Value Investment Case Study #1

Below are the links to download the most recent quarterly and annual reports for the first blind value investment case study on this blog.  As I stated in one of my previous posts about this I redacted all identifying information about this company so all you will have to rely on is what is found in the financials.

The only information I am going to give you that is not in the financials is that as of this past Friday the company has a current market cap of $4.7 million.

I will not post my analysis until at least a few of your analysis write ups posted in the comments section of this post and I am not looking for a full 7-20 page write-up.  The main things I am going to post about when I write my analysis is valuations, pros and cons, and if I would invest in the company.  If I would at what price do I estimate its intrinsic value to be and at what price would I buy into them.  If I wouldn’t buy into them why not.

I hope that we will all learn a lot from this by seeing each others analysis and helping each other out to see where we could improve.  I also hope that these kinds of exercises will help keep all of our skills fresh while we wait for a market drop.

I hope to see a lot of write ups and hope this is a good exercise for us all.  If you are able to figure out which company this report is (or in case I missed some kind of identifying information to redact) please do not post about it until after the company is revealed.  Also, if you have any suggestions for the next case study please let me know what you think could improve this process for us all.  The financials are directly below.

Case Study #1 3Q 2013 10Q

Case Study #1 2013 10K

14 Replies to “Value Investment Case Study #1”

  1. Hi, first off, thank you for a great blog! This comment is unrelated to the above post, but I would appreciate an answer a lot. I have been looking at BOBS and I can’t seem to find any numbers regarding the NOL:s in their annual reports. In the 2013 annual report there is a post in the balance sheet titled “deferred tax assets” which accounts for R$10 million. This number seems way lower than your estimate though, even when the 2013 income tax is deducted. Could anyone please point out to me what I am missing?

    1. Jonathan,

      Thanks a lot for reading and the compliments!

      Directly below are the paragraphs directly from BOBS 2012 10K. Has their 2013 10K been released yet? It is not listed on their website yet so if so please let me know.

      “Tax loss carryforwards through December 31, 2012 relating to income tax were R$37.3 million and to social contribution tax were R$68.7 million, comprised mainly of fiscal results at Venbo, CFK, IRB and DGS. Social contribution tax is a Brazilian tax levied on taxable income and is by its nature comparable to corporate income tax.

      The accumulated tax loss position can be offset against future taxable income. Brazilian tax legislation restricts the offset of accumulated tax losses to 30.0% of taxable profits on an annual basis. These losses can be used indefinitely and are not impacted by a change in ownership of the Company.

      These losses can be used indefinitely and are not impacted by a change in ownership of the

      What I did from the above numbers was convert them to USD and then discount them further just to be safe. Usually NOL’s are only listed in the companies annual reports and not their quarterly reports. There are some exceptions but that is generally what I have seen at least.

      Hope this helps, if you have any other questions please let me know.

        1. Jonathan,

          Thanks for the heads up about the BOBS 10K coming out. Right after I posted that last comment I got an emailed Google alert that their annual was out. Looks like I have some reading to do.

          Thanks for buying the book and please let me know your thoughts on it when you read it!

          1. I will do so. Sorry to bother you again, but there are two more details about the NOLs that I am trying to understand that I would apprechiate if you could clarify. First, the NOLs grew between the 2012 and 2013 reports even though BOBS turned a profit. Shouldn’t they be shrinking as they are used to offset taxes? Second, it seems to me that the NOLs only offset the taxes on the losses of R$40.6 and R$65.7 and rather than offsetting taxes of those full amounts.Especially the sentance: “The accumulated tax loss position can be offset against future taxable income” in the 2013 report leads me to believe this. Are you sure that the NOLs represent the actual tax amounts and not the taxable income that it can offset the taxes of? I sincerely apprechiate you taking the time to answer my amateurish questions!
            Best Regards,

          2. Jonathan,

            I will get back to your question after I get some time to read BOBS most recent 10K that you sent to me so I can better answer your question.

  2. Jason, thanks for a great book and a great blog.

    The Case study company has a negative book value (according to the financial reports anyway) and negative EBIT, so we can’t value the company by price to book or do an (8x EBIT + cash)/share calculation as shown in your book. We can try to calculate the reproduction value as shown in your book as follows ($K):
    cash 16.2 * 1 = 16.2
    accounts receivable 2.3 * 0.85 = 1.96
    property & equipment net of $787 accumulated depreciation as stated in balance sheet 669.4 * 0.6 = 401.6
    total reproduction value of assets 16.2 + 1.96 + 401.6 = 422.4 divide by 4624 shares outstanding = $0.09
    However, I suspect that the property value stated on the balance sheet is original cost and is way too low.

