Dole Article Update and My Investment Checklist

Since my last post I have been doing a lot of research on Dole and its history and operations.  I have the sum of the parts valuation almost completely done and am just waiting for its next quarterly report so that I can finish all my valuations and analysis and get the article together.

I also have a call in to Dole investor relations about something that I came across that could be potentially problematic for current shareholders if I understand the situation correctly.  After I hear back from Dole IR tomorrow, I will let you know about the situation and how it could affect my valuations and analysis, if at all.

In between doing research I have also finally put together my buying investment checklist and wanted to share it with you to see if I missed anything.  I still need to organize the checklist better but wanted to get your input first.

Investment Checklist-Buying

  1. Can I in a short paragraph explain what the company does?
  2. Is the company undervalued?  If so by how much and does it reach my minimum 30% margin of safety threshold?
  3. Does the company create FCF?  If it does, how long has it created positive FCF?
  4. Does the company pay a dividend and is the dividend safe?
  5. Does the company buy back shares?  If the company does buy back shares is it at a discount to intrinsic value?  Does the company take advantage of its shares being overvalued by issuing shares?
  6. What is the EV/EBIT ratio?
  7. What are the company’s margins? (EBIT, Net, Gross, FCF/Sales, ROIC, ROE, etc)  Are the company’s margins getting better or worse?
  8. If ROIC and ROE are high is it because they are inflated by debt?
  9. What are the company’s debt ratios and are they getting better or worse?  Are they sustainable in your eyes?
  10. What are the company’s total debt and contractual obligations?  When are these obligations due?  Is this sustainable?
  11. Is there some kind of catalyst to unlock the value in the shares if the shares are undervalued?
  12. What is insider ownership?  Have insiders and institutions been buying or selling?
  13. Does any value investing partnerships, hedge funds, or activist investors own shares in the company?
  14. What is the company’s book value per share and is it selling for less than book value?
  15. Has book value been growing or declining?
  16. Does the company have any kind of sustainable competitive advantages?  If so what?  Same questions with barriers to entry into the industry?  Does the company have pricing power?
  17. What are the current and quick ratios?
  18. Has there been recent dilution in the stock?  If so why?
  19. Do I trust Management?  Have any directors or executives had problems in the past legally or ethically with companies they have been a part of?
  20. Does the company require a lot of cap ex to maintain?
  21. Are the company’s prospects good into the future?
  22. Is the company’s business essential?  Can the company’s operations become outdated fast by technology?  Can the company’s operations be destroyed by Amazon, EBay, or Wal Mart?
  23. Have cost of goods sold as a % of revenue been going up or down?
  24. Is managements pay too high?  Is management pay structure convoluted?  Do management and other insiders own a decent portion of the company?  Are managements goals aligned with shareholders?
  25. Is the company in an unloved boring sector?
  26. Has the company been having problems it can overcome?  Has it recently dropped out of an index or is there irrational selling in the stock?  Is the company dealing with any other kind of irrational fear that could lead to a buying opportunity?
  27. If this is a spinoff have company insiders been buying shares in either company?
  28. Are you comfortable holding the company for at least 5 years?  If this is a spin off or other special situation, how long are you comfortable holding the company for?
  29. In your opinion is the company able to compound its returns over time without acquisitions?
  30. Which portion of the portfolio will this company go into Special Situations, Long Term Compounders, or Net Net/Asset plays?
  31. Are you willing to go all in on this company; at least a minimum 20% of the portfolio?
  32. Is the company better than having cash in the portfolio?
  33. How long is the cash conversion cycle, has it been going up or down?
  34. How big is the downside if you buy into the company?
  35. How much cash and other assets does the company have in case of problems?
  36. What potential problems does the company face in the near future?  Are those problems big enough to keep you from investing?  What are risks to the company and how likely are those risks to disrupt your investment thesis?
  37. How robust is the company’s competition?  What is the company ranking in its industry?  Can the company out compete?
  38. Is this investment better than buying stock in companies that are already in your portfolio?  If so why?  If not why should it be added to the portfolio?
  39. How many customers does the company have?  If it is only a few are you comfortable with those customers?
  40. Does the company have any underlying undervalued assets that could be sold/spun off/put to better use to unlock value; land, intellectual property, buildings, etc?

Other than organizing it better which I am going to do, let me know if I missed anything that you use in your own checklists.

Hopefully, I will hear back from Dole IR tomorrow so I can update that situation as well.

Professional Analysis Versus My Amateur Analysis Of Jack in the Box

This first link from MarketFolly contains the presentation from the winner of the Value Investors Congress contest whose presentation and analysis was a bull case for Jack in the Box.

The above analysis is actually the one I voted for in the contest as I thought it was the best, and the analysis he did in his article is actually what led me to research JACK as a possible investment for myself as he laid out a very good bull case for the company.

