I promised you a net-net. Here it is. This is what I put my HYDEA profits into. Another footwear company.
Penobscot Shoe (PSO - 6 1/4)
The market capitalization is only $8.6 million, and it is the most illiquid trader I have ever seen. You won't believe me until you try to buy 1,000 shares. LIMIT ORDER this one, and be patient.
Here goes. The company imports women's shoes and sells them under the Trotters brand name. I've never heard of it either, but their biggest retail customer is Nordstrom, which tells me all I need to know. Average price point of about $70 a pair. The company has been in business for a long time under the same management. The stock is controlled by the founding shareholders. Lets cut to the chase - this is a crappy business. BUT...
1) It is profitable
2) It pays a 3.3% dividend yield that is not going anywhere
3) Orders have been up over 10% for the last two quarters
4) The company has bought back a very large percentage of its shares in the last couple years, and may buy back more.
Thats not what you tend to see in a company with a valuation like this:
I will use Ben Graham's net-net technique of valuing the company. Very simple. What do I own if I buy this business? Start (and finish) with the balance sheet. In this first cut, we are going to consider fixed assets worthless. We are only going to value current assets (much more likely than fixed assets to be worth what the balance sheet amount), though we are going to subtract all of the liabilities. Here goes ==>
There are 1.4 million shares outstanding, which trade at 6 1/4. So lets start with the "asking price" in mind (remember, we are buying a small piece of a business). That asking price for the whole company is $8.7 million.
Now lets go to the latest balance sheet:
- There is $4 million of cash and marketable securities. I know what that's worth.
- Then there is $4.2 million of accounts receivable. I considered this suspect until I talked to the company and found out that their creditors are not middleman distributors, but rather Nordstrom, Dillards, and other big name retailers. This is a sound number.
- Inventories of $4.7 million. Once again, suspect, until you ask some questions. For you accounting guys, it is LIFO. And last year, the company sold into inventories and booked income on LIFO liquidation. In English, what that tells me loud and clear is that the inventories last year sold for much more than their value on the balance sheet. So I consider the $4.7 million number neither conservative nor aggressive (they already took the LIFO liquidation), but I see no reason to haircut it.
When we add a smidgen of other current assets, we get to $13.3 million of current assets, or $9.65 a share. Remember, the stock trades at $6 1/4.
Now lets move to the liability side. This is easy. As Buffett and Graham teach us, question assets, but always assume liabilities are real. Total liabilities are only $2.6 million.
So that gives me a net-net valuation of $7.78 per share. In Ben Graham-speak, at a 6 1/4 price, this is a 25% margin of safety. I would have invested on the above, but there is more.
Remember, we assumed fixed assets are worth zero for our net-net valuation. So if the fixed assets are worth anything, its "bonus points". What do we find when we look into Penobscot's fixed assets?
Well, they own just two things (remember the business, they're an importer, which requires no factories or anything). They own two pieces of real estate. (Incidently, I am a REIT specialist, so I know how to value real estate.) One is an industrial property in Maine which I valued very very conservatively at $500,000. I assumed it was termite and rat infested. i.e. - its got four walls and a floor. what is the LEAST it could be worth. Then I called the company, and found out two very important things. 1) the property is literally for sale, and 2) the asking price is $1.6 million, and they think they could sell it in a second for $1 million. So take the $1 million number. That's another 70 cents per share, or 13% of the stock price. If they sold this property and used the proceeds to buy back stock, its worth even more to me as a shareholder.
The second piece of real estate is the company headquarters, and is not for sale, but we are talking about a leased building of about 70,000 square feet. The very least that is worth is $20 per square foot, or $1.4 million. That is VERY conservative. Add $1 per share.
So lets wrap this up.
Net current assets $7.75 per share
Real estate 1.75
Total asset value 9.50 per share
and the stock trades at 6.25. That, my friends, is what a 35% margin of safety looks like. i.e. I could be high on my valuation by 35%, but you would still be paying fair value for the assets.
And don't forget, we would be getting a business (a net-net valuation values the assets in liquidation, not as an ongoing business) which a) makes money, and b) pays a dividend yield twice the market's yield.
This is what a value investment looks like. This is my second largest investment, and my largest U.S. investment. With the dividend and the valuation, I don't think it has any market risk.
I would be more than happy to answer any questions from anybody who read this far. Sorry to be so verbose, but I wouldn't put my own money into anything somebody pitched me in a one liner. Check my facts. The numbers are straight out of the 10-Q and you can read about the real estate in the 10-K. And the corporate treasurer takes calls.
Respectfully,
Jim |
