Wednesday, November 30, 2005

Nu Skin Enterprises (NUS)

Nu Skin (NUS) is one of the largest direct selling companies in the world, selling and distributing premium quality, innovative personal care products and nutritional supplements under the Nu Skin and Pharmanex brands. In Mainland the firm operates using a retail model with employed sales representatives because of current regulatory restrictions on direct selling activities.

The company has fallen into some disfavor recently being down 35% year to date.

The company seems to be well positioned in its products with over 100 SKUs in skin care, hair care, cosmetics, vitamins, and nutritional supplements etc. The restrictions on direct selling in China appear to be easing. The company will be launching in Russia in early 2006 and in India in early 2007.

Over 40% of revenue for the business now comes from subscriptions, the bulk of which come from the Pharmanex nutraceutical side thereby making revenues more predictable.

The company has consistently generated free cash flow. YTD the company has generated $44.7 million in FCF above net earnings YTD of $40.5 million. On a TTM basis, the business has generated $90 million in FCF.

Given a current market cap of $1.192 billion and an Enterprise Value of $1.2 billion, the business is selling for a FCF yield of 7.5%. Return on invested capital has been in the high teens to the low 20’s for the last few years.

The company has returned capital to shareholders through an established and growing dividend. For the period 2000-2004, the company has bought back $240 million in stock. Year-to-date, another $7.5 million in stock buybacks have been recorded.

I find the stock very appealing at current levels.

Tuesday, November 29, 2005

Aspect Medical Systems (ASPM)

This stock has been upgraded by a number of brokers in the last several days as a result of the approval by the Japanese Ministry of Health of the marketing of its BIS XP monitoring system.

The company is recognized as the leader in brain monitoring technology and the ability to access the Japanese market as the second largest medical devices market in the world is a fabulous opportunity.

Little question that this is a great business, but can it be a great stock? The operating profitability has expanded in the most recent quarter to 11.5% versus 1.9% a year ago. Return on invested capital has escalated to 17% in the most recent quarter from last year’s levels of -3.6%.

Cash flow from operations for the year to date is below earnings. In fact, for the last ten quarters, CFFO has been less than earnings for every quarter but one. Free cash flow for the year to date is only $2.6 million, relative to a market capitalization of $820 million and enterprise value of $786 million.

EV/EBITDA for the TTM is 122 times! Wall Street is starting to use all too familiar “bubble” language in its effusive praise of this stock…

“We believe traditional metrics do not reflect the market upside potential for Aspect Medical.”

In my view, the Street has already anticipated a takeout based on Boston Scientific’s 28% position in ASPM. With median estimates of 0.59 for next year and median growth estimates of 40%, the 63 P/E seems to reflect a lot of hope.

Monday, November 28, 2005

Abitibi (ABY)

Somewhat surprised to see this outperform rating on Abitibi (ABY). The valuation of the business on an EV to EBITDA basis is beguiling at about 5 times. The upgrade seems to be related to the sale of the 50% holding in its PanAsian subsidiary for $600 million in cash thereby reducing the near-term financial risk. Post deal, debt net of cash, will still represent about 60% of total capital.

Looking back, the company has failed to generate any free cash flow in some time. On a TTM basis, FCF was negative $85 million. In the last two years, CFFO has averaged about $50 million annually, however, cash interest unfortunately has averaged about$315 million!

Most newspapers are switching to lighter weight newsprint and reducing their width to tabloid formats. The Wall Street Journal has done so already in its Asian and European editions and will follow this in North America. The NY Times is proposing lighter weight newsprint as well.

It seems to me that the newsprint industry remains in decline especially in the developed world. Abitibi has just sold off its only growth opportunity in my view. Though management should be commended for the price it received and the rescue of the balance sheet, what remains is a declining business that is subject to the current high valuation of the Canadian dollar. The Canadian dollar acting as a petro-currency does little to improve the future of the Canadian newsprint industry.

Geico and GenRe buy Diageo shares (DEO)

As the article reveals, Buffett (or Lou Simpson) has purchased 15 million shares of Diageo (DEO).

What is the attraction? Diageo has a market cap of about 25 billion British pounds. Enterprise value is approximately 29 billion. Free cash flow for the year ended June 30,2005 is about 2.6 billion pounds for a free cash flow yield of 9.1%. Free cash flow for the last five years has totalled in excess of 12 billion pounds. In other words, for a holding period of only five years, one would have received in free cash flow about 42% of your investment! For an investment horizon of forever, as WEB envisions, he could own it gratis after 10 years. In the meantime, the current dividend yield on the stock is 4.6%.

Diageo has a ROIC of over 12%. In the last five years, Diageo has bought back about 7.5 billion sterling of stock. During that time, about 2.3 billion in debt was paid down.

Brands include Johnnie Walker, Smirnoff, Tanqueray,Guinness, J&B, Baileys, Capt Morgan, and Cuervo. Given these brands and BRK's position in Anheuser Busch, it will be difficult to avoid enriching Buffett and happy shareholders most weekends and through the holiday season!