This second link is my analysis which is a bear case for Jack in the Box.

We came to the same conclusions about future possibility which he counts on more than I like to.  I generally only count in my analysis what I can see now and do not base my valuations on speculation of what could happen in the future.

Please feel free to leave comments on the two articles: Where I might have gone wrong, what I could have done better, etc.  I would really appreciate your thoughts.

My Plan for Deliberate Practice, fixing a problem, and free books

I first mentioned a problem I have been having about how to budget my time in this post at the beginning of August.

I have been doing a lot of thinking and reading lately and I wanted to share my thoughts here to see if anyone has any input.

After my post on Aceto, which is now an article on Seeking Alpha for those who want to follow the discussion in the comments section, I went straight into evaluating another company.  It has been my first time in truly trying to evaluate a bank, and about half way through its annual report, I quickly realized that I did not know enough about banks or the banking industry to fully evaluate its prospects properly.

I finished up reading its most recent annual and quarterly reports, did a P/B valuation where I found the company to be fairly priced, and was going to do a full valuation and analysis write up like I have been doing. However, my evaluation up to this point is pretty poor, and I realized I need to learn more about banks and the banking industry before I do the write up.

I have been seeing a lot of sites lately talking about deliberate practice and how to constantly get better, and I have been trying to figure out how best to personally accomplish my goals, and here is what I have come up with so far.

My Plan For Deliberate Practice and How to Fix My Time Budgeting Problem

Here are my ideas so far.

  1. I look at multiple companies as potential investment ideas on a daily basis, but I am fully committing myself to completely evaluating at least one new company every two weeks.  By fully evaluating I mean researching the company and its competitors, valuing the companies, evaluating its investment potential at this time, and writing an article about the company.  I think this will help me become a better investor on several levels: Thinking about and bettering my investment process, becoming better at putting my ideas into writing, better and more thorough investment write ups, and this will enable me to learn more about new industries and companies. Originally I wanted to fully evaluate a new company every week but that left little time for learning new things, which gets me to my second idea.
  2. I have known for a while now that I have a lot to learn still but after my foray into the banking industry, I realized I needed to set up some more time where I would specifically be learning, instead of trying to write an article or research another company.  The remainder of the two week period after I have finished up my article(s), I will spend learning: New techniques, new industries, reading books, finding better ways to think, etc.
  3. While I am researching and learning, I will again be posting more links that I think we all could learn from.
  4. I would also really encourage you the readers to post some ideas on The Readers Investment Ideas and Analysis Page.  If you are not comfortable doing an entire write up, I would be fine with your stating which company you have researched and giving a few points on why they are a buy or sell at this time in your opinion.  Again, I do not care if you are a beginner or have advanced knowledge, all ideas are welcome.  Also the free book giveaway is still in tact so the first person to put an idea on the page will receive a free book from my collection, and I will also continue to give free books away to other investment ideas that are put on the page as well. That page is also for any questions anyone might have.  I want us to all learn from each other, and since I am relatively new to investing I hope some of the more experienced viewers give some of their advice.
  5. I am giving you my email here as well if you would like to contact me for any reason.  I would be extremely excited to meet new people and discuss ideas or address any questions you might have in the privacy of email if you are not comfortable posting them on the site.  JMRiv1986@gmail.com

So far these are my ideas and I would like to hear your feedback on them.  I will be adding to, and tweaking the list periodically when I come across something that I think will help this process.  I will stick to the time frame as best as I possibly can, but will allow for some flexibility if some kind of issue, good or bad arises.

I am excited to see what kind of feedback I get as lately I have felt that my investment process has been lacking something that I cannot quite put my finger on.  I do feel that I have been getting better with every article I write and I am hopeful that I will find whatever it is that I think I am missing though my version of deliberate practice.

In the meantime I cannot wait to hear from you and to discuss your ideas and thoughts.

Kirkland’s Valuations and Analysis

In this article, I will be analyzing and valuing Kirkland’s (KIRK).  I will also be comparing margins between KIRK and some of its competitors to see how good KIRK stacks up and decide if it looks to be a good buy now.

Kirkland’s is a specialty retailer of home décor and gifts in the United States, operating 299 stores in 30 states as of January 28, 2012. Our stores present a broad selection of distinctive merchandise, including framed art, mirrors, wall décor, candles and related items, lamps, decorative accessories, accent furniture, textiles, garden-related accessories and artificial floral products. Our stores also offer an extensive assortment of holiday merchandise during seasonal periods as well as items carried throughout the year suitable for gift-giving.  The description is taken from its website here.

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

All numbers are in millions of US dollars, except per share information, unless otherwise noted.   Valuations were done using KIRK’s 2011 10K, and 2012 first quarter 10Q.  Valuations were done on July 19th, 2012.  Its reports can be viewed here.

