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Business and Management Review
1) Is the business simple and understandable?

Given the nature of the retail industry, this business is very simple. The company analyzes the market to determine purchase requirements, markets their goods, and finishes with a point of sale.

2) Does the business have a consistent operating history?

Federated has a long and fruitful history as they have become one of the largest retailers in the United States. The industry shares this legacy and continues to move forward in an attractive fashion.

3) Does the business have favorable long term prospects?

Even with increased online competition, a business line such as Federated is protected with their higher ticket goods and the type of cliental they serve. We feel confident that they will continue to enjoy the level of success of their past.

4) Is management rationale?

Management seems to be rationale in their decision making process. Particularly the acquisition of Marshall Fields under the Macy’s nameplate we feel will have long term growth potential for the company.

5) Is management candid with its shareholders?

Investor relations are in depth and comprehensive containing all relevant information a savvy investor might require.

6) Does management resist the institutional imperative?

We see no reason to question management’s decisions and are confident in saying that they do resist the institutional imperative.

Financial and Value Review
Defensive:

1) Size of firm

The firm’s market capitalization is above the $2 billion requirement. Pass.

2) Strong financial condition

With a current ratio around 1.30 the company is short of the 2.00 requirement. Fail.

3) Earnings stability

There has not been positive net income for the past ten years. Fail.

4) Dividend record

The firm has failed to pay a dividend consistently for the past ten years. Fail.

5) Earnings growth

Federated has increased their EPS by one third over the past ten years. Pass.

6) Price to earnings analysis

With a P/E ratio around 17.80 the company is below the 20 requirement. Pass.

7) Price to book analysis

The companies P/B ratio is at 1.63 which is below the 2.5 requirement. Pass.

Conclusion:

Scoring 4/8 this firm fails the test for the defensive investor and would not be recommended to be placed in that investor’s portfolio.

Enterprising:
1) Strong financial condition

Current ratio below 1.5. Fail.

2) Earnings stability

There has been positive net income for the past five years. Pass.

3) Dividend record

Company currently pays a dividend. Pass.

4) Earnings growth

Earnings are greater than five years ago. Pass.

Conclusion:

Scoring 3/4 the company passes the test for the enterprising investor and should be considered for this classification of investor.

We find a fair market price for Federated Department Stores to be around $52.

Given a current price of around $41 we would feel comfortable allowing the enterprising investor to include this security in their portfolio. We see continued growth potential and management’s decisions are in line with our long term goals.

Neither of us held a position in Federated Department Stores at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Jon at 10:18 PM | Permalink | Comments (1) | TrackBacks (0)

Dillard's, Inc. operates retail department stores located primarily in the southeastern, southwestern and midwestern areas of the United States. As of January 28, 2006, the Company operated 330 Dillard’s stores, selling a selection of merchandise, including men's, women's and children's apparel and accessories, cosmetics, home furnishings and other consumer goods. Most stores are located at suburban shopping malls. Customers may also purchase products online at Dillard's, Inc.'s Website. The Company also offers an online bridal registry to customers. Dillard's, Inc. operates retail department stores located primarily in the southwest, southeast and midwest. The stores are located in 29 states, with 51 stores being located in the western region, 124 stores in the eastern region and 155 stores in the central region.

Dillard’s is in the simple business of retail.  They purchase inventory, mark it up, and sell it.  The main issues for the industry are attracting customers and keeping inventory costs low.

The company was founded by William Dillard, in 1938 when he opened his first retail store.  Since then, the company has focused on an acquisition strategy as the industry has gone through numerous consolidation stages.  The company also focuses on advertising to attract its customers.  The operating history has been consistent, as there have been no unusual tactics used (such as being a retail business but acquiring a telephone company).

The retail industry will continue to be around as long as we exchange goods and services; however the composition of the retail industry may change.  There have been countless mergers the last few years within the industry, and a marked move towards internet purchasing by consumers.  Store fronts are still needed as consumers need to be able to see a store’s presence and have a specific location to make returns to (if necessary).  Dillard’s seems well aware of this, as their internet site allows online shopping while they are continuing to acquire new locations.

Management appears rational in its approach to business.  We especially like the company’s outlook on the recent major mergers of their competitors – they view it as an opportunity to attract customers who are not happy with the change in store names. 

Dillard’s has an average investor relations page, and we would like to see a more informative letter to shareholders.  The letter in the latest annual report seems generic, focused on overall goals but avoids discussing tactics in detail – something investors deserve to hear from management.

We have no reason to doubt that management has resisted the institutional imperative. 

At a market cap of over $2.5 billion, the company passes the requirement of $2 billion.

The company’s current ratio is not suitable for the defensive investor.

The company has achieved a positive net income for 10 years.  Pass.

Dillard’s has paid a dividend for over 10 years.

Earnings per share have not grown suitably in the last 10 years for the defensive investor.

With a PE ratio (using our Methods) of 28.60, the requirement of under 20 is not met.  Though the trailing 12-month PE ratio is 14.18, we maintain that our version of the PE ratio focusing on long-term performance, is the better statistic and should be used in determining investment opportunities.

Since the PB ratio is 1.08, it makes up for the high PE ratio, and the company passes the final test.

Having passed only 5 of the required 7 tests for the defensive investor following Benjamin Graham’s value investing strategy, we do not believe Dillard’s is suitable for the defensive investor.

The company’s current ratio is sufficient for the enterprising investor.  Pass.

The company has achieved a positive net income for over 5 years.  It passes the test.

The company currently pays a dividend.  Pass.

Earnings are greater today than they were 5 years ago.

We find the company to be suitable for the enterprising investor.

Our valuation model finds a fair value to be around $43. 

Since the company is currently trading at $33, the company seems fairly valued (it does not quite meet our margin of safety to be considered undervalued), but may be a suitable investment for a long term enterprising investor.

Neither of us held a position in Dillard’s Incorporated at the time of publication.  Also, please read our disclaimer and Our Methods.

Posted by Ben at 09:16 AM | Permalink | Comments (2) | TrackBacks (0)

Business and Management Review
1) Is the business simple and understandable?

Bon-Ton Stores is in the business of department retail and it is a very easily understandable industry. The company acquires merchandise and places a retail mark up that generates the revenue for the item sold. The main expenses for a company of this type include overhead rent (or mortgage if property owned) and payroll for human labor.

2) Does the business have a consistent operating history?

The retail business has been around for as long as individuals traded one product for another. More specifically, department retailing has been extremely successful for the past century.

3) Does the business have favorable long term prospects?

As long that an individual chooses to purchase their products through a brick and mortar storefront, Bon-Ton Stores has a very favorable outlook. With that said there is an ever expanding competition from virtual merchants selling through the internet that may erode market share in the future. There will always be the convenience factor, however, with shopping at a brick and mortar store and we feel that they will continue to have a position in commerce.  

4) Is management rationale?

Management seems to be acting rationally and their financial position proves the point. The company is outpacing the industry in both EPS growth and sales growth over the past five years. The margins the company is operating under exceed the industry significantly. There is some worry with the amount of debt the company is holding mixed with the lagging indicator of capital spending making one question what growth prospects are to be had as they may be over leveraged.  

5) Is management candid with its shareholders?

Investor relations are strong as the company is presenting the relevant information that investors require.

6) Does management resist the institutional imperative?

We are satisfied with the continued growth of the company, but we question if this growth is sustainable long term given the indicators mentioned above.

Financial and Value Review
Defensive:

1) Size of firm

The company is below the $2 billion requirement and fails the test.

2) Strong financial condition

With a current ratio around 1.80 the firm falls below the 2 requirement and fails the test.

