Preliminary Analysis Case Study #1 Part 1- Constellation Brands

Preliminary Analysis Case Study #1 Part 1 Constellation Brands

Years ago, I would spend hours researching one company on a preliminary basis so I could figure out if I wanted to do further research on it and possibly invest in it.

And I would do this full hours long process on a company no matter what I found out during the preliminary analysis.

Not only was this a massive waste of time spent researching companies I knew I wasn’t going to invest in, but this process only allowed me to go through one company on a preliminary basis in an hour or two.

With more than 20,000 companies available to research worldwide, I knew I needed to streamline this process a lot.

I needed to get rid of crap companies faster and evaluate more companies in a shorter time.

By doing these two things it would not only allow me to find potentially great investments faster but I’d also learn more industries and business models faster as well.

So out of necessity came my preliminary analysis checklist you can get by subscribing to Value Investing Journey for FREE here.

After developing this process I can now go through 5 – 10 companies in an hour and learn an immense amount about one company in just a few minutes.

Why am I telling you about all this?

Because one of my $10,000 coaching clients, in less than a month, went from minimal value investment knowledge to doing these full preliminary analysis on companies by himself.

He now knows what everything on the checklist means and he now wants to help others as he’s learning.  Here’s the kicker:

He graciously offered to post his first ever full preliminary analysis here on the Value Investing Journey blog so that not only can he get feedback from you to help him improve.  But also so that we could all help each other grow our value investing knowledge by doing real-world value investment case studies together.

The company he chose to evaluate is…

Constellation Brands – Stock Ticker STZ

Here’s the brief profile of Constellation Brands from its own company profile…

Simply put, we produce and market high-end beer and premium wine and spirits brands that consumers love.

Whether at home relaxing, in a restaurant marking a special occasion – or at a concert, a ball game or a day at the beach – our brands are front and center.

We understand our consumers and strive, not only to meet their current drinking preferences, but to anticipate and respond to what they’ll be reaching for next.

If you’d like to participate in this case study yourself all you’ll need is the exclusive Value Investing Journey Preliminary Analysis Checklist you can get for FREE here and Internet access to go to Morningstar.com.  That’s it.

You’ll learn best if you do your preliminary analysis before Wednesday when I release the preliminary analysis he did on this company.

And on Friday, I’m going to release part one of our exclusive training session explaining why everything is on the preliminary analysis worksheet and more importantly what everything means in terms of analyzing the company.

If you have any comments or questions please post them in the comments section below and I’ll answer them.

I’d also love to see your preliminary analysis as well so feel free to post these in the comments below.

The Worst Run Company I’ve Ever Seen? ICON Case Study Part 2

The Worst Run Company I’ve Ever Seen? ICON Case Study Part 2

We’ve all got our favorites in life… Favorite sports teams, colors, movies, etc.

When I started investing I didn’t think there was any way I would ever have a favorite type of business to invest in.  I thought I looked at every company “unbiased” and hoped for the best when evaluating something.

This was naïve…

We all have our biases no matter how much we learn about and try preventing them.

Maybe its human nature.  Maybe its happy thoughts from prior past experiences that lead to these biases.  Or maybe its something inherent in our brain structures that lead us to do things we know we like.

I think it’s a combination of the above.  And this isn’t necessarily bad because biases aren’t always awful when investing.

The value investing concept of circle of competence is a form of bias in that it helps separating out your favorite businesses to invest in and which you want to avoid.

Biases can keep you away from things you don’t – or don’t want to – understand.  For example one of the industries I’m biased against as of this writing are banks.

My mind goes numb reading through all the legalese BS in their filings.  I get annoyed reading their financials every time I try because it seems like they’re written to make sure there are as many ways as possible for them not to get sued.

They seem purposely convoluted and confusing and this further annoys me until I stop reading the financials.

These are several of the reasons up to this point I still haven’t taken the time to understand how to evaluate banks.

Does this make logical sense?  It doesn’t even to me since banks and insurance companies are similar in how they make money and I love insurance companies.

But I’ve taken the time to understand insurance companies that I’ve not taken with banks.  Maybe I will some day.

For now I’m fine sticking to my circle of competence – my biased favorite businesses to invest in – when searching though companies.  And even in my circle of competence I do have favorites I love to invest in.

In no particular order they are:

  • Insurance Companies.
  • Companies that earn royalties.
  • Asset managers.
  • And businesses based on consulting.

Of the four types of companies above only one – insurance companies – are hard to operate well in a healthy way.  And the difficulty in operating insurance companies is mostly from having strict discipline making sure you underwrite policies that can be profitable in the future.

The other three are in the easier to operate category where you have to concentrate on growing sales and contracts more than having in-depth technical knowledge.

I’m not saying the three non insurance kinds of companies listed above are easy to operate and grow.  But I am saying they’re easier to run than most other companies.

As long as you don’t have morons running the company insiders should do well for themselves and shareholders over the long-term.

This goes back to another bias/checklist item of mine that Warren Buffett always says: “Always try to invest in a company that a monkey could run and still reward shareholders because eventually a monkey will run it.”

The three non insurance kinds of companies pass this test which is another reason I love them.  As long as you don’t have morons running the business they should do well over time.

But what Buffett doesn’t talk about in his quote above is what happens when you have someone or a group of people through hubris, incompetence, corruption, or some combination of these things are worse than monkeys at running a company.

When this is the case even the best business models can be ruined.  This is what’s happened to ICON the past few years.

Who knew a company based on collecting royalties which produces the biggest FCF/Sales margin I’ve ever seen would have been better run by monkeys than the people who have run it.

ICON Case Study Part 2 – Digging Into The Financials

In part 1 of this case study I did my preliminary analysis and showed that while ICON produced a 48.8% FCF/Sales margin.  The best I’ve ever seen.  The company had way too much debt for me to consider investing in it.

I kept the case study going because the high FCF/Sales margin and huge debt load intrigued me.

Most of the time when a company produces a ton of free cash it allows the company to have low or no debt.  And since I also knew ICON was a royalty based company I knew their costs were low so I was wondering why its debt load was so high.

I assumed the worst and even my worst case expectations weren’t bad enough.  ICON’s turned out to be the worst run company I’ve ever evaluated.

To find out why click below to get the 20 pages of notes on I took on ICON.

20 Pages of ICON Financial Notes

Or if you want to evaluate the company yourself go to the following pages for the financials I dug through.

The only company I’ve come across that’s even close to this bad was Koss and its business model was a lot more difficult to manage than ICON’s.

As a company that collects royalties ICON could have just sat back, collected those royalties, done nothing else, and made a ton of money for themselves and shareholders.

Monkeys could have run this company better than its current and recent managers who’ve driven it near bankruptcy.

For now ICON takes that cake as the worst run company I’ve ever researched.

Thank you Professor Andrew for sending this recommendation to me to do a case study on.  It was a great learning experience on what not to look for when evaluating an investment.

A great use of Charlie Munger’s principle of inversion.

Normally I would value the company next but ICON is so bad I won’t even value it.

No matter what my numbers say, with everything I know about it I would place a value of zero on the equity.

This is because unless something changes radically and fast there is a high likelihood of default/bankruptcy here.  And as mentioned in the notes this would mean the first lien holders would take full control of the company and shareholders would be left holding nothing.

Let me know in the comments below your thoughts on ICON.  If I missed anything.  If you disagree with my analysis.  Or if you have any questions about the analysis.

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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