores. In addition to acquiring and licensing their brands they also assist other companies,wholesalers and retailers in identifying licensees or licensors for their brands or stores for which they charge a certain percentage of the net royalties generated by the brands.

RISK FACTORS
Royalties paid under the licensing agreement are generally based on a percentage of the licensee’s net sales of licensed products. Cherokee and Sideout brand which are manufactured and sold by both domestic and international wholesailers and retail licenses are subject to extensive competition by numerous domestic and foreign companies. Such competitors with respect to the Cherokee brand include Levi Strauss & Co, The Gap, Old navy, Liz Claiborne and private labels such as Faded Glory, Arizona and Route 66 developed by retailers. Competitors with respect to Sideout Brand include QuickSilver, Mossimo, Nike and other active wear companies. Factors which shape the competitive environment include quality of garment construction and design, brand name,style and colour selection,price and manufacturer’s ability to respond quickly to the retailer.

In FY 1999 76% of royalty revenues of the Cherokee group was generated from a single source, Target stores, a division of Target Corp. but in FY 2006 57% of royalty revenues were from target stores. If Target Stores elects to terminate the agreement, effective after January 31, 2006 or at any other time, it would have a material adverse effect on the business, financial condition and results of operations. There can be no guarantee that they would be able to replace the Target Stores royalty payments from other sources. But I feel the chances of terminating the agreement is less because the sale of Cherokee brand accounts for 3% of total sales of Target Stores.

The success of the business is largely dependent on the continued services of Robert Margolis, the Chairman and Chief Executive Officer, who is the primary person responsible for conceiving and implementing the overall business and marketing strategy. Mr. Margolis is the beneficial owner of approximately 16.8% of outstanding common stock.

COMPETITIVE ADVANTAGES

1. The Cherokee group has a low-cost infrastructure as it doesn’t manufacture the brand apparel.
2. Retailers leverage their economies of scale to source products and reduce picing by eliminating conventional wholesale margins.

FINANCIAL OVERVIEW

Balance Sheet

all numbers in thousands
PERIOD ENDING 28-Jan-06 29-Jan-05 31-Jan-04

Assets
Current Assets
Cash And Cash Equivalents 11,896 10,960 8,477
Short Term Investments - - -
Net Receivables 10,558 8,571 13,946
Inventory - - -
Other Current Assets 1,445 1,081 747

Total Current Assets 23,899 20,612 23,170
Long Term Investments - - -
Property Plant and Equipment 305 149 108
Goodwill - - -
Intangible Assets 8,116 9,077 9,726
Accumulated Amortization - - -
Other Assets 15 35 34
Deferred Long Term Asset Charges 1,131 1,320 1,589

Total Assets 33,466 31,193 34,627

Liabilities
Current Liabilities
Accounts Payable 10,479 9,170 4,844
Short/Current Long Term Debt - - 2,625
Other Current Liabilities - - -

Total Current Liabilities 10,479 9,170 7,469
Long Term Debt - - -
Other Liabilities - - -
Deferred Long Term Liability Charges - - -
Minority Interest - - -
Negative Goodwill - - -

Total Liabilities 10,479 9,170 7,469

Stockholders' Equity
Misc Stocks Options Warrants - - -
Redeemable Preferred Stock - - -
Preferred Stock - - -
Common Stock 175 173 171
Retained Earnings 12,997 14,447 20,780
Treasury Stock - - -
Capital Surplus 9,815 7,403 6,207
Other Stockholder Equity - - -

Total Stockholder Equity 22,987 22,023 27,158

Net Tangible Assets $14,871 $12,946 $17,432

INCOME STATEMENT

All numbers in thousands
PERIOD ENDING 28-Jan-06 29-Jan-05 31-Jan-04
Total Revenue 42,732 38,928 36,312
Cost of Revenue - - -

Gross Profit 42,732 38,928 36,312

Operating Expenses
Research Development - - -
Selling General and Administrative 11,709 10,735 11,118
Non Recurring - - -
Others 1,125 1,025 991

Total Operating Expenses - - -

Operating Income or Loss 29,898 27,168 24,203

Income from Continuing Operations
Total Other Income/Expenses Net 474 774 491
Earnings Before Interest And Taxes 30,372 27,942 24,694
Interest Expense 22 22 693
Income Before Tax 30,350 27,920 24,001
Income Tax Expense 12,073 10,754 9,840
Minority Interest - - -