3) Earnings stability

There has been positive net income for the past ten years and thus passes the test.

4) Dividend record

Dividends have not been paid for the past ten years and the test is failed.

5) Earnings growth

There has been and increase in EPS of one third over the past ten years. Pass.

6) Price to earnings analysis

With a P/E ratio around 30 the company is above the requirement of 20. Fail.

7) Price to book analysis

The company barely passes this test with a P/B ratio of 2.49 which is below the 2.5 requirement. Pass.

Conclusion:

Scoring only 3/8 the we would not recommend this firm to be placed in the defensive investor’s portfolio.

Enterprising:
1) Strong financial condition

Current ratio is above 1.5. Pass.

2) Earnings stability

Positive net income for the past five years. Pass.

3) Dividend record

Currently pays a dividend. Pass.

4) Earnings growth

Earnings are greater than five years ago. Pass.

Conclusion:

Scoring 4/4, the firm passes the test for the enterprising investor and should be considered for this type of investor.

We find a fair market price for Bon-Ton Stores to be $33.

With a current price around $36.50 we would feel comfortable allowing the enterprising investor to consider this security. We see growth potential and find the current price to be attractive relative to our valuation.

Neither of us held a position in Bon-Ton Stores at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Jon at 10:23 PM | Permalink | Comments (0) | TrackBacks (0)

Industry Review:  Railroads

The last couple of weeks we have looked at eight different companies within the railroad industry.  Here, we look to present a summary of those reviews and directly compare the companies through common-sized statements.

Specifically, we looked at: 

Monday, January 8 - Jon - Burlington Northern Santa Fe (BNI)
Tuesday, January 9 - Ben - Union Pacific Corporation (UNP)
Wednesday, January 10 - Jon - Kansas City Southern (KSU)
Thursday, January 11 - Ben - Providence & Worcester Railroad Co (PWX)
Monday, January 15 - Jon - The Greenbriar Companies (GBX)
Tuesday, January 16 - Ben - Genesee & Wyoming Inc. (GWR)
Wednesday, January 17 - Jon - Canadian National Railway (CNI)
Thursday, January 18 - Ben - Norfolk Southern Corporation (NSC)

 Here is a look at the common-sized Interim Balance Sheet for all of the companies:

And the common-sized Income Statement of all the companies:

 
In the next couple weeks, we will look at the Department Stores Sector.  Please come back for the following articles:

Monday, January 22 – Jon – Bon-Ton Stores, Inc. (BONT)
Tuesday, January 23 – Ben – Dillard’s, Inc. (DDS)
Wednesday, January 24 – Jon – Federated Dept. Stores, Inc (FD)
Thursday, January 25 – Ben – Gottschalks, Inc – (GOT)
Monday, January 29 – Jon – J.C. Penny Company – (JCP)
Tuesday, January 30 – Ben – Kohl’s Corporation (KSS)
Wednesday, January 31 – Jon – Saks Inc (SKS)
Thursday, February 1 – Ben – TJX Companies, Inc (TJX)
Monday, February 5 – Ben – Industry Review & Introduction of Next Industry

Posted by Ben at 03:29 PM | Permalink | Comments (0) | TrackBacks (0)

Norfolk Southern Corporation (Norfolk Southern) and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC). CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of NSR and CSX Transportation Inc. (CSXT). Norfolk Southern Corporation and Subsidiaries' (NS) non-carrier subsidiaries engage principally in the acquisition, leasing and management of coal, oil, gas and minerals; the development of commercial real estate; telecommunications, and the leasing or sale of rail property and equipment.

Norfolk Southern is in the primary business of freight transportation.  Its focus is mostly on rail operations.  As we have said previously, the rail industry is simple and understandable.

Norfolk Southern is the culmination of over 300 railway lines that have merged over the last two centuries.  The most recognizable name on the list of merged lines is Penn Central.  Overall, the company has maintained a consistent focus on rail transportation throughout its history.  Financially, the company has achieved a positive net income for over 10 years and has paid a dividend for over 20 years.

As we have said all week, the rail industry appears to have good prospects for continued existence.  There will be railroads in 100 years as there will still be a need for the transportation of heavy goods and resources.  As for Norfolk Southern, the company is well diversified across the nation and has the capabilities of acquiring other lines across the globe for further growth.

We are encouraged by management’s focus on its shareholders.  Beginning with the mission statement, there is a clear and distinct view that the primary goal of the company is to maximize shareholder value over the long-term.  We see no reason to believe the management is irrational.

Norfolk Southern has a standard investor relations site with all of the usual information available for shareholders.  They have also devoted a portion of their corporate website to the history of the company, which is well worth a read. 

We have found no reason to doubt that management has fallen under the spell of the institutional imperative.

The market cap of Norfolk Southern is $20.83 billion.  Pass.

The company’s current ratio is about 1.4, below the 2.0 requirement.  Fail.

The company has had a positive net income for over 10 years.  Pass.

Norfolk Southern has paid a dividend for over 10 years.  Pass.

Earnings have grown more than 1/3 over the last 10 years.  Pass.

With a PE ratio (using our Methods) of 24.15, the requirement of under 20 is not met.   Also, the company’s trailing 12-month PE ratio is 14.41.  It should be noted that this discrepancy in ratios is due to higher than usual earnings in the latest reported year.  Since we base the requirement on our PE ratio being below 20, the company fails this test.

Though the PB ratio is only 2.09, allowing it to pass half of this requirement, the multiple of its PE and PB ratios is over 50.  Fail.

Having passed only 5 of the required 7 tests for the defensive investor following Benjamin Graham’s value investing strategy, we do not believe Providence and Worcester is suitable for the defensive investor.

The company’s current ratio is below 1.5.  Fail.

The company has achieved a positive net income for over 5 years.  It passes the test.

The company currently pays a dividend.  Pass.

Earnings are greater today than they were 5 years ago.  Pass.

We find the company to be suitable for the enterprising investor, having passed 3 out of 4 tests.

Our valuation model finds a fair value to be around $47. 

Since the company is currently trading at about $50, we feel it is fairly valued but may be a suitable investment for the enterprising investor.

Neither of us held a position in Norfolk Southern Corp. at the time of publication.  Also, please read our disclaimer and Our Methods.

Posted by Ben at 08:54 AM | Permalink | Comments (0) | TrackBacks (0)

Business and Management Review
1) Is the business simple and understandable?

Given the nature of the railway business and based upon our previous analysis, this is a simple industry to understand.

2) Does the business have a consistent operating history?

Railroad transportation has had a long history and has been profitable as well. Again, please refer to previous posts to learn more about the history of this industry.

3) Does the business have favorable long term prospects?

As long as companies need to transport in a manor that is safe, reliable, and economic the railroad industry will exist. There is competition from the air and land, but railroads have the ability to move mass amounts in a fairly quick timeframe.

4) Is management rationale?

This company is lean and is beating their competitors in almost all major financial aspect. Please refer to reuters detailed comparison of the company versus industry and market averages. We are pleased with the actions management are taking, especially in keeping their debt to equity ratio below that of the industry which reduced interest expense and lowers financing costs.

5) Is management candid with its shareholders?

Investor relations for the company incorporate all the relevant information an investor would desire. There are some added features on their site, but for the most part it contains the type of information we have come to expect in the 21^st century.  

6) Does management resist the institutional imperative?

We are confident in our position that management is acting responsibly by looking forward and not loading the company with too much unnecessary debt.

Financial and Value Review
Defensive:

1) Size of firm

Market capitalization is over $23 billion which is more than enough to pass this test. Pass.