Asset valuation:

Assets: Book Value: Reproduction Value:
Current Assets
Cash and Cash Equivalents 73.2 73.2
Inventories 47.5 23.75
Deferred Income Tax 1.7 0
Prepaid Expenses and Other CA 8.1 2
Total Current Assets 130.5 98.95
PP&E Net 61.4 30
Other Assets 2.6 0
Total Assets 194.5 128.95

Total number of shares are 18.2

Reproduction Value:

  • 128.95/18.2=$7.09 per share.

Normally I would use this estimate of value as my base case since I am an extremely conservative investor.  After honing, and learning some new valuation techniques I have found that almost every company I evaluate is selling for quite a bit more than its reproduction value.

Stating that I will be using one of the below estimates of intrinsic value as my base case.

EBIT and net cash valuation:

Cash, cash equivalents, and short term investments=73.2

Total number of shares=18.2

Total current liabilities=38.6

Cash, cash equivalents, and short term investments-total current liabilities=34.6

  • 34.6/18.2=$1.90 in net cash per share.

KIRK has a trailing twelve month EBIT of 30.57-5.2+3.2=28.57.

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

  • 5X28.57=142.85+73.2=216.05
  • 8X28.57=228.56+73.2=301.76
  • 11X28.57=314.27+73.2=387.47
  • 14X28.57=399.98+73.2=473.18
  • 5X=216.05/18.2=$11.87 per share.
  • 8X=301.76/18.2=$16.58 per share.
  • 11X=387.47/18.2=$21.29 per share
  • 14X=474.58/18.2=$26.00 per share.

Market cap is 192.83

Enterprise value is 122.4

  • EV/EBIT=4.28

From this valuation, I like that they have positive net cash per share and that they have a very low EV/EBIT, even in comparison to their competitors, which we will get to later.  From this valuation, I would use either the 8X or 11X EBIT as my estimate of intrinsic value.  Both of which make KIRK pretty undervalued as it now sits at $10.30 per share.

These next three valuations are some of the new techniques I have been working on.

Revenue and EBIT valuation:

This valuation is using trailing twelve-month numbers.

Trailing twelve months revenue=98-94+430=434

Multiplied by:

Average 6 year EBIT percentage:4.1%

Equals:

Estimated EBIT of 17.79

Multiplied by:

Assumed fair value multiple of EBIT: 8X

Equals:

Estimated fair value of enterprise value of KIRK: 142.32

Plus:

Cash, cash equivalents, and short term investments: 73.2

Minus:

Total Debt: 0

Equals:

Estimated fair value of common equity: 215.52

Divided by:

Number of shares of 18.2

Equals:

$11.84 per share.

Base case estimate of value.

My low case estimate was $8.95 per share, and my moderate to a high case was $14.82 per share.  Using this estimate of intrinsic value KIRK still appears to be undervalued.

Book value and P/B valuation:

Book Value: 117.57

Minus:

Intangibles: 0

Equals:

Tangible book value: 117.57

Multiplied by:

Industry P/B ratio: 3.22

Equals:

Industry multiple implied fair value: 378.58 ($20.80 per share.

Multiplied by:

Assumed multiple as a % of industry multiple: 75% (2.42 X the multiple of Tangible book)

Equals:

Estimated fair value of common equity of KIRK: 283.94

Divided by:

Number of shares: 18.2

Equals:

$15.60 per share.

Base estimate of intrinsic value.

My low case estimate of value was $10.40 per share, and my high estimate was $20.80 per share.  Again, KIRK looks to be very undervalued.

EV/EBIT valuation:

KIRK is currently selling at an EV/EBIT of 4.28.  The average EV/EBIT ratio of its main competitors is 7.55, I will get back to the competitors in a bit.

If KIRK was selling at the industry average EV/EBIT ratio of 7.55, it would be worth $18.69 per share.  Again, very undervalued.

After five valuations, KIRK appears to be very undervalued except by the very low case estimates of intrinsic values.  Now I am going to check out their competitors’ margins and see how KIRK stacks up that way.

Margin Comparison:

Williams-Sonoma (WSM) Gordmans (GMAN) Bed Bath and Beyond (BBBY) Pier 1 (PIR) Kirklands (KIRK) Industry Avg (Most recent qtr)
P/B 2.87 4.11 3.61 3.86 1.65 3.22
ROE (TTM) 19.14% 35.61% 26.01% 38.67% 14.94% 26.87%
Op Margin 6.60% 5.30% 12.50% -0.20% 8.60% 6.56%
EV/EBIT 8.55 7.41 7.86 9.75 4.28 7.55
ROIC (5yr average) 12.07% 33.44% 19.98% 5.92% 12.72% 16.83%
ROIC TTM 18.27% 34.92% 26.01% 37.86% 14.94% 26.40%
FCF/Sales (5yr average) 5.64% 2.25% 7.57% 1.86% 3.71% 4.21%
FCF/Sales TTM 6% -0.07% 9.97% 3.79% 2.15% 4.37%
Insider Ownership 12.41% 72.07% 13.06% 13.12% 15.30% 25.19%

The first thing that jumped out at me about this table was Gordmans (GMAN) gigantic margins and insider ownership.  The margins are a little bit skewed though because they only go back 4 years instead of the 5 for the others, which take the other companies back further into the recession.

