33% Off Everything In the Value Investing Journey Shop Until Tuesday

33% Off Everything In the Value Investing Journey Shop

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While I announced the opening of the Value Investing Journey Shop last month, because I’ve been so busy I didn’t announce it to many people.

To make up for that oversight, I’m offering 33% off everything in the Value Investing Journey Shop for the next three days only.

This includes all issues and the All Past Press On Research issues package where you get all past issues for one set price.

This means for the next three days you can pick the individual issues you want most for $65 instead of the regular $97.

And that you can get All the Past Press On Research issues in one package for $628 versus a normal price of $997.

33% off all items in the Value Investing Journey Shop until Tuesday

But only until Tuesday…

I won’t do discounts often – if at all in the future – so if you’ve wanted to see my latest stock recommendation issues at a discount you better buy them now.

As of this writing, each pick is up a combined average of 50.3%.  And these picks are crushing the market.

Below are some of the highlights from all the issues…

  • The average gain for all 12 recommendations is 50.3% as of this writing…  These picks are crushing the stock market since April 2015.
  • As of this writing, the stock market has only produced a 15.8% return.
  • Meaning, my picks since April 2015 have outperformed the stock market by 34.5 percentage points.
  • Two companies I recommended grew from sub $500 million market caps to $1 billion plus market caps as of this writing.
  • One company as of this writing has now surpassed a $2 billion market cap since I recommended them.

So you’re probably wondering what you have to do to get the coupon code.  And the answer to that is nothing…

The coupon code is – 33%OffGrandOpening

The discount won’t show up until you input the code when the item is in your cart as you’re getting ready to check out.  So make sure to put the coupon code in before you hit the payment button or you’ll have to pay full price.

You can go to the Shop here and begin getting your deals now.

And this is the only place to see my most recent stock recommendation issues.

If you have any questions contact me using the Drift App – the blue icon in the bottom right third of the page – to message me through this site and I’ll get back to you right away.

Happy shopping smart value investors.

Greatness According To Nick Saban

Greatness According To Nick Saban

If you’re a sports fan you know with the dawn of free agency and rise of player movement in the last two decades it’s become almost impossible to win championships on a consistent basis.

Before the 1980’s in the US sports dynasties were normal.  They could do this because player movement was restricted.

This kept player salaries down and meant that the best teams had huge competitive advantages over poor teams.  If you’re all getting paid about the same doesn’t it make sense to stay with a great team instead of going to a bad one?

This changed in the US in the 1980’s though…

Free agency, drafts, and salary caps became the norm.  Poor teams could now pay huge amounts to star players to lure them away from championship teams.  Drafting players became more important as they’re generally cheaper than star players.  And salary caps in professional football and basketball meant talent was spread around the league instead of concentrated on a handful of teams.

This all led to higher salaries for great – and sometimes even average – players.  More player movement.  And fewer super teams and dynasties forming as talent spread around.

Now most teams in all sports around the world go through periods of relative success followed by failure until the cycle repeats and the team goes on an up – or down – swing again.

Few teams win championships.  And even fewer win them on a consistent basis.  The ones that do should be studied.

Unlike most people in America who root for the underdogs in big games and playoffs, if my favorite team isn’t involved I always root for greatness to beat the underdog.

I want to watch the best of the best play for and win championships.  I don’t like watching inferior teams beat better ones with a “lucky bounce” or fortunate call by referees.

I love when skill, hard work, perseverance, drive, and passion trumps luck.  So when I see greatness I try to study it.  And I thought this would be a great topic to post about since all of us here are trying to reach greatness.

This post is the first in a planned three post arc focusing on great teams from the world of sports.  In these posts I’ll focus on the head coaches, star players, and team structures over the long-term.  The hope is we all can learn something about what it takes to become – and stay – great at what we do.

If these posts are popular I’ll turn it into a regular series.

Today’s Part 1 is about head coach five time football champion head coach Nick Saban now of the University of Alabama Crimson Tide.

Saban’s led the Crimson Tide to championships in four out of the last seven years.  Only the second team since 1936 to do this.  Saban’s other title was when he coached at LSU.

Below is a profile of this championship coach with linked articles detailing his processes.

Nick Saban

Excerpts below are from linked articles.  Bolded emphasis is mine.  My notes are the non quoted lines.

The following is from: The Lesson From Nick Saban’s Championship Reign is to stop trying to copy Nick Saban.

Success breeds imitation in every industry. In football, when a coach figures out something, hoards of administrators notice.  Offenses come up with something new, defenses adjust, offenses adjust to the adjustment, etc.

With Saban, however, teams have attempted to copy without figuring out what they should be copying. They hire his assistants, hoping his influence rubs off. Sometimes it does. Former Alabama DBs coach Jeremy Pruitt became Florida State’s defensive coordinator in 2013 and helped to boost the Seminoles to the national title under head coach and fellow former Saban assistant Jimbo Fisher. Often, it doesn’t. Former defensive coordinator Will Muschamp took the Florida head coaching job three years after a Gator national title and won more than seven games just once.