2) Strong financial condition

The companies current ratio rest at roughly 0.58 which is far below the required 2 level, therefore, they fail this test. Fail.

3) Earnings stability

There has been positive net income for the ten years prior. Pass.

4) Dividend record

The firm has paid a dividend consistently for the past ten years. Pass.

5) Earnings growth

EPS has increased by at least one third over the past ten years. Pass.

6) Price to earnings analysis

With a P/E ratio of roughly 26, the firm is above the benchmark of 20. Fail.

7) Price to book analysis

With a P/B ratio of over 2.60 the firm is above the 2.5 requirement. Fail

Conclusion:

The company fails the overall test for the defensive investor, and would not be an appropriate selection.

Enterprising:
1) Strong financial condition

Current ratio is below 1.5. Fail.

2) Earnings stability

They have had positive net income for the past five years. Pass.

3) Dividend record

The firm does currently pay a dividend. Pass.

4) Earnings growth

Earnings are greater than five years ago. Pass.

Conclusion:

The firm passes the overall test for the enterprising investor, and would be a fine choice for this classification of investor.

We find a fair market price for Canadian National at $71.00 per share.

Opinion:
Given the current market price of around $52.00 we find this stock an extremely attractive choice for the enterprising investor. We expect that there is much upside potential in the long term.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

This is the seventh part of our study of the Rail Transportation sector.  Please come back in the next couple weeks for the following articles:

Monday, January 8 - Jon - Burlington Northern Santa Fe (BNI)
Tuesday, January 9 - Ben - Union Pacific Corporation (UNP)
Wednesday, January 10 - Jon - Kansas City Southern (KSU)
Thursday, January 11 - Ben - Providence & Worcester Railroad Co (PWX)
Monday, January 15 - Jon - The Greenbriar Companies (GBX)
Tuesday, January 16 - Ben - Genesee & Wyoming Inc. (GWR)
Wednesday, January 17 - Jon - Canadian National Railway (CNI)
Thursday, January 18 - Ben - Norfolk Southern Corporation (NSC)
Monday, January 22 - Ben - Overall Industry Analysis & Introduction of Next Industry

Posted by Jon at 11:36 PM | Permalink | Comments (0) | TrackBacks (0)

Company Profile: Genesee & Wyoming Inc. (GWR) (obtained via Google Finance)

Genesee & Wyoming Inc. is an owner and operator of short line and regional freight railroads in the United States, Canada, Mexico, Australia and Bolivia. In addition, the Company provides freight car switching and rail-related services to industrial companies in the United States. As of December 31, 2005, the Company owned, leased or operated 49 short line and regional freight railroads with approximately 9,300 miles of track and has access to more than 3,000 additional miles under track access arrangements. On February 13, 2006, the Company and Wesfarmers Limited entered into an agreement to sell its Western Australia operations to Queensland Rail and Babcock & Brown Limited.

Business and Management Review

1) Is the business simple and understandable?

As we have said all week, the railroad industry is simple to understand.  It is all about transporting goods and the main concerns of the railroad are infrastructure and equipment maintenance. 

2) Does the business have a consistent operating history?

The company was founded in the late Nineteenth century as a small railroad that transported salt out of a family owned mine in New York.  Over the next 90 years, the railroad focused mainly on its operations in New York and was highly dependent on the Salt industry.  Following the deregulation of the railroads in the early 1980s, the company began to expand its services through a strategy of acquisitions.  Since then, Genesee & Wyoming has continued to expand through acquiring regional rail companies and improving margins.

3) Does the business have favorable long term prospects?

The freight rail industry is in a good position to continue to at least remain solvent in the future.  Goods will need to be transported through rail services until we can fly significantly heavy amounts of materials at a lower cost.

4) Is management rational?

Mortimer B. Fuller III, Chairman and Chief Executive Officer, is one of the primary reasons G&W is operating today.  It was his vision and devotion to his great grandfather’s railroad that helped the company survive in the 1980s and grow to its current state.  Yes, we believe management is rational.

5) Is management candid with its shareholders?

Genesee & Wyoming has a very nice investor relations page and shows no sign of not being candid.  The site also includes some pages for rail-fans (not necessarily relevant for the investor, but fun to check out anyway)

6) Does management resist the institutional imperative?

We see no evidence to suggest that the management has done anything but resist the institutional imperative.  How easy would it have been for Fuller to just take the pay and let the company die?  The management cares about the company and acts accordingly.

Financial and Value Review

Defensive:

1) Size of firm

With a market cap of less than $2 billion, the company fails this test.

2) Strong financial condition

With a current ratio under 2, the company fails this test.

3) Earnings stability

The company has achieved a positive net income for over 10 years, and passes this test.

4) Dividend record

The company does not pay a dividend.  Fail.

5) Earnings growth

Earnings have not grown sufficiently over the last 10 years.  Fail.

6) Price to earnings analysis

With a PE ratio (using our Methods) of 16.37 and a trailing 12-month PE ratio of 8.66, the company passes this test.

7) Price to assets analysis

Since the PB ratio is 2.18 and the multiple of the PB and PE ratios is less than 50, the company passes this test.

Overall

The company only passes 4 out of the 7 required tests and is thus unsuitable for the defensive investor.

Enterprising:

1) Strong financial condition

Since the current ratio is above 1.5, the company passes this test.

2) Earnings stability

The company has earned a positive net income for over 5 years.  Pass.

3) Dividend record

The company does not currently pay a dividend.  Fail.

4) Earnings growth

Earnings are not greater today than they were 5 years ago.  Fail.

Overall

Since the company only passed 2 out of the 4 tests for the enterprising investor, it is not suitable for this type of individual.

Valuation:

Our valuation model gives a fair value of about $34. 

Opinion:

Though this company is currently fairly valued (allowing for a margin of safety), we do not believe it to be suitable for the defensive or enterprising investor following a modernized Benjamin Graham value investing strategy.

Neither of us held a position in at the time of publication.  Also, please read our disclaimer and Our Methods.

This is the sixth part of our study of the Rail Transportation sector.  Please come back in the next couple weeks for the following articles:
Monday, January 8 - Jon - Burlington Northern Santa Fe (BNI)
Tuesday, January 9 - Ben - Union Pacific Corporation (UNP)
Wednesday, January 10 - Jon - Kansas City Southern (KSU)
Thursday, January 11 - Ben - Providence & Worcester Railroad Co (PWX)
Monday, January 15 - Jon - The Greenbrier Companies (GBX)
Tuesday, January 16 - Ben - Genesee & Wyoming Inc. (GWR)
Wednesday, January 17 - Jon - Canadian National Railway (CNI)
Thursday, January 18 - Ben - Norfolk Southern Corporation (NSC)
Monday, January 22 - Ben - Overall Industry Analysis & Introduction of Next Industry

Posted by Ben at 09:01 PM | Permalink | Comments (0) | TrackBacks (0)

Business and Management Review

1) Is the business simple and understandable?
This business relies solely on the health of the rail freight industry, as they supply the rail cars that move product. The company leases rail cars to railroad companies, as well maintains those cars as maintenance occurs. The company as well supplies vessels for marine usage.

The railcar industry has had continued success due to the continuing usage of railroads across the United States. Seeing that the physical railcar is the “nuts and bolts” of a railroad, the company has enjoyed long standing prosperity.

3) Does the business have favorable long term prospects?
As with the prior railroad companies, we see no reason to question the continued success of this industry. In particular with Greenbrier, the fact they lease their railcars allows a continued stream of cash flow which further helps this company within the industry.

6) Does management resist the institutional imperative?
We see management looking towards the future for the company and acting in the best interests of the shareholders.