Black Friday-Apparently Robust Results

The U.S. consumer once again defies the weakening consumer confidence numbers and comes out for the holiday shopping season waving her credit card defiantly! The statistical inference of the National Retail Federation is questionable since it is based on a very small sample size based on a consumer survey rather than actual sales data. Be careful!

A regional view of sales

A 21.9% increase YOY

Sunday, November 27, 2005

Are growth stocks back?

In this article in today's New York Times, Paul Lim has written an article about the poor returns in the last decade that growth stock investing provided. He speculates that better returns are forthcoming from growth investing.

In 1992's Berkshire report, Buffett reminded us that there is no clear demarcation between growth and value investing...rather, growth and value approachesare joined at the hip. Consequently, I often prefer companies that have shown terrific records of profitability and returns if they are available at a sensible price.

Black Friday-Is the party over

Contrasting views on Black Friday's retail sales:

The positive view

The negative view

GSI Commerce

An interesting article in Mike Santoli's "The Trader" discusses this controversial name. Superficially, the company, at least relative to its industry, does not appear terribly expensive, with market cap of $730 million and enterprise value of $690 million relative to TTM revenues of $403 million. But relative value will not buy you a retirement or a legacy. Let's look at the financial characteristics of this business.

Since 2000, the company has had negative free cash flow of over $100 million and appears to have had capex of over $80 million to the end of 2004. In the last twelve months alone, capex has exceeded $77 million. Return on invested capital remains negative through the last five years.

Operating income has been consistently negative for EACH quarter other than the 4th quarters of 2003 and 2004. Operating income remains negative through each reported quarter of this year.

Though it is interesting to note that significant holdings in GSIC are held by Liberty Media, Comcast, and Softbank, there has been significant net selling in the last twelve months by insiders of 3.7 million shares, roughly 9% of the outstanding.

Short sellers have noticed these trends as Santoli points out. The short position does represent about 14% of the float which is quite significant. There seems to be a high potential for a short squeeze in my opinion.

For those interested in the long side, there does not appear to be much of a margin of safety.

Saturday, November 26, 2005

Importance of ROIC versus Earnings Growth

As this link from DeepWealth effectively discusses, the return on invested capital is the most simple measure of the effectiveness of the whole company. Earnings growth is highlighted by many Wall Street analysts, yet that growth generally comes at a price, heavy investment in fixed assets, investment in working capital such as accounts receivable and inventories, or the funding of the business with incremental stock issuance. Joel Greenblatt of Gotham Capital has highlighted the importance of buying solid businesses at bargain prices. What defines a business as being solid? From the standpoint of its inherent profitability there is no better measure than ROIC.

ROIC provides a view of how effectively capital is being deployed in the business regardless of capital structure, that is, the proportion of debt versus equity. Highly leveraged businesses can show very high returns on equity since very little equity is deployed. A slight change in such a business' fortunes will result in a large change in ROE. Return on invested capital "looks through" the capital structure to measure the operating profitability of the business, not just how the business was financed.

Lancaster Colony

Lancaster Colony (LANC)

As highlighted in Barron’s November 28th edition, LANC once again has increased the dividend, as it has annually for 43 consecutive years. In addition, the company has declared a special $2.00 dividend to be paid Dec. 30th. This represents about 45% of its cash on hand as of Sept 30th.

LANC is a diversified manufacturer and marketer of consumer products, including specialty foods for the retail and foodservice markets; glassware and candles for the retail, industrial, floral and foodservice markets, and automotive accessories for the original equipment market and aftermarket.

The company is cash-rich and completely debt free, largely as a result of its strong free cash flow generation. The company exhibits very strong discipline in its acquisition strategy, and seems to evaluate many opportunities but accepts very few.

Free cash flow margins have dropped to about 6% from an historic level of about 8-9%, yet over the last five years, the business has generated $568 million in FCF which represents 48% of its current enterprise value or 42% of its current market capitalization.

Return on equity was 15.8% as of the last fiscal year ending June 30th. Return on invested capital was 18.6%. Cash ROE (or CFFO/ beginning equity) was 46.6% for the trailing twelve months.

In the last five years, the company has returned over $200 million to shareholders through its active share buyback program.

Insiders own over 26% of the company.

Friday, November 25, 2005

Why Bother with Another Blog

What the world most likely does not need is another value oriented stock market blog. Nevertheless, I hope to analyse a few stocks, knock or praise a few street recommendations, and generally, try to find a few good companies in both U.S. and global markets. In short, I will try to bring perspective that over 30 years of investing has taught, both as an amateur and a professional.

I rely on fundamental analysis. I am a Buffetteer who loves discounted cash flow approaches to valuation. For a technical perspective, please go elsewhere. To my knowledge, there is no one on the Forbes 400 list who got there using technical analysis. Not one. Enough said.

Important to note that ALL ideas, thoughts, and/or forecasts expressed or implied herein are for informational and entertainment purposes only and should NOT be construed as a recommendation to invest, trade, or speculate in the markets.

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