An accounting quibble here. While it costs the company real cash money to open company stores, and even franchisee stores, these costs are not "expenses" in the accounting sense of the word (i.e., they are mostly capitalized). And even those store opening costs that are recognized in current financial statements, are most definitely *NOT* reflected in the "operating earnings".
I'm certainly not one to take GAAP (Generally Accepted Accounting Principles) at face value, but they do provide an excellent, consistent starting point for determining the true economics of a company. In the case of many traditional companies, the GAAP figures do end up fairly reflecting discounted cash flow models, etc -- after all, GAAP was developed around traditional sorts of companies and industries.
It may well be that KREM's GAAP financial statements grossly underestimate the company's long run intrinsic value -- that's what potential shorts such as myself most fear missing during analysis. However, just because a company has various unique intangible characteristics, and just because they make a superb product, and just because their common stock is currently in short supply, does not mean that one can buy the stock today at today's price with an expectation of earning a reasonable annualized return (which I'd call 10-15%) over the next ten or fifteen years. And if you're thinking about a ten year holding period, you're increasingly moving into the game of "I'm smarter buyer/seller than the other seller/buyer" -- which is not to say that you aren't, and is not to say that there is anything wrong with this at all -- but it should be realized that this is the game being played.
Until someone can convince me that their reported (Yahoo!) 12% ROE and 4.2% net margins substantially understate economic reality, I will continue to keep KREM in reserve as a research candidate for a short position (in the category of "real businesses, nothing spectacular though, no fraud or sleaze, but overvalued 3-5X").
- Daniel |