2) Strong financial condition

Greenbrier’s current ratio is around 1.70 which falls short of the requirement of being over 2, therefore failing the test.

7) Price to assets analysis
The P/B ratio is below 2.5 at around 2 which allow the firm to pass this test.

Greenbrier passed 4/8 of the tests for the defensive investor, but failed to pass the requirement of at least seven. We therefore would not recommend this stock be placed in the defensive investor’s portfolio.

Enterprising:
1) Strong financial condition
The firm has a current ratio greater than 1.5 and passes the test.

Neither of us held a position in The Greenbrier Companies at the time of publication.  Also, please read our disclaimer and Our Methods.

This is the fifth part of our study of the Rail Transportation sector.  Please come back in the next couple weeks for the following articles:
Monday, January 8 - Jon - Burlington Northern Santa Fe (BNI)
Tuesday, January 9 - Ben - Union Pacific Corporation (UNP)
Wednesday, January 10 - Jon - Kansas City Southern (KSU)
Thursday, January 11 - Ben - Providence & Worcester Railroad Co (PWX)
Monday, January 15 - Jon - The Greenbrier Companies (GBX)
Tuesday, January 16 - Ben - Genesee & Wyoming Inc. (GWR)
Wednesday, January 17 - Jon - Canadian National Railway (CNI)
Thursday, January 18 - Ben - Norfolk Southern Corporation (NSC)
Monday, January 22 - Ben - Overall Industry Analysis & Introduction of Next Industry

Posted by Jon at 10:59 PM | Permalink | Comments (0) | TrackBacks (0)

Providence and Worcester Railroad Company (P&W) is a class II regional freight railroad that operates in Massachusetts, Rhode Island, Connecticut and New York. The Company transports a variety of commodities for its customers, including construction aggregate, iron and steel products, chemicals, lumber, scrap metals, plastic resins, cement, coal, construction and demolition debris, processed foods and edible food stuffs, such as frozen foods, corn syrup and animal and vegetable oils. P&W serves as an interstate freight carrier in the State of Rhode Island and possesses the exclusive and perpetual right to conduct freight operations over the Northeast Corridor between New Haven, Connecticut and the Massachusetts/Rhode Island border. It also operates double-stack intermodal terminal facilities in New England in Worcester, Massachusetts.

Providence and Worcester is a very small regional railroad with a total market cap of $86.1 million.  The railroad focuses mainly on intermodal (semi-trailers stacked on train cars) freight transportation in the New England region and currently operates on about 545 miles of track.

The company began operating as an independent railroad in 1973 and has remained focused on its initial operating strategy as a freight rail service.  In addition, the company has been consistent in its acquisitions by targeting connecting lines to grow.  Financially, the company has paid a dividend and maintained a positive net income for over 10 years.

As the only interstate freight carrier in the state of Rhode Island (according to their website), Providence and Worcester holds a strong competitive advantage in their operating region.  To enter the railroad industry requires substantial capital to construct lines, build customers, purchase equipment, etc.   

Management has remained rational throughout its history, as evidence in the acquisition strategy the management has employed.  The company has not made any irrational purchases that were not within the initial operating strategy. 

Providence and Worcester has a very limited website and there is limited information available for the company.  However, the site lists the company directory with the email addresses and phone numbers for several key individuals.

We have found no reason to doubt that management has fallen under the spell of the institutional imperative.

With a market cap of only $86.1 million, this company is far too small for the defensive investor.

The company’s current ratio of 2.15 is proof of a solid financial condition.  Pass.

The company has had a positive net income for over 10 years.  Pass.

Providence and Worcester has paid a dividend for over 10 years.  Pass.

Earnings have not grown more than 1/3 over the last 10 years.  The company fails this test.

With a PE ratio (using our Methods) of 97.27, the requirement of under 20 is not met.  Also, the company’s trailing 12-month PE ratio is 55.

Though the PB ratio is only 1.24, allowing it to pass half of this requirement, the multiple of its PE and PB ratios is over 50.

Having passed only 4 of the required 8 tests for the defensive investor following Benjamin Graham’s value investing strategy, we do not believe Providence and Worcester is suitable for the defensive investor.

The strong current ratio allows the company to pass this requirement.

The company has achieved a positive net income for over 5 years.  It passes the test.

The company currently pays a dividend.  Pass.

Earnings are greater today than they were 5 years ago.

We find the company to be suitable for the enterprising investor.

Our valuation model finds a fair value to be around $18. 

Since the company is currently trading at about $19, we feel it is fairly valued but may be a suitable investment for the enterprising investor.

Neither of us held a position in Providence and Worcester Railroad Company at the time of publication.  Also, please read our disclaimer and Our Methods.

This is the fourth part of our study of the Rail Transportation sector.  Please come back in the next couple weeks for the following articles:

Monday, January 8 - Jon - Burlington Northern Santa Fe (BNI)
Tuesday, January 9 - Ben - Union Pacific Corporation (UNP)
Wednesday, January 10 - Jon - Kansas City Southern (KSU)
Thursday, January 11 - Ben - Providence & Worcester Railroad Co (PWX)
Monday, January 15 - Jon - The Greenbriar Companies (GBX)
Tuesday, January 16 - Ben - Genesee & Wyoming Inc. (GWR)
Wednesday, January 17 - Jon - Canadian National Railway (CNI)
Thursday, January 18 - Ben - Norfolk Southern Corporation (NSC)
Monday, January 22 - Ben - Overall Industry Analysis & Introduction of Next Industry

Posted by Ben at 02:01 PM | Permalink | Comments (0) | TrackBacks (0)

Company Profile: Kansas City Southern (KSU) (obtained via Google Finance)

Kansas City Southern (KCS) is a holding company with principal operations in rail transportation. The Company, along with its subsidiaries and affiliates, owns and operates a North American rail network strategically focused on the north/south freight corridor that connects commercial and industrial markets in the central United States with certain industrial cities in Mexico. Its principal subsidiary, The Kansas City Southern Railway Company (KCSR), serves a 10-state region in the Midwest and southern parts of the United States and has a short north/south rail route between Kansas City, Missouri, and several ports along the Gulf of Mexico in Alabama, Louisiana, Mississippi and Texas.
 

Business and Management Review
1) Is the business simple and understandable?

The business is basic and easy to understand as they move product(s) for customers and charge fees that represent revenue. The primarily operate in the north/south freight corridor, but also freight shipments internationally to Mexico.                                               

2) Does the business have a consistent operating history?

The company was founded in 1887 and found a market niche in establishing a north-south axis of rail lines, while competition was focusing on east-west. Today, Kansas City Southern is a holding company for the Texas Mexican Railroad Company, and Kansas City Southern de Mexico. Interesting enough, the founder envisioned in the late 1800’s to develop a rail network reaching from Kansas City, though the Gulf States, and finally into Mexico; he was proven correct in his analysis.

3) Does the business have favorable long term prospects?

As stated with prior analysis of the rail line industry, there are continued favorable prospects as long as companies continue to need to move product that is unsuitable for air or ground (highway) transport. Therefore, we believe the rail companies will continue to enjoy the success of years and centuries past. 

4) Is management rationale?

We find several reasons to be concerned of management’s decisions after analyzing this firm. In comparison to industry averages, KSU falls behind on key indicators. Gross margin, operating margin, and especially net profit margin are significantly below that of the industry. The five year average of return on equity is half that of their competitors, obviously there are problems. Startling is the amount of debt this company is carrying on their books. They debt/equity ratio stands at 1.12 compared to an industry average of 0.65. This raises concerns of over leverage within the company that further weakens them competitively. We are very concerned of these indicators.

