I went and found my first post on this stock a couple months ago. I don't know how to do a hyperlink, so I'll just repost it. After the bell, this company released sales up 74% year over year and earnings up from a loss to a profit of .10. Earnings in two quarters are 35 cents. I know some of you own this, but we should all be watching it tomorrow morning. - Jim
<< 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.>> |