To imitators, Saban’s Process™ seems to consist of strong defense and occasional offense. Because he is a former defensive coordinator himself, that is the product. But that isn’t the Process. The Process is the path, not the style.

Love this saying.

To truly imitate Saban, you look first for someone who runs the most organized, effective recruiting operation on the planet

The following list is from the article talking about how Saban approaches everything.

You must develop.

Saban pushes a lot of kids out the door. If you do not fill a depth chart spot or fill a niche, odds are pretty good that you will be transferring. But many are willing to wait a couple of years for serious playing time because they know they’ll develop.

What is your niche?  What is your competitive advantage?  Are you willing to put in the time to improve?

You must deploy your talented, well-developed players appropriately.

You don’t have to take many strategic risks when you’ve got a talent advantage in every game, but you need to make sure that these players belong to a system is built to defeat the opponents you will play on a yearly basis. And if your offense or defense gets a little staid, you must be willing to make changes.

If you’re in a leadership position are you putting your “players” into the proper positions to succeed?  If so are they the right people for your system?

You must be impossibly organized.

A place for everything, everything in its place.

Love this saying as well.

If, despite all that, you find yourself in a dogfight for the national title, you must have the guts to call for a surprise onside kick by Griffith with 10 minutes left in a tied game.

If you read the article you’ll know this play wasn’t a fluke.  Saban and the coaching staff knew from watching film to look for this tendency during the game.  And since they saw Clemson doing the same thing over and over on kick returns they knew this onside kick would work if executed properly.

The teams that find a way past Alabama do it by following a path that isn’t Alabama’s.

Strive for greatness but don’t emulate something that doesn’t adhere to your philosophy and principles.  Create your own path for greatness.

This sport requires you to learn the right lessons when you fail, lest you be doomed to fail even more. Those who attempt to imitate Saban have already failed. There is only one Nick Saban.

There’s also only one Warren Buffett, Charlie Munger, Seth Klarman, etc in our business.  Strive for greatness by taking knowledge from the greats.  But don’t try to emulate them exactly.  Create your own path for greatness.

The following is from Nick Saban: Sympathy For The Devil.  This is an older article… He’s now won five total national titles.  And four of the last seven.

Saban’s pathological drive helps explain why he’s both one of the most successful coaches in American sports and, simultaneously, one of the most polarizing. He has now won four national championships—one at LSU and three over the past four years at Alabama, a coaching run unmatched in college football in more than half a century—

“The thing that amazes me about him is that he doesn’t let up,” says retired Florida State coach Bobby Bowden. “People start winning, they slack off. But he just keeps jumping on ‘complacency, complacency, complacency.’ Most coaches don’t think like that.”

Are you grounded enough to continue to work towards greatness after success?

Most big-time head coaches leave camp duty to assistants—the daylong photo session with every last camper is considered enough—but in Saban’s mind that wouldn’t be right. He has a saying: Right is never wrong. It means, in essence, there is only one way to do things: the correct way. A Nick Saban Football Camp without a great deal of Nick Saban would be something short of entirely right and is therefore, to Saban, unthinkable.

Love this saying and mindset.

Saban’s guiding vision is something he calls “the process,” a philosophy that emphasizes preparation and hard work over consideration of outcomes or results. Barrett Jones, an offensive lineman on all three of Saban’s national championship teams at Alabama and now a rookie with the St. Louis Rams, explains the process this way: “It’s not what you do, it’s how you do it.”

Taken to an extreme—which is where Saban takes it—the process has evolved into an exhausting quest to improve, to attain the ideal of “right is never wrong.” At Alabama, Saban obsesses over every aspect of preparation, from how the players dress at practice—no hats, earrings, or tank tops are allowed in the football facility—to how they hold their upper bodies when they run sprints. “When you’re running and you’re exhausted you really want to bend over,” Jones says. “They won’t let you. ‘You must resist the human need to bend over!'”

“He pretty much tells everybody what our philosophy is, but not everyone has the discipline to actually live out that philosophy,” Jones says. “The secret of Nick Saban is, there is no secret.”

What is your philosophy?  What are your processes? And do you have the discipline to live by them?  Every day?

If you poke around Alabama for a few weeks, you’ll run into a lot of people who’ve had similarly awkward interactions with Saban—on the golf course, perhaps, or at booster banquets, where Saban often looks like a man held captive. Those close to him make excuses for the behavior. His wife, Terry, says he’s shy and introverted. His golf buddy Rumsey says Saban has a kind of tunnel vision that short-circuits social niceties.

“He’ll walk by people and they’ll think he’s rude,” Rumsey says. “He’s not an asshole—he never saw ’em!”

Reminds me of stories I’ve read of Munger in places like the book Damn Right.

Even among his adversaries, Saban is regarded as a master of X’s and O’s.

“I don’t want people to think I’m not happy when we win—I am,” Saban says. “But there’s a difference between being happy for the feeling of accomplishing something and being overjoyed and feeling ‘This is it—we conquered the world.’ We didn’t. We just won a game.”

The following is from: Do You Really Want To Know What It Takes To Beat Alabama?