5) Is management candid with its shareholders?

The company’s investor relation page is fully loaded with the data and features that are demanded by investors in the 21st century. Very interesting is speak up!, which is a feature for that explains how employees can report misconduct within the company. Every company should take these steps to enhance their corporate governance!

6) Does management resist the institutional imperative?

Given the data we have uncovered, we are concerned about management’s priorities.

Financial and Value Review
Defensive:

1) Size of firm

Market capitalization of the firm is over $2.2 billion passing KSU on this test.

2) Strong financial condition

Current ratio is below 2, at about 0.81. KSU fails this test.

3) Earnings stability

The firm has failed to generate positive net income for the past ten years which fails the test.

4) Dividend record

The company does not pay a dividend which fails this test.

5) Earnings growth

The company has failed to grow their EPS by one third over the past ten years, which fails this test as well.

6) Price to earnings analysis

The company’s trailing 12 month P/E ratio stands at roughly 39, which is significantly higher than the benchmark 20. KSU fails this test.

7) Price to book analysis

The P/B ratio for KSU is about 1.46 which is below the 2.5 requirement, therefore allowing the firm to pass this test.

Conclusion:

Scoring only 2/7, Kansas City Southern fails the overall test for the defensive investor.

Enterprising:
1) Strong financial condition

KSU fails this test, as the enterprising investor requires a current ratio below 1.5.

2) Earnings stability

The enterprising investor requires positive net income for five years prior and KSU fails to meet this requirement.

3) Dividend record

The company does not pay a dividend; failure is a result for this test.

4) Earnings growth

Earnings are greater than five years ago, which allows KSU to pass this test.

Conclusion:

Scoring 1/4, Kansas City Southern fails the overall test for the enterprising investor.

We find a fair market value for the firm to be around $26 per share.

This is the third part of our study of the Rail Transportation sector.  Please come back in the next couple weeks for the following articles:

Monday, January 8 - Jon - Burlington Northern Santa Fe (BNI)
Tuesday, January 9 - Ben - Union Pacific Corporation (UNP)
Wednesday, January 10 - Jon - Kansas City Southern (KSU)
Thursday, January 11 - Ben - Providence & Worcester Railroad Co (PWX)
Monday, January 15 - Jon - The Greenbriar Companies (GBX)
Tuesday, January 16 - Ben - Genesee & Wyoming Inc. (GWR)
Wednesday, January 17 - Jon - Canadian National Railway (CNI)
Thursday, January 18 - Ben - Norfolk Southern Corporation (NSC)
Monday, January 22 - Ben - Overall Industry Analysis & Introduction of Next Industry

Posted by Jon at 10:59 PM | Permalink | Comments (0) | TrackBacks (0)

Company Profile:  Union Pacific Corporation (obtained via Google Finance)

Union Pacific Corporation (UNP) operates primarily as a rail transportation provider through Union Pacific Railroad Company (UPRR or the Railroad), its principal operating company. UPRR is a Class I railroad that operates in the United States. UPC has approximately 32,426 route miles, linking Pacific Coast and Gulf Coast ports with the Midwest and eastern United States gateways and providing several north/south corridors to key Mexican gateways. UPC serves the western two-thirds of the United States and maintains coordinated schedules with other rail carriers for the handling of freight to and from the Atlantic Coast, the Pacific Coast, the Southeast, the Southwest, Canada and Mexico. Export and import traffic is moved through Gulf Coast and Pacific Coast ports, and across the Mexican and Canadian borders. The Railroad's commodity revenue consisted of six commodity groups: agricultural, automotive, chemicals, energy, industrial products and intermodal.

Business and Management Review
1) Is the business simple and understandable?
            Union Pacific is in the transportation business.  Transportation is a simple and understandable business.  The company’s main focus is rail transit and they operate 8,400 locomotives on over 32,400 route miles in 23 states. 

2) Does the business have a consistent operating history?
            In 1848, the Galena and Chicago Union Railroad began operating.  Later, this company would eventually become the Union Pacific Railroad after some mergers.  In 1862, President Lincoln signed into law the Pacific Railroad Act – designating the Union Pacific as one of the two railroads responsible to build the first transcontinental railroad (which was completed in 1869).  Over the years, Union Pacific has dealt with bankruptcy, countless mergers, recessions, depressions, and 33 different U.S. Presidential Administrations.  Throughout its history, it has been a railroad operator without question.  
            From a financial standpoint, UPC has paid a dividend for over 10 years, and has had only one year with a net loss in the last 10 years.

3) Does the business have favorable long term prospects?
            The rail industry will continue to be around until we no longer need to move materials too heavy to fly.  In other words, the rail industry should be around a very, very long time.  Union Pacific should be able to survive any stress that may come its way as it has proven through its survival of multiple issues throughout its history.  The company maintains a strong advantage in its well-recognized brand image and the sheer size of the company. 

4) Is management rational?
            Management appears to be rational in its efforts.  Having reviewed the company, we believe in management’s strive toward operation efficiency, safety, better fuel efficient locomotives and other aspects of the company’s long term plan.  We have found no reason to doubt management’s rationality.

5) Is management candid with its shareholders?
            In the company’s annual reports, the letter to shareholders is one of the more informative letters we have seen.  Details of the corporation’s strategies, issues that came up, and some forward looking statements are included.  In addition, the company has an impressive investor relations site.  While you’re there, check out the history section for the general public.  It has some very interesting reading!

6) Does management resist the institutional imperative?
            We believe the management has always resisted the institutional imperative.  Unfortunately (or maybe fortunately, as it led to some of the laws that govern businesses today and support investors) the history of Union Pacific in the nineteenth century includes tales of bribery and fraud – but we don’t need to worry about today’s management.

Financial and Value Review

Defensive:
1) Size of firm
            At a market cap of over $24 billion, the company passes the requirement of $2 billion.

2) Strong financial condition
            The company’s current ratio is not suitable for the defensive investor.

3) Earnings stability
            The company had a net loss in 1998 so it does not pass this requirement either.

4) Dividend record
            Union Pacific has paid a dividend for over 10 years.

5) Earnings growth
            Earnings per share have not grown suitably in the last 10 years for the defensive investor.

6) Price to earnings analysis
            With a PE ratio (using our Methods) of 24.94, the requirement of under 20 is not met.

7) Price to assets analysis
            Since the PB ratio is 1.67, it makes up for the high PE ratio, and the company passes the final 2 tests.

Overall
Having passed only 4 of the required 8 tests for the defensive investor following Benjamin Graham’s value investing strategy, we do not believe Union Pacific is suitable for the defensive investor.

Enterprising:
1) Strong financial condition
            With a poor current ratio, the company fails this test.

2) Earnings stability
            The company has achieved a positive net income for over 5 years.  It passes the test.

3) Dividend record
            The company currently pays a dividend.  Pass.

4) Earnings growth
            Earnings are greater today than they were 5 years ago.

Overall
We find the company to be suitable for the enterprising investor.

Valuation:
Our valuation model finds a fair value to be around $95. 

Posted by Ben at 04:03 PM | Permalink | Comments (0) | TrackBacks (0)

Business and Management Review
1) Is the business simple and understandable?

Burlington Northern is in the business of rail transportation and they earn their revenue from the fees generated for these services. The business is simple as they market themselves to earn the business, load the trains, move the trains, and deliver the product where desired.

2) Does the business have a consistent operating history?

Railroad transportation has a long history as it was the first mass transport service before airlines, or highway freight existed. The business has taken time to purchase the rail lines they operate, therefore, saving costs by not leasing line space from other rail companies.

3) Does the business have favorable long term prospects?

