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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: James Clarke who wrote (6134)	2/27/1999 2:26:00 PM
From: Michael Burry	Read Replies (2) \| Respond to of 78476

I sense we've got an accounting issue here Yes, in 1996, tangible book exploded upward, as did earnings and ROE, skewing the averages. I got 38 % by finding compound annual growth from 1990 at 19.9M equity, to a recent $230 M equity. That is skewed, so I used the lower EPS growth, 28%, using 1990's 0.16 and the recent 1.16. I could go farther back to 1987, when tangible book was .32/share, and earnings were 0.06/share. If you look at the annual ROE on an S&P sheet, it sits around 20% and has fluctuated about that since 1987, which is the earliest data I have. What happened in 95/96 is that JMED acquired what are two of its biggest sellers, Levoxyl and Tapazole. Both treat thyroid disorders. This is a growing market. In April 1998, the company sold its nutritional supplements business to TwinLab for $55M, which in addition to strong cash flow has built its cash kitty. The way I look at it, over the long term, this management can perform. They have produced growth in sales and earnings ever since they founded the company in 1981. Now, with a renewed focus on the high-margin pharmaceutical business and a significant amount of cash, the company is like a coiled snake. Its last 16 acquisitions have been accretive to earnings, and in this case I am trusting that management can continue. The last "blockbuster" acquisitions were in 1996, and the stock price jumped quite a bit. I also have the feeling that the divestment of the contract manufacturing and nutritional supplements business is a prelude to another significant move on management's part. The balance sheet is way underleveraged. I think it is very hard to find an overlooked Buffett stock, but if I read in the paper that BRK had just made a buyout offer for this company at $27/share, I wouldn't be surprised. 10 years from now if the stock is at 200 I wouldn't be surprised. Like all Buffett companies, there has to be some consistency, some market power, and some great management. As far as I can tell, JMED meets those. The catch - this company gets its market power on a temporary basis across many products. There has to be faith management can continue. And it isn't as certain here as it is with Nebraska Furniture Mart. But then the management is as old either. Mike