If you want to know how to beat Alabama, the answer is simple. You need five turnovers and need to make none yourself. You need a lottery ticket, a lightning strike, or both. You need a whole bureaucratic apparatus devoted to reducing any possible loss to a gross accumulation of statistical anomalies.

Even then, you don’t get the two things that make this all work.

The first is Saban. He is not a renewable resource, as far as I know, but his transformation of Alabama into a ratings-killing certainty so oppressive it might have blacked out the sun for an entire generation of rickets-stricken coaches and players is complete. There is no adjustment against him. He will outwork you or hire people to outwork you and the people you hire. No one is more committed to building Football Walmart and bankrupting your mom-and-pop programs. No one.

How committed are you?

Give up on this idea of doing his thing better. Hire a bandito with a spread passing attack and zero fear of death. Hope for five turnovers or the NFL to poach him away*. Life is about being brave in the face of inevitable doom. Until someone does, Saban will charge you all unfair rates for sunlight.

The following is from Nick Saban Is Ready For Everything.

“He understands every element of human performance,” Moawad wrote in the email. “And there is no contingency that he doesn’t prepare for.”

Are you prepared enough?

It’s true. There are no accidents. There are onside kicks that will almost certainly work. There is an army of assistants and former assistants versed in the Process and ready to serve at a moment’s notice. And there is a head coach who has no idea when he’ll finally be ready to stop kicking everyone else’s butt.

So… Are you really ready to strive for greatness?  Are you willing to outwork the titans of the investment and business worlds to achieve that greatness?  Let me know in the comments below.

Also let me know in the comments below how I can improve this series going forward as I already have two other articles planned.

***

Remember if you want access to my exclusive notes and preliminary analysis you need to subscribe for free to Value Investing Journey.  And this isn’t all you’ll get when you subscribe either.

You also gain access to three gifts.  And a 50% discount on a year-long Press On Research subscription.  Where my exclusive stock picks are evaluated and have crushed the market over the last four years.

Brazil Fast Food Company Is Substantially Undervalued and Has A Moat

In this article I will be talking about Brazil Fast Food Company (BOBS.OB).  Bob’s was founded in 1952 by American tennis player Bob Falkenberg and serves hamburgers and sandwiches with a Brazilian twist, shakes, French fries, and other typical fast food offerings.  BOBS has grown to become the second biggest fast food chain in Brazil with operations in every state of the country, Angola, and Chile.

When I talk about BOBS in all capital letters I mean the company as a whole.  When I refer to Bob’s it means just the fast food burger chain.

A fellow value investor mentioned on my blog that I should research BOBS as a possible investment since I have already researched and written articles on a couple fast food companies; Jack In The Box (JACK) and Wendy’s (WEN).  Also with my recent turn towards concentrating on micro caps he thought I might find this company interesting.

I have found BOBS to be very interesting and it has turned into only the fifth company I have bought into this year as it meets most of my criteria for things I look for in a potential investment.  Some main points of interest are: I have found BOBS to be substantially undervalued, I believe BOBS to have a competitive advantage, or moat that has been growing in the past several years, the company is very small and under followed, and its sales and margins have also been growing in recent years.

Introduction

For the better part of the last 60 years Brazil Fast Food has been operating and franchising only its Bob’s fast food burger chain and expanding the chains reach throughout Brazil.  Here is a history of BOBS up to 2004 that goes over its many struggles and near death multiple times. Very interesting read especially when you consider what they have become now.  After updating its stores, changing the Bob’s logo, enacting cost cutting and efficiency measures, and changing its strategy to become a multi-brand restaurant company with partnerships to bring KFC and Pizza Hut restaurants to Brazil, and through acquiring Doggi’s and Yoggi’s, BOBS has expanded its restaurant count dramatically and expanded from just selling burgers, sandwiches, shakes, and fries, into selling KFC’s chicken related products, pizza’s, hot dogs, frozen yogurt and smoothies to become the second largest fast food chain in Brazil.

As we found out in my Wendy’s article, growth is not always a good thing if your cost of capital is very high due to debt and other costs.  Luckily, BOBS debt is at a very manageable level and BOBS has been lowering its costs over the last few years.  The growth in the amount and type of products along with the growing restaurant count has helped grow revenues and margins at pretty substantial percentages over the last several years.  Most importantly of all, I believe BOBS is growing at less than its cost of capital because as it has grown its store count and sales it has become more profitable.

Also helping to grow BOBS as a whole is that I believe that it has at least some minor competitive advantages which it has had for a while now but has only recently been fully unleashed due to BOBS growing scale as it pertains to its growing number of restaurants, and its cost cutting and efficiency measures over the last several years.  At this point I cannot say for certain whether the small moat I see for BOBS is sustainable for the long term, but this is the first company I have evaluated in a while where I see some kind of very clear moat.