Although both air and highway transportation is a quicker way to move merchandise, the rail system still has positive prospects. Railroads will continue to move large amounts of items, and single items that are too large to move by other methods. We feel that this industry will continue to attract a segment of the customers in this market, and will thrive as long as they stick to their business line and not deviate too far.  

4) Is management rationale?

We find no reason to suspect that management is not rationale in their decision making process. Growth rates of sales, income, and dividends have been attractive in comparison to industry averages. The company holds little debt in regards to overall equity and we feel that the firm is not over leveraged.

5) Is management candid with its shareholders?

6) Does management resist the institutional imperative?

There is no reason to be concerned about management within Burlington Northern. They seem to be acting rationale and in the best interest of their shareholders.

Financial and Value Review
Defensive:

1) Size of firm

Coming in at about 26 billion in terms of market capitalization, BNI passes the test of being over 2 billion.

2) Strong financial condition

With a current ratio of about 0.58, the company falls short of the 2.00 requirement in order to pass this test.

3) Earnings stability

Burlington has had positive net income for the prior ten years, and therefore, passes this test.

4) Dividend record

There has been consistent dividend payments over the past ten years and passes this test for the defensive investor.

5) Price to earnings analysis

With a P/E ratio of over 26, the company fails the test of having a ratio below 20.

6) Price to assets analysis

With a P/B above 2.5 the company fails this test as well, although barely as the ratio stands around 2.8.

Conclusion:

Based upon our valuation for the defensive investor, Burlington Northern does not pass the test.

Enterprising:
1) Strong financial condition

The current ratio is not above 1.5, and thus does not pass for the enterprising investor as well.

2) Earnings stability

The company has had positive net income for the past five years which allows the company to pass this test.

3) Dividend record

Burlington Northern currently pays a dividend and as such passes this test.

4) Earnings growth

Earnings for the company are greater than five years ago, therefore, the company passes this test.

Conclusion:

Based upon our valuation for the enterprising investor, Burlington Northern passes the test of being attractive for this type of investor.

Valuation:

We find a fair market price to be around $67 for Burlington Northern.

Opinion:
Given the current (1/9/07) share price of about $72 our valuation recommends holding this security. However, seeing that it passed our test for the enterprising investor, we would be comfortable placing this stock in their respected portfolio.

Neither of us held a position in BNI at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Jon at 10:10 AM | Permalink | Comments (1) | TrackBacks (0)

Company Profile: MGM MIRAGE (MGM):

MGM MIRAGE is a gaming company, which through its wholly owned subsidiaries owns and operates casino resorts, which includes gaming, hotel, dining, entertainment, retail and other resort amenities. The Company owns and operates casino resorts in Las Vegas, Nevada. The Company owns three resorts in Primm, Nevada, as well as two championship golf courses located near the resorts. The Company also owns and operates two resorts in Mississippi. During the year ended December 31, 2005, MGM Mirage’s operations consisted of 24 wholly owned casino resorts and 50% investments in three other casino resorts. On April 25, 2005, MGM MIRAGE closed its merger with Mandalay Resort Group (Mandalay) under, which it acquired Mandalay.

Business and Management Review

1) Is the business simple and understandable?

The gaming industry bases their business on the entertainment of their customers while visiting their establishments. Customers gamble their money and the casino pays out periodically, but the risk of loss on the casinos’ end is minute. There is constantly a steady cash flow entering the company as the casinos are open twenty-four hours a day, three hundred sixty five days a year.

2) Does the business have a consistent operating history?

Gaming has a long and at times troubling history as the culture in the United States has changed its perception of this industry. Currently, it has turned into a corporate powerhouse with huge profits and even larger assets in terms of buildings and land. With Las Vegas, NV being the Mecca of gambling, MGM Mirage is in a position to prosper with the amount of casinos they own and operate.  

3) Does the business have favorable long term prospects?

With continued growth in Las Vegas, as well international gambling sites (particularly Dubai) there will be competition. We feel that traditional brick and mortar gambling’s best days may be behind them as online gambling will grab more market share even with current legislation in this country to curb the usage. However, we do not expect gambling to decrease in size, but rather that the explosive growth MGM enjoyed in the 1990’s will be difficult to replicate, at least here in the United States. There may be opportunities abroad, but there would be needed infrastructure for this to take place.   

4) Is management rationale?

We worry that management may be acting out of order in the amount of debt they are piling on the company. This is unless they have explicit plans to use this financing to expand internationally, otherwise they are misallocating resources. The fact they pay no dividend is another reason we are concerned of the priorities of management.

5) Is management candid with its shareholders?

6) Does management resist the institutional imperative?

We worry that the CEO is also the chairman of the board and would like to see the two positions be separate individuals. That issue mixed in with the overall capital structure of the company makes us worry where management is in terms of outlook and long term forecasts.

Financial and Value Review

Defensive:
1) Size of firm

At $16 billion (USD) market capitalization, MGM passes the test of being less than $2 billion in market size.

2) Strong financial condition

At 0.66 MGM fails the test of having a current ratio of above 2. Looking at the reasons why this ratio is so low, it is evident that the debt/equity ratio is roughly 3.6. This explains the high liability portion in the current ratio and may be troublesome as to the amount of debt the company currently holds.

3) Earnings stability

MGM has had positive net income for the past ten years, therefore, passing this test for the defensive investor.

4) Dividend record

The company does not pay a dividend and fails this test. It is again worrying that there is not sufficient capital to pay a dividend leading us to again infer that the level of interest payments on their debt obligations are stripping this company of liquidity.

5) Price to earnings analysis

The P/E ratio for MGM is over 29 and fails the test of being below 20.

6) Price to assets analysis

The P/B ratio is over 4.5 and significantly fails the test of being below 2.5. Between this and the P/E ratio we have to begin to question current pricing on the open market.

Conclusion:

MGM Mirage fails the defensive investor test and we would not recommend placing this security in such a portfolio.

Enterprising:
1) Strong financial condition

With a current ratio 0.66 the company fails this test of being below 1.5.

2) Earnings stability

The company has had positive net income for the five years prior and passes this test for the enterprising investor.

3) Dividend record

MGM pays no divided and fails this test.

4) Earnings growth

Earnings are greater than five years ago and as such the company passes this test.

Conclusion:

MGM Mirage fails the test for the enterprising investor and would not fit the investing criteria of this type of investor.

Valuation:
Based upon our internal valuation we place a fair price of $24 a share on MGM Mirage which currently places this stock significantly overpriced as the closing share price (12/20/06) was $55.31.
Opinion:
Given the factors explained above, we are not favorable of MGM Mirage and feel that it does not suit our investing philosophy. We are not against the gaming industry, but feel that this company is not in line with the Benjamin Graham or Warren Buffett school of investing.

Neither of us held a position in MGM at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Jon at 06:38 PM | Permalink | Comments (0) | TrackBacks (0)

Company Profile: Costco Wholesale Corporation (COST)

Costco Wholesale Corporation (Costco) operates membership warehouses that offer a selection of nationally branded and private-label products in a range of merchandise categories in self-service warehouse facilities. The Company buys the majority of its merchandise directly from manufacturers and routes it to a cross-docking consolidation point (depot) or directly to its warehouses. Costco's depots receive container-based shipments from manufacturers and reallocate these goods for combined shipment to its individual warehouses, generally in less than 24 hours. As of September 3, 2006, the Company operated 487 warehouses, including 354 in the United States and four in Puerto Rico, 68 in Canada, 18 in the United Kingdom, five in Korea, four in Taiwan, five in Japan and 29 warehouses in Mexico (through Costco Mexico, a 50%-owned joint venture).
 