Net Income From Continuing Ops 18,277 17,166 14,161

Non-recurring Events
Discontinued Operations - - -
Extraordinary Items - - -
Effect Of Accounting Changes - - -
Other Items - - -

Net Income 18,277 17,166 14,161
Preferred Stock And Other Adjustments - - -

Net Income Applicable To Common Shares $18,277 $17,166 $14,161

The business has a profit margin of about 41% and ROIC of about 83%. Now that’s a terrific performance.
The net asset value comes to around 24Million and the intrinsic value according to my valuation is 203Million which is much greater than the asset value which shows that business is able to utilize its assets to generate a high earnings power.
The Enterprise value is 362 million which is far much greater than the intrinsic value and doesn’t provide any margin of safety.
The asset required for entering this industry is very low and it supports the point that the business doesn’t have any barriers to entry.

Understanding Business Strategy

noreply@blogger.com (Sandesh) — Thu, 01 Mar 2007 14:30:00 +0000

"Strategy" is the most overused word in the vocabulary of business which is just another way of saying "this is important".The reality is there are a very few effective strategies. According to Professsor Michael Porter there are five forces which affect the industry outcome.They are the porters five forces which shape the basic strategy framework.
1)Bargaining power of suppliers
2)Bargaining power of customers
3)Threat of new entrants
4)Threat of substitutes
5)Competition among firms
But one of them is clearly much more important than others and one needs to focus only on it.that force is "barriers to entry" which prevents threat of new entrants.If there are barriers to entry then it is difficult for new firms to enter the market. Essentially there are two possibilities either the existing firm within the market is protected by barriers to entry or it is not. No other feature of the competitive landscape has as much influence on a company's success as where it stands in regard to these barriers.
With a universe of companies seeking profitable opportunities for investment, the returns in an unprotected industry will be driven down to levels where there is no economic profit that is no returns above the cost of invested capital. If demand conditions enable any single firm to earn unusually high returns, other firms will notice the same opportunity and flood in. Both theory and history support this proposition. As more firms enter,demand is fragmented among them. Costs per unit rise as fixed costs over fewer units sold, prices fall, and the high profits that attracted the new entrants disappear.
The erosion of profitability due to increased competition from new entrants isn't confined to commodity markets as one might expect . It occurs as well in markets for differentiated products, so long as all actual and potential competitors have equal access to customers,technology and resources. Consider the luxury car market in the United States. When Cadillac and Lincoln were the only significant competitors, their brands commanded higher prices, relative to costs leading to higher returns on invested resources. These returns attracted other competitors to the market: First the Europeans (Jaguar, Mercedes & BMW) and then the Japanese (Acura,Lexus & Infiniti) started to sell cars in America as there were no barriers to entry for the europeans and japanese car manufacturers.
The arrival of these competing products did not lower prices as it might have for a commodity like copper. Differentiation protected against that possibility. But profitability still suffered. Cadillac and Lincoln lost sales to the newcomers. As sales volume fell, fixed cost per car sold - such as advertising, product development, special service support,market intelligence and planning-inevitably increased, since these costs had to be covered by the revenue from the smaller number of units sold. Margins fell- same old prices, higher unit costs- so profits took the double hit of lower margins and reduced sales. If there were very low barriers to entry, entrants attracted by the reduced but still above average return on investment would have continued to arrive until all the excess profits were eliminated.
Barriers to entry are easier to maintain in sharply circumscribed markets. The conduct of strategy requires the competitive arena to be "local" either in the geographic sense or in the sense of being limited to one or handful no of products. The two most powerful competitive advantages, customer capitivity and economies of scale- which pack an even bigger punch when combined and are more achievable and sustainable in markets restricted in these ways.Indeed its perilous to chase growth across borders. Because a global market's dimensions are wider and less defined than a nation's or a region's firms face a higher risk of frittering away the advantages they have secured on small playing fields. If a company wants to grow and still mantain superior returns, the appropriate strategy is to assemble and dominate a series of discrete but preferably smaller markets and then expand at edges.