    So given the location of the property is stated as located on the Las Vegas Strip just south of the international airport, I easily found the property on Google maps, and then looked up the property on the Clark County Nevada tax assessment website.
    The parcel number is 177-04-101-009 and the taxable value is $3,479K (land and improvements).
    So take (422.4 + 3479)/4624 shares = $0.84 per share replacement cost.
    You stated the market cap is $4700K. So divide market cap by 4624 shares gives $1.02 share price.
    I suspect the $1.02 share price is undervalued because it gives little value to the business, just the replacement cost of the property.


    1. Yoram,

      Sorry about the very late reply. I just today got the message that you replied to the case study nearly a month ago. I deeply apologize.

      Nice research and digging!

      What do you think about the company as a whole? Would you buy it even if it is undervalued, which it is not. Its valuation is well over your conservative $1.02 estimate of intrinsic value. Even nearly a month again it was, and again I deeply apologize for not seeing that you replied a lot sooner.

      Would you assign any value to the companies operations and if so does that add or subtract from the valuation?

      Do you assign any value to the NOL’s and if so what value would you give them?

      Again, I am very sorry and apparently I need to check my junk email folders more often and/or change my email settings.

  3. Good Morning Jason-

    I have been reading your blog for about 6 months and
    recently purchased your book (a few weeks too soon!!!!) I thoroughly enjoyed
    it. It was straight forward with great examples of the points you were trying
    to make. I have been investing for a number of years but never really took the
    time to learn valuation. After reading your book I thought I would take a stab
    at Case Study #1. So here it goes:

    I put a value of $0.00 on the shares of this company and
    here is why:

    1) The business operated at a loss in 2012 and I think
    it has for some time; its working cap deficit is over $11 million. Therefore I
    put all EBIT valuations at $0.00

    2) It has gross margins of 70% which are great but
    its G&A Expenses are over 71% of revenues and this is not a young company
    looking to grow revenues. Contributors to this outsize G&A expense are the
    executive compensation packages (which I think are excessive for a company of
    this size) and I suspect that the expenses of the par 3 golf course may not
    justify its existence when compared to the amount of revenue it brings in.

    3) Its TOTAL assets are dwarfed by its CURRENT liabilities, by a factor of 16! The 2012 10K explains that the business is located on 65 acres on the Las Vegas Strip, but this acreage is leased not owned. Therefore I only place a value on the par 3 illuminated golf course, the 110-station driving range, and the club house. If you want to put a value of $1000000 fine but I would value them at their carry value in the 2012 10K due to their special connection to this specific business. Therefore I would put all asset/recreation valuations at $0.00

    4) In the 2012 10K the company itself places no value
    on the $21 million it has in NOLs; since they will likely never be used. According to Section 382(I)(5) of the tax code,
    there is a rather convoluted scenario in which the NOLs would have some value;
    it would be in a liquidation or bankruptcy and it would apply to the debt
    holders who also own stock. If a debt holder were to convert their debt to
    stock and their stake is pushed above 50%; the NOLs could be carried over, at a
    50% discount and minus the value of the debt converted. In this scenario the NOLs
    could be worth almost $6 million ($2.1 million when you factor in a 35% tax
    rate) to a current holder of stock and debt in the company. Therefore I put a
    value of $0.00 on the NOLs for the average shareholder.

    5) The company has adopted ASU 2013-07 as of Sept
    2013. This ASU “requires entities to prepare their financial statements using
    the liquidation basis of accounting when liquidation is imminent.”

    The company has great gross margins but nothing
    else. There does not appear to be any competitive advantage that this company
    has over other non-gaming entertainment facilities that could be used to drive
    greater profitability. I think the company could have positive EBIT if the
    G&A expenses (which I think are bloated) were reduced, but I do not think
    management has shown any interest in reducing them.

    1. Thanks so much for reading the blog and buying the book! Just out of curiosity do you have any analysis write ups/thoughts that you put together before reading the book? If so I would love to hear from you at my email Do you have any recommendations on things I could work on, do better, or explain better in the book?

      Fantastic analysis! I agree completely that they are a terrible company and you did a great job explaining why they are such a bad company. Great job and hope to hear from you on the next case study whenever I get some time to do that. I plan to make the next case study a bit harder to determine.

    2. Oh and great job of explaining why the NOLs should have ZERO value. I was thinking that might trip some people up since when I first started incorporating NOL’s into my analysis I probably would have ascribed some value to them, even if it would have been highly discounted.

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