Business and Management Review

1) Is the business simple and understandable?

Costco is in the business of selling wholesaled goods to consumers at discounted prices over department stores. The company buys the merchandise from the manufacturer at a significantly lower price due to the volume of purchase. They then pass along the savings to the consumers who must pay a membership due(s) in order to shop from the “club”. The concept behind the business is to sell in extremely large volumes due to the low item by item margin.

2) Does the business have a consistent operating history?

Over the past five years, Costco has experienced overall positive growth even during periods of extensive expansion of the company. Earnings have fluctuated somewhat during key years of heavy expansion; however, we feel that this is necessary for the company to continue to be the powerhouse wholesaler they currently are.  

3) Does the business have favorable long term prospects?

The main competitor for Costco is Wal-Marts’ Sam’s Club division. We feel that Costco offers a greater value to their consumers and will continue to see market share increase in their favor. Costco enjoys remarkable brand awareness for a retailer and the consumer enjoys the treasure hunt atmosphere of possible savings. These factors will drive Costco to become more efficient and profitability to increase as well.  

4) Is management rationale?

We are impressed with the board of directors and the vast array of individuals it contains. We feel that the board is acting in the best interests of shareholders, and thus have management that as well is acting in the same manor. We see no reason to have concern that management is out of line in any foreseeable detail.

5) Is management candid with its shareholders?

Costco has a detailed investor relations page that has the typical detailed information one would expect from a company of this size. The page is easily found on the company’s website, and the content provided does not lack of any material information.

6) Does management resist the institutional imperative?

Given the diversity on the board of directors and the checks and balances that are in place, we see no reason to have any concern on this point. We trust that management is acting in the best interests of the shareholders of Costco.

Financial and Value Review
 

Defensive:

1) Size of firm

Costco passes the market capitalization test, with the company having a market size of over $24 billion.

2) Strong financial condition

The current ratio of the company falls below 2 at 1.22, therefore failing this test as well.

3) Earnings stability

Costco has enjoyed positive net income for the past ten years and passes this test for the defensive investor.

4) Dividend record

The company has failed to pay consistent dividends for the past ten years and fails this test.

5) Earnings growth

Costco has increased its earnings per share by one third over the past ten years, and therefore, passes this test.

6) Price to earnings analysis

The P/E ratio for Costco is roughly 22 and falls above the benchmark of 20 and as such fails this test.

7) Price to assets analysis

The P/B ratio is 2.6 and fails the test of being below 2.5.

Conclusion:

Costco fails the test of being suitable for the defensive investor with only a score of three. Although, two of the tests Costco barely failed and this should be noted.

Enterprising:

1) Strong financial condition

The current ratio is below 1.5 and therefore fails this test.

2) Earnings stability

The company has enjoyed positive net income for the five years prior and passes this test for the enterprising investor.

3) Dividend record

Currently, the company pays a dividend and passes the test of dividend payment.

4) Earnings growth

Earnings are greater than five years ago which allows Costco to pass this test.

Conclusion:

Costco passes the test for an enterprising investor with a score of 4/5.

Valuation:
Our analysis computes a fair price of $43.40 which concludes on a pure valuation approach of an overpriced security as the current market price is roughly $53.
 

Opinion:
Given the fact that the company passes the test for the enterprising investor we would allow this security to be in out portfolio, but given the inflated share price at this time we would wait for a more attractive price. An approximate ten percent decrease in share price would be place Costco in a more suitable position for acquisition.

Neither of us held a position in Costco at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Jon at 05:44 PM | Permalink | Comments (0) | TrackBacks (0)

Company Profile:  Lone Star Steakhouse & Saloon, Inc. (STAR)

Lone Star Steakhouse & Saloon, Inc. owns and operates two mid-priced full service, casual dining restaurant concepts under the names, Lone Star Steakhouse & Saloon (Lone Star) and Texas Land & Cattle Steak House, in the United States. In addition, the Company operates restaurants in the upscale steakhouse market under the Del Frisco's Double Eagle Steak House and Sullivan's Steakhouse names. As of March 6, 2006, Lone Star Steakhouse & Saloon, Inc. owned and operated 250 Lone Star restaurants, 20 Texas Land & Cattle Steak House restaurants, and 20 upscale steakhouse restaurants, comprising five Del Frisco's Double Eagle Steak House (Del Frisco's) restaurants and 15 Sullivan's Steakhouse (Sullivan's) restaurants. The Company also operates a mid-priced restaurant under the Frankie's Italian Grille (Frankie's) name. On March 11, 2006, the Company decided to close certain Lone Star Steakhouse & Saloon restaurants.

Business and Management Review

1) Is the business simple and understandable?

Lone Star Steakhouse is in the dining business – a simple operation that has been around probably as long as man has been cooking food and trading goods and services.  It doesn’t get much simpler than cooking food and serving it to customers.             

2) Does the business have a consistent operating history?

The business has a consistent operating history, having been founded in 1989 in Winston-Salem, North Carolina (surprised that it wasn’t founded in Texas?  We are!).  In 1992, the company had an Initial Public Offering of common stock with 8 restaurants.  Since then, it has grown to over 250 locations.  In terms of financial operating history, the company has achieved a positive net income for over 10 straight years, while maintaining a low level of debt through equity financing.

3) Does the business have favorable long term prospects?

While there are a number of other similar restaurants, we believe the strategy employed by management will create an economic moat and competitive advantage in the long-term.  Specifically, the company focuses on a limited, distinguished menu and maintains a low server-to-table ratio (the aim is no more than 3 tables per waitperson). 

4) Is management rational?

We believe the management is rational.  In the most recent letter to shareholders, Chairman Fred B. Chaney outlined a detailed explanation of the events that happened during the year, including admitting to some issues that Lone Star faced.  Admission of problems is one of the first steps in a rational response.

5) Is management candid with its shareholders?

While we would like to see a more detailed and easier to navigate investor relations website, we were encouraged by the level of candor in the Chairman’s letters.  Details into numerous events were provided to explain the activities the company participated in during the last year.  In our experience, many other companies do not exhibit this level of candor and Lone Star’s management should be encouraged to continue the work.

6) Does management resist the institutional imperative?

We believe that management has resisted the institutional imperative, though one path we would like to see management pursue is a share repurchase plan.  Since 1992 the company has issued more and more stock to raise capital, a strategy employed to avoid taking on additional debt.  But now it is time to start buying back those shares, as the current price appears attractive.

Financial and Value Review

Defensive:

1) Size of firm

Weighing in at about $600 million, it does not meet the $2 billion requirement of the defensive investor.

2) Strong financial condition

With a current ratio of about 1.6, it is not quite in a strong enough financial condition for the defensive investor.

Having achieved a positive net income for over 10 straight years, it passes this test for the defensive investor.

4) Dividend record

The company began paying dividends within the last 10 years, so it has not quite attained a suitable dividend record.

5) Earnings growth

The company has not sufficiently grown earnings over the last 10 years for the defensive investor.

6) Price to earnings analysis

With a PE ratio (see our methods) of 24.5, it fails this test (requirement is 20 or below).

7) Price to assets analysis

Since the PB ratio is 1.55, and multiplying the PE by the PB nets a value less than 50, it passes the final two tests of the defensive investor.

Overall, the company scores 3/8 for the defensive investor.  Therefore, it is not suitable for a defensive investor following a value investing strategy.

Enterprising:

1) Strong financial condition

With a current ratio higher than 1.5, it passes the enterprising investors requirement.

2) Earnings stability

Positive net income for longer than 5 years.  Pass.

3) Dividend record

Currently pays a dividend.  Pass.