Overview of Operations and Subsidiaries

Before 2007, Brazil Fast Food Company just comprised of Bob’s burger chain which I described above.  In 2007 BOBS as a whole started on its path towards becoming a multi-brand restaurant operation as it agreed with Yum Brands (YUM) to open KFC restaurants in Brazil.  In 2009 BOBS further expanded to include operating some Pizza Hut’s in Brazil and it also acquired Doggi’s hot dog chain.  In 2012 BOBS further expanded as it acquired Yoggi’s frozen yogurt and smoothie company.  Since its beginnings as a regional company in Brazil with the bulk of its operations in the Southeastern portion of the country, BOBS has grown into the second biggest fast food chain in Brazil behind only McDonald’s (MCD) with operations in every state in Brazil.  BOBS has also started to grow outside of Brazil as it now has operations in Chile and Angola.  Below is a chart showing how BOBS has grown its restaurant count since 2007.

122112_0045_NumberofRes1.png

Restaurant count has grown by 7% annually since 2007.  Its growing size and now countrywide operations have enabled BOBS to sign some very favorable agreements with suppliers.  Here are some direct quotes from BOBS 3Q 2012 10Q about the favorable relationship with its trade partners.  Emphasis is mine.

“We enter into agreements with beverage and food suppliers and for each product, we negotiate a monthly performance bonus which will depend on the product sales volume to our chains (including both own-operated and franchise operated). The performance bonus can be paid monthly or in advance (which are estimated), depending on the agreement terms negotiated with each supplier. The performance bonus is recognized as a credit in our Consolidated Statements of Operations (under “Revenues from Trade Partners”). Such revenue is recorded when cash from vendors is received, since it is difficult to estimate the receivable amount and significant doubts about its collectability exists until the vendor agrees with the exact bonus amounts.”

‘The rise in the number of franchisees, from 774 on September 30, 2011 to 916 on September 30, 2012, together with the expansion of the multi-brand concept, has given the Company’s management greater bargaining power with its suppliers. Such increase of point sales did not derived an increase on Revenue from Trade Partners from 2011 to 2012, because the Company had agreements with new trade partners during 2011 and 2010 which originated bonus paid in advance. The bonus recorded during 2012 was from the regular business since no further advances were received during 2012.”

BOBS also has several exclusivity agreements including with Coca-Cola (KO).

“We participate in long-term exclusivity agreements with Coca-Cola, for its soft-drink products, Ambev, the biggest Brazilian brewery company, Farm Frites, the Argentinean producer of French fries, and Sadia, one of the biggest meat processors in Brazil, as well as with Novartis Nutrition for its Ovomaltine chocolate. These agreements are extensive from four to five years. The Coca-Cola agreement was amended in 2008 to extend the exclusivity period to April 2013.”

“Amounts received from the Coca-Cola exclusivity agreements (see note 12) as well as amounts received from other suppliers linked to exclusivity agreements are recorded as deferred income and are being recognized on a straight line basis over the term of such agreements or the related supply agreement. The Company accounts for other supplier exclusivity fees on a straight-line basis over the related supply agreement. The Coca-Cola agreement was amended in 2000 to extend the exclusivity period to 2008.  Later amended and extended until April, 2013. Performance bonuses may also include exclusivity agreements, which are normally paid in advance by suppliers.”

Due to its growing size and economies of scale BOBS has gained a competitive advantage over competitors by being able to receive “bonus payments” in advance from some of its suppliers.  Its size and scale has enabled the company to sign these preferential and exclusive agreements, which have helped expand BOBS competitive position and moat in my opinion.  Another reason I think BOBS has at least a minor moat is because it has been able to raise prices in recent years without losing sales which has helped to raise margins.

BOBS has had these preferential agreements in place for years, and hopefully will be able to continue them for years to come.

Due to BOBS growing store count, the agreements above, and the moat that I think it has, BOBS has been able to improve its sales, reduce its costs, and improve margins in recent years.  Numbers in below charts are taken from Morningstar or BOBS filings.

122012_0603_BOBSRevenue1.png

122112_0359_BOBSCOGSand1.png

122012_1741_BOBSMargins1.png

As you can see in the above charts as BOBS restaurant count has grown, it sales have gone up, costs have gone down, and margins have gone up, substantially so since 2008.  As BOBS continues to grow the same three things should continue to happen as BOBS should continue to compound its economies of scale: More restaurants means more sales, more restaurants means more compact grouping of restaurants which means lower costs and higher margins.  It seems that BOBS has taken some lessons on how to cultivate and grow competitive advantages from companies such as Wal-Mart (WMT).

Margins

All numbers are taken from Morningstar, Yahoo Finance, or BOBS financial reports unless otherwise noted.

Gross Margin TTM

28.00%

Gross Margin 5 Year Average

24.12%

Gross Margin 10 Year Average

24.53%

Op Margin TTM

8.43%

Op Margin 5 Year Average

7.26%

Op Margin 10 Year Average

5.39%

ROE TTM

31.64%

ROE 5 Year Average

31.35%

ROIC TTM

23.76%

ROIC 5 Year Average

21.43%

My ROIC Calculation With Goodwill

45.10%

My ROIC Calculation Without Goodwill

48.30%

My ROIC TTM With Goodwill Using Total Obligations

15.56%

My ROIC TTM Without Goodwill Using Total Obligations

15.25%

FCF/Sales TTM

-3.54%

FCF/Sales 5 Year Average

-1.43%

FCF/Sales 10 Year Average

-1.39%

P/B Current             2.5
Insider Ownership Current

70.36%

My EV/EBIT Current

2.72

My TEV/EBIT Current

6.75

Working Capital TTM      22 $R Million
Working Capital 5 Yr Avg     0.4 $R Million
Working Capital 10 Yr Avg    -3.1 $R Million
Book Value Per Share Current