The second thing was the ROIC margins that were surprisingly high to me.  I was expecting them to be lower since all of these companies depend on discretionary spending from consumers, which supposedly dropped quite a bit during the recession.

The third thing was the FCF/Sales margin numbers, anything over 5% is very good.  Gordmans numbers again are a bit skewed since they only have four years of data.  However, two of the companies still had margins over 5%, even through the recession, and the average is at 4.2%.

The fourth thing is that KIRK is selling at about half the P/B value of the rest of the companies.

KIRK has total contractual liabilities of $335 million coming due over the next 5 years.

One thing you can definitely tell from looking at the margins is that Kirkland’s and Pier 1 (PIR) seem to be the most affected by the cyclical nature of spending that is accompanied by this industry.  William-Sonoma (WSM), and Bed, Bath, and Beyond (BBBY) seem to be more resilient as the margins did not drop nearly as much in the recession.  With GMAN again not being as affected as much because its numbers only go back 4 years.

Kirklands Pros:

  • By almost all of the valuations, I did they look to be pretty undervalued.
  • KIRK keeps its inventory levels pretty low, meaning they can change out products faster if they aren’t selling well or order more if they have something that is selling well.
  • They have positive net cash.
  • They have been repurchasing shares over the past several years and are authorized to purchase more.  Since 2009 KIRK has reduced its share count by about 2 million shares.
  • Insider ownership of 15.3%.

Kirklands Cons:

  • The consumer industry it is in, is highly cyclical and KIRK appears to be more affected than some of its competitors.  So if there is another economic crisis, which looks entirely possible, KIRK could struggle again.
  • It leases almost 100% of its properties, and a lot of the leases are still for the long term: $45.2 due in 2012, $42 due in 2013, $38.3 due in 2014, $35 due in 2015, $28.5 due in 2016, and a total of $83.4 due thereafter.
  • It only has one major distribution facility that is located in Tennessee.  If there is some kind of natural disaster that hits the distribution center or the surrounding area, KIRK could be crippled for a while.
  • KIRK gets most of its items made in China, whose economy looks like it is slowing down and could affect KIRK.
  • KIRK has some strict covenants in place to prevent a takeover of any kind.

Kirklands Potential catalysts:

  • At this time I do not really see a potential catalyst to unlock the value of the shares.
  • Since it does not own its own properties KIRK could not sell those to unlock the value of the company.
  • While KIRK’s stock is owned by some small cap value investing funds, with my research I did not find them to be activists investors.
  • In my opinion, a BBBY and KIRK merger looks like it could be a good thing, but KIRK has some very strict anti-buyout covenants that might prevent something like that from happening.

Conclusion:

With all of the above stated, I am going to be using the book value and P/B valuation as my base case estimate of intrinsic value.  If KIRK gets its own P/B up to 75% of the industry P/B, it would be worth $15.60 per share.  Current share price is $10.70 per share, leaving an upside potential of 69% and about a 31% margin of safety if I were to buy now.

Normally with all of the above stated and KIRK meeting my minimum 30% margin of safety, I would be a buyer.  However, I will not be buying at this time due to two reasons mainly:

  • 1) Since KIRK is a very cyclical company, I would want a bigger margin of safety of at least 50%.
  • 2) Another reason I would want at least a 50% margin of safety is because 95% of its suppliers are in China, whose economy looks like it’s slowing down at best, and at worst looks like it might crash completely, which would affect KIRK quite a bit.

When and if KIRK gets to a 50% margin of safety and/or I see some kind of catalyst, such as an activist investor getting involved that could unlock the value of the company, I would have no hesitations buying at that time.

As always feel free to give some feedback.

Something every investor should read.

Found this on Twitter since I follow Jae Jun of oldschoolvalue.com.  He has put together a digital magazine that lists the best investment websites, blogs, podcasts, research sites, screeners, etc.

The 30 page magazine is completely free and all you have to do is tweet about, or Facebook the link to download the magazine.

The best thing about this aside from it being free and the quality, is that it has shown me a lot of websites I have never even heard of.  Hopefully a lot of fertile grounds for investment research.

I hope you all enjoy

Digital magazine link