4) Earnings growth

Earnings are greater than they were 5 years ago.  One final pass.

Overall, the enterprising score is 4/4.  Lone Star is suitable for the enterprising investor.

Valuation:

Our valuation model finds a fair value to be approximately $39.  We believe it is currently trading at an attractive price relative to the fair value.

Opinion:

We believe this company may be a suitable undervalued investment for an intelligent enterprising investor following a value investing approach similar to Benjamin Graham’s. 

Neither of us held a position in Lone Star Steakhouse & Saloon, Inc. at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Ben at 06:27 PM | Permalink | Comments (0) | TrackBacks (0)

McGraw Hill Companies

As always our valuation follows Warren Buffett’s approach for the business review, and Benjamin Graham’s method for equity valuation. Please note our methods are clearly described on our website.

Business and Management Review

1) Is the business simple and understandable?

The McGraw-Hill Companies, Inc. is an information services provider serving the financial services, education and business information markets. Other markets include energy, construction, aerospace and defense, and marketing information services. It serves customers through a range of distribution channels, including printed books, magazines and newsletters, online via Internet Websites and digital platforms, through wireless and traditional on-air broadcasting, and through a variety of conferences and trade shows. The company’s basic business model is to sell these products to individuals and corporations and the company is susceptible to macroeconomic conditions.  

2) Does the business have a consistent operating history?

The operating history of the company is strong given the analytical data provided below. Both earnings and dividends have grown over time. Being in the publishing industry the demand for their product is fairly predictable, and even with the emergence of digital delivery of the content, the company has been able to change with the times and alter their business model.

3) Does the business have favorable long term prospects?

Given the nature of the industry there will be continued pressure from digital delivery, but as long as they continue to innovate and move with technology they should be able to have the same success they have enjoyed. The textbook publishing division of the company should continue to have the success they have seen, especially considering that they have no competition in terms of other content providers besides other competing publishers.

4) Is management rationale?

With a very low debt to equity ratio we feel that management is not over leveraging their shareholders, and even could have missed opportunities in years past to take on more debt to expand for larger projects. With that being said, however, we still feel that management is acting in the best interests of shareholders. The company also states that they have returned over 5 billion in cash to their shareholders through dividends and share repurchases.

5) Is management candid with its shareholders?

6) Does management resist the institutional imperative?

Given the low levels of debt and the dividend and share repurchase record, we fell they are resisting this urge.

Financial and Value Review
 

Defensive:

1) Size of firm

McGraw Hill’s market capitalization is about 24 billion which surpasses the 2 billion requirements.

2) Strong financial condition

McGraw Hill fails this test as their current ratio is below 2 (it is 1.16).

3) Earnings stability

The company passes this test as net income has been positive for the prior ten years.

4) Dividend record

The company passes this test as they have paid dividends for the past ten years.

5) Price to earnings analysis

With a P/E ratio of 28 it fails the test of being below 20.

6) Price to assets analysis

With a P/B of over 7 the company fails the test of being below 1.5.

Enterprising:
1) Strong financial condition

Current ratio of the company fails the test.

2) Earnings stability

Company passes the test of having positive net income for the five years prior.

3) Dividend record

The company currently pays a divided, therefore, passes the test.

4) Earnings growth

Earnings are greater than five years prior; therefore, McGraw Hill passes the test.

Valuation:
Our valuation puts a fair price for the company at $32 a share showing they are quite overpriced purely on a valuation approach.
 

Opinion:
We agree in principle that the company is overpriced, but we do not feel the gap is as large as the valuation dictates. We would be comfortable paying a small premium to own this company and would put a fair value at $45 a share. Therefore, the company would need to reduce in share price significantly in order to meet our amended standards.

Neither of us held a position in McGraw Hill at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Jon at 03:50 PM | Permalink | Comments (0) | TrackBacks (0)

Profile:  Pogo Producing Company (PPP)

Pogo Producing Company is engaged in oil and gas exploration, development, acquisition and production activities in North America, both onshore in Canada and the states of New Mexico, Texas, Louisiana, Wyoming and Indiana, and offshore in the Gulf of Mexico (primarily in federal waters offshore Louisiana and Texas). The Company also conducts exploration activities in offshore New Zealand. As of December 31, 2005, it owned approximately 3,885,000 gross leasehold acres in oil and gas provinces in North America and approximately 1,044,000 gross acres in New Zealand. As of December 31, 2005, approximately 86% of Pogo Producing Company's reserves are located onshore. On August 17, 2005, it closed the sale of Thaipo Limited, a wholly owned subsidiary of the Company (Thaipo), and all of the Company's 46.34% interest in B8/32 Partners Limited. On September 27, 2005, it completed the acquisition of Northrock Resources, Ltd. In May 2006, the Company acquired Latigo Petroleum, Inc.

Business and Management Review

1) Is the business simple and understandable?

As with many of the other companies we have reviewed on this site, the details of the business of gas and oil exploration is difficult to understand.  The average investor does not hold an engineering degree and may not understand how the refining of oil works or the process of the development of new fuels.  However, the fundamentals of the business are simple:  Look for the raw materials, extract them, then refine and sell them.

2) Does the business have a consistent operating history?

Pogo Producing Company was founded in 1970 as an oil and gas exploration company and remains in that operating business today.  In the past 10 years, the company has paid a dividend consistently and has only experienced one year with a negative net income.  In our view, Pogo Producing Company does have a consistent operating history.

3) Does the business have favorable long term prospects?

Recently, I had a conversation with a couple of intelligent individuals about economic moats.  A detailed explanation about a moat will be forthcoming, but for now think of it simply as an advantage a company holds that makes it difficult for competition to hold a significant factor in the company’s long-term prospects.  Looking at Pogo, it does not appear that they have a significant moat, if they have any at all.  This may or may not end up being a big deal, but it certainly does not help as there are 178 other companies in the Oil & Gas Operations sector as listed on Google Finance. 

4) Is management rational?

We are unconvinced of the rationality of some of management’s ideas.  Though we agree that the company should repurchase common shares as they are at an attractive price, we are concerned about the rise in long-term debt and pursuit of growth through acquisitions.  Growth should be made through investments from operational income, not from the increase in debt.  Especially when the company is trying to repurchase shares – the debt/equity structure of Pogo is changing, and the current shareholders may or may not want that to happen.

5) Is management candid with its shareholders?

Pogo Producing has a detailed investor relations page, including webcasts, presentations, and other interesting and helpful information.  The only thing we would like to see more from the website would be a more detailed company information and history page.

6) Does management resist the institutional imperative?

We are not entirely convinced that the management of Pogo is resisting the institutional imperative.  Their pursuit of acquisitions through increased debt is a common path of many companies.  In addition, we have not seen evidence of the company clearly avoiding the institutional imperative.

Financial and Value Review

Defensive:

1) Size of firm

Pogo’s market cap is approximately $3 billion, which is greater than the requirement of $2 billion for the defensive investor.

2) Strong financial condition

Pogo does not have a current ratio of higher than 2 (the current ratio is 0.87).  Therefore, it fails this test.

3) Earnings stability

Pogo had a negative net income in 1998, which eliminates it from the earnings stability requirement.

4) Dividend record

Having paid a dividend since 1994, it passes the requirement of dividend payments for 10 straight years.

5) Earnings growth

Earnings have grown more than 1/3 over the last 10 years. 

6) Price to earnings analysis

With a PE ratio of 13.09 (see our methods), it passes the requirement of 20 or below.

7) Price to assets analysis

With a Price to book ratio of 1.18, it passes this test as well.

Overall, Pogo Producing Company does