$3.17

Book Value Per Share 5 Yr Avg

$1.89

Float Score Current

0.88

Float Intensity

0.6

Debt Comparisons:
Total Debt as a % of Balance Sheet TTM

16.78%

Total Debt as a % of Balance Sheet 5 year Average

16.40%

Current Assets to Current Liabilities

1.56

Total Debt to Equity

1.71

Total Debt to Total Assets

72%

Total Obligations and Debt/EBIT

4.36

Margin Thoughts

Please reference my Wendy’s or Jack in the Box articles linked above to see how BOBS compares to the other fast food companies.  TEV/EBIT and last three debt numbers talked about also include total obligations.

  • Almost across the board BOBS margins have been improving over the 5 and 10 year periods I looked at.  Especially impressive are its ROE and ROIC.
  • In comparison to the other fast food companies I have evaluated, BOBS margins are at worst about at the industry average or better than those companies.
  • My estimates of ROIC make the company look absolutely exceptional as I estimate that without total obligations its ROIC is 45.1% with goodwill, and 48.3% without goodwill.  Even if I count total obligations its ROIC with goodwill is 15.25%, and without goodwill is 15.56%.  Numbers that are close to McDonald’s ROIC.
  • Even if we just count BOBS 5 years average ROIC using Morningstar’s numbers of 21.43%, which is what I used when I evaluated the other fast food companies, its margin is 6.35% points better than the industry average, and better than McDonald’s by 4.05% points.  Its ROIC is only bested by Yum Brands ROIC which is inflated by debt unlike BOBS.
  • FCF/Sales for BOBS is worse than the industry average by 8.78% points and regularly negative over the past several years, and still negative this year.
  • I think that its FCF/Sales margin is negative due to cap ex related to renovating and updating some of its restaurants.
  • BOBS P/B is lower than the other fast food companies by a substantial margin.  The only company with a lower P/B is Wendy’s which as I talked about in my article on them, should be higher.
  • Insider ownership above 70% for BOBS is fantastic, especially in comparison to the other fast food companies.  BOBS is effectively a controlled family run company as four individuals own a combined 63.2% of BOBS as of the 2011 annual report: Ricardo Figueiredo Bomeny; the CEO and CFO of BOBS.  Jose Ricardo Bosquet Bomeny; father of Ricardo and brother of Gustavo, business partner with Romulo and owns 20 of BOBS franchised restaurants.  Romulo Borges Fonseca; owns 22 of BOBS franchised restaurants and business partner with Jose.  Gustavo Figueiredo Bomeny; brother of Jose and uncle of Ricardo.
  • I am estimating BOBS EV/EBIT to be only 2.72 and it’s TEV/EBIT to be only 6.75.  BOBS EV/EBIT is lower than any company I have evaluated thus far and it is lower than the other fast food companies I have evaluated whose EV/EBIT average including Wendy’s is 20.12.  As I have stated before, I like to buy companies that have EV/EBIT and TEV/EBIT ratios lower than 8 so BOBS on a relative basis looks very cheap, especially when you consider it’s very high ROE and ROIC and other margins that have been growing.
  • Book value has been growing and BOBS debt levels look very sustainable to me.

Due to the sales and margin growth mentioned above, working capital has gone from negative for the better part of the past decade to now being solidly positive, BOBS accumulated deficit has almost disappeared and shareholders equity has improved drastically, all of which can be seen in the chart below.

122012_0555_WCSEandAD1.png

Other Things Of Note

  • BOBS intends to focus its efforts on expanding both the number of its franchisees and the number of its franchised retail outlets, neither of which are expected to require significant capital expenditure. In addition, the expansion will provide income derived from initial fees charged on new franchised locations.
  • BOBS franchise agreements generally require the franchisee of a traditional Bob’s burger restaurant to pay us an initial fee of $R 60,000, which is lower for kiosks and small stores, and additional monthly royalties fees equal to 5.0% of the franchisee’s gross sales.  Bob’s fast food burger restaurants make up the vast majority of total restaurants in BOBS system.
  • Lowered franchise fee in recent years from $R 90,000 to $R 60,000 to help attract more franchisees.
  • BOBS has bought back shares recently and is authorized to buy back more shares.  I think management has bought back shares at reasonable prices and I think now would be a good time to buy back even more shares.  On December 5th, 2012 Mr. Romulo Borges Fonseca bought an additional 30,500 shares in the open market.  I love to see buys from insiders who acquire their shares in the open market.  Insiders generally only buy for a couple reasons: They think the company is undervalued, and/or that the company is going to perform well into the future.
  • Operating margin for franchises used to be over 80%.  Recently it has dropped into the mid 60% range and it seems to have stabilized in that area.  It looks like the drop in franchise operating margin is due to franchise related costs rising.
  • BOBS has been an OTC listed company for years, and this year it deregistered its shares with the SEC to save money every year, approximately $300,000.  BOBS management says that it will continue to provide quarterly and annual reports to shareholders and that it will retain its reporting standards at the level they are at now.  BOBS management has been in place for nearly 20 years so these things do not bother me that much as management has done a good job running the company over the years.
  • There are only 51 current shareholders of BOBS stock so the company is very under followed.
  • BOBS has substantial tax loss carry forwards NOL’s: As of December 31, 2011 relating to income tax were R$31.6 million, $1.88 per share, and to social contribution tax were R$57.6 million, $3.42 per share.  Social contribution tax is similar to the corporate tax here in the US.
  • Due to its small size with a market cap around $65 million, only 51 shareholders, and it being a controlled company with 70% of BOBS owned by insiders and/or affiliates of the company, average daily volume is only 2,000 shares, and in the past two weeks about half of the days the market has been open there have been no shares traded.
  • Same store sales have been rising in the 4% range every year since 2007.

Intrinsic Valuations

These valuations were done by me, using my estimates and are not a recommendation to buy stock in any of the companies mentioned. Do your own homework.

Valuations were done using BOBS 2011 10K and 2012 third quarter 10Q. All numbers are in millions of Brazilian Real, except per share information, unless otherwise noted.

Low Estimate of Intrinsic Value

Numbers:
Revenue:

237

Multiplied By:
Average 5 year EBIT %:

7.26%

Equals:
Estimated EBIT of:

16.99

Multiplied By:
Assumed Fair Value Multiple of EBIT:                  8X
Equals:
Estimated Fair Enterprise Value of STRT:

135.92

Plus:
Cash, Cash Equivalents, and Short Term Investments:

28.4

Minus:
Total Debt:

21

Equals:
Estimated Fair Value of Common Equity:

143.32

Divided By:
Number of Shares:

8.1

Equals: 17.69 R$ per share.
Equals: $8.48 per share.

Base and High Estimate of Intrinsic Value

EBIT and net cash valuation

Cash and cash equivalents are 28.4

Short term investments are 0

Total current liabilities are 38.7

Number of shares are 8.1

Cash and cash equivalents + short-term investments – total current liabilities=

  • 28.4-38.7=-10.3/8.1=-1.27 R$ per share=-$0.61 per in net cash per share.

BOBS has a trailing twelve month EBIT of.

5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:

  • 5X21.2=106+28.4=134.4/8.1=16.59 R$ per share=$7.93 per share.
  • 8X21.2=169.6+28.4=198/8.1=24.44 R$ per share=$11.69 per share.
  • 11X21.2=233.2+28.4=261.6/8.1=32.30 R$ per share=$15.45 per share.
  • 14X21.2=296.8+28.4=325.2/8.1=40.15 R$ per share=$19.20 per share.

From this valuation I would use the 8X and 11X estimates of intrinsic value as my base and high estimates of intrinsic value respectively.  None of the above valuations takes into account BOBS $5.30 per share worth of NOL’s or BOBS future growth.

Relative Valuations

  • As I said above, I like to buy companies whose EV/EBIT and TEV/EBIT ratios are lower than 8 and BOBS ratios are at 2.72 and 6.75 respectively.  BOBS EV/EBIT ratio is the lowest I have found out of the companies that I have done full evaluations on.
  • Its P/B ratio is also quite a bit lower than other fast food companies.
  • BOBS P/E ratio of 9.1 is less than half of the industry P/E of 19.8.

I found BOBS to be cheap on an intrinsic value basis and it also looks to be equally cheap on a relative valuation basis.  On an EV/EBIT basis, BOBS is the lowest valued company I have fully analyzed which is a bit shocking considering its high ROIC and other margins, and the moat that I think it has.

Competitors

  • McDonald’s (MCD): The number one fast food chain in Brazil and fast food behemoth around the world always provides stiff competition to smaller companies.  Here is some information on Arcos Dorados (ARCO)the largest operator of McDonald’s restaurants in Latin America and the world’s largest McDonald’s franchisee.  As of its 2011 10K it had 662 McDonald’s restaurants in Brazil.  Arcos Dorados’ margins are quite a bit worse than BOBS margins.  Overall McDonald’s has more than 1,000 restaurants in Brazil.
  • Giraffas: A private company with around 400 restaurants most of which are in Brazil, it has recently started opening restaurants in South Florida.  Serves similar food as Bobs burger chain.
  • Yogoberry: Another private company who has more than 100 restaurants in Brazil.  Will be competing with BOBS latest acquisition Yoggi’s in the frozen yogurt and smoothie arena.
  • Various other fast food offerings including from Japanese, Middle Eastern, and other typical fast food restaurants.

The fast food service industry is very competitive in Brazil as it is here in the US with peoples income being sought after by a plethora of restaurants and fast food companies.  I think the major threat is of course McDonald’s as BOBS other local competitors are generally quite a bit smaller than it.  I think that due to the moat I see within BOBS, along with its growing size, and expansion into pizza, frozen yogurt, and chicken, that it can compete very well with the competition it has in Brazil, and continue to grow its store count profitably.

Pros

  • BOBS is cheap on an intrinsic value and relative value basis.
  • I think BOBS has a small and growing moat that should continue to grow as BOBS restaurant count gets bigger.
  • BOBS margins generally have been growing over the past five years.  In some cases by multiple percentage points.  Some of BOBS margins are even better than McDonald’s and quite a bit better than Arcos Dorados’ run McDonald’s restaurants in Latin America.
  • BOBS has signed exclusivity agreements with several companies including Coke, and also enjoys preferential agreements with its suppliers.
  • BOBS has $5.30 per share worth of NOL’s that are not even counted in any of my valuations.
  • BOBS has a low and sustainable amount of debt.
  • Its book value per share has been growing.
  • BOBS has almost eliminated its accumulated deficit, made its working capital positive after it being negative for most of the last decade, and substantially increased shareholders equity.
  • COGS and total restaurants costs and expenses as percentages of sales have been lowered by multiple percentage points in recent years.
  • The company is effectively controlled by four individuals who have thus far done a very good job of running the company.
  • BOBS has bought back some shares and has the authorization to buy back more shares.
  • BOBS can grow its restaurants through franchisees at minimal cap ex expenses.  Franchise operating margin has been in the mid 60% range recently.
  • Brazil has a growing middle class that should help grow sales further.

Cons

  • Although I think BOBS has a small and growing moat, it may not be a long term sustainable competitive advantage due to competition and possible loss of exclusivity and preferential trade partner agreements.
  • BOBS does not create consistent positive FCF.
  • BOBS FCF/Sales margin is below the average of the other fast food companies I have evaluated and it is also negative.
  • Franchise operating margin has dropped from over 80% to the mid 60% range in recent years.
  • Stiff competition including McDonald’s in Brazil.

Potential Catalysts

  • Confederations Cup in 2013, FIFA World Cup in 2014, and the Olympics in 2016, all of which are in Brazil, will bring millions of tourists to Brazil which should help grow BOBS revenues further in the short and medium term.
  • BOBS growing franchise store count will help grow BOBS moat as margins are very high and cap ex is very low when opening new franchised restaurants.
  • BOBS moat may not be sustainable over the long term due to competition and possible loss of exclusivity and preferential trade partner agreements which would most likely hurt the company.
  • Brazil’s growing middle class should also help grow sales.

Conclusion

Brazil Fast Food Company, BOBS, has turned out to be a very interesting company to me. From its near death experiences in the mid 90’s and early 2000’s, to now being the number two fast food chain in Brazil, its growing store count and margins, and the various other things I have talked about in this article I have come away very impressed with BOBS as a whole and its management.

I think that BOBS is very undervalued on an intrinsic value and relative value basis and I think that it should conservatively be valued somewhere between $11.50 and $16.00 per share, not including the $5.30 per share in NOL’s that it currently has.  Adding the NOL’s to my estimates of value would take its estimated value up to between $16.50-$22 per share which is the range that I think BOBS should be selling at, and what I think its private market value is.  Even leaving the NOL’s out of the equation, BOBS is selling currently at only $8 per share which is a 32% discount to the absolute minimum I think BOBS is worth at $11.50 per share.  I think that BOBS has a moat that could possibly grow over time, and that the company has catalysts in the short and medium term that could help unlock some of its value.

Warren Buffett always says that if you buy good companies that have some kind of moat at fair prices, that you will do very well investing over the years.  I think BOBS is a good company with a moat that is currently selling at a very cheap price and I think I will do very well holding it over the years as I have bought its shares in my personal account and the accounts I manage.

Intel Brief Thoughts and Valuations

Intel (INTC) is another company I bought before doing any type of valuations.  Intel is one of the first companies whose annual and quarterly reports I actually read, and it was noticeable even then with my limited knowledge to see its massive competitive advantages, huge margins, the free cash flow it creates, etc.  The following are descriptions taken from Morningstar.

Intel holds long-term advantages over smaller rival Advanced Micro Devices AMD in the microprocessor industry. While there have been rising fears that Intel may have trouble competing against emerging processor design firm ARM ARMH, we believe such panic has been blown out of proportion.

Intel is the largest chipmaker in the world. It develops and manufactures microprocessors and platform solutions for the global personal computer market. Intel pioneered the x86 architecture for microprocessors.

Asset Valuations

  • With intangible assets and goodwill: $7.95 per share.
  • Without intangible assets and goodwill: $6.71 per share.

EBIT and Net Cash Valuations

  • Intel has $0.60 in net cash per share.
  • 5X=$19.00 per share.
  • 8X=$28.82 per share.
  • 11X=$38.65 per share.
  • 14X=$48.47 per share.

Revenue and EBIT Valuations

  • 5X=$14.23 per share.
  • 8X=$22.03 per share.
  • 11X=$29.82 per share.
  • 14X=$37.61 per share.

Operating Cash Flow and Free Cash Flow Valuations

  • Low estimate=$12.05 per share.
  • Base estimate=$17.62 per share.
  • High estimate=$23.18 per share.

Price to Book and Tangible Book Valuations

  • Low estimate=$11.51 per share.
  • Base estimate=$16.82 per share.
  • High estimate=$22.14 per share.

Debt Ratios

  • Current assets to current liabilities=2.45.
  • Total debt to equity=14.7%.
  • Total debt to total assets=9.9%.

Intel’s current only competitor in the computer chip area is AMD who has always been a distant second place to INTC.  Also of note is that AMD’s CFO just resigned which is never a good sign.  Intel has also been increasing its business in the server arena where it also has huge competitive advantages and controls a big chuck of the space.

The only area where Intel has been struggling recently has been in the tablet and smart phone arenas, with Intel having to play catch up to Arm Holdings (ARMH) who was first and best in those areas.  Intel appears to be catching up to ARMH in the tablet and smart phone business segments as it currently has its chips in three smart phones, it will also have its chips in the upcoming Motorola Razr I, the Razr I will launch in October in Europe and Latin America, and its first Intel Powered tablets are going to be coming out in November.

Intel’s huge competitive advantages, size, and balance sheet, have enabled it to catch up to ARMH and I think it will soon surpass Arm Holdings in the mobile processor arena and extend its dominance into new profitable business segments.

Knowing what I know about Intel, its huge competitive advantages, gigantic margins, etc, I have decided to use the 11X EBIT and cash valuation, $38.65 per share, as my estimate of intrinsic value, a 40% margin of safety as its current share price is $23.32 per share.

Even if I were to use the 8X EBIT and cash valuation as my estimate of intrinsic value just to be safe, $28.82, that gets us to a 19% margin of safety.  I think the 8X estimate of value is too conservative with Intel’s massive competitive advantages however.

My current cost basis in Intel is $19.90 per share.  Again a bit fortunate to be up anything since I did not do any type of valuations before I originally bought into them.  With all of the above stated I am going to continue to hold Intel for the long term and have my investment compound hopefully years and decades into the future.

I will also look for opportunities when the stock price is at a healthy margin of safety to continue to add shares to my portfolio and for the portfolios that I manage, now looks like it would be a good entry point, and I will update when and if I buy any more stock in INTC.

Philip Morris Brief Thoughts and Valuations

Philip Morris International’s (PM) premium positioning of its strong brands, global scale, and addictive products give the firm a wide economic moat, in our opinion. While some of the company’s more mature markets are experiencing lower cigarette demand, we expect that the company’s Asian operations will continue to be an engine for the firm’s future growth.

Philip Morris International is the world’s second-largest tobacco company, behind only China National Tobacco, and holds 28% of the non-U.S./non-China global market. The firm owns seven of the leading 15 international brands. Marlboro, the company’s flagship brand, accounted for about one third of total volume in 2011. Other key brands include: L&M, Philip Morris, Bond Street, Chesterfield, Parliament, and Lark.

Both of the above descriptions were taken from Morningstar.

Asset Valuation

  • With intangible assets and goodwill $11.73 per share.
  • Without intangible assets and goodwill $8.34 per share.

EBIT and Net Cash Valuation

  • Philip Morris currently has -$7.59 in net cash per share.
  • 5X is $42.07 per share.
  • 8X is $65.97 per share.
  • 11X is $89.86 per share.
  • 14X is $113.76 per share.

Revenue and EBIT Valuation

  • Low estimate is $27.09 per share.
  • Base estimate is $49.29 per share.
  • High estimate is $71.50 per share.

Operating Cash Flow and Free Cash Flow Valuation

  • Low estimate is $76.24 per share.
  • Base estimate is $111.43 per share.
  • High estimate is $146.62 per share.

Debt Ratios

  • Current assets to current liabilities=0.92
  • Total debt to equity is not applicable because PM has negative equity.
  • Total debt to total assets=58%.

As with Vodafone, Philip Morris’ valuations are all over the place.

Philip Morris was spun off from Altria so that it could get away from the massive amount of litigation that is involved in the United States tobacco industry. Foreign countries are increasingly bringing litigation and sanctions upon tobacco companies that operate in their  respective countries such as Australia and Norway, but at this point it does not look to be a massive problem for PM.  It is something to watch for continuing into the future however as the proposed plain packaging could really hurt PM’s results as it would deemphasize the Marlboro brand and packaging.

Knowing what I know about its massive competitive advantages, which are generally the same as those I outlined in my Altria article, its risks, which are also generally the same as Altria’s, I would use the 11X EBIT and cash valuations, $89.86 per share, as my estimate of Philip Morris’ intrinsic value.  Philip Morris is currently selling at $89.48 per share meaning that there is absolutely no margin of safety.  My current cost basis for PM is $69.38 per share, up 27% since I bought in June of 2011.

Again, PM is one of the companies I bought before doing any kind of valuation so I am very fortunate to be up anything at this point. Philip Morris has gigantic competitive advantages, huge margins, creates a lot of free cash flow, pays a very good dividend, and buys back its shares.  My main concerns with PM long term are the same as Altria, a lot of debt, pensions, etc.

With my cost basis being so low I plan to hold onto my PM shares for years and hopefully decades and hope to have my investment compound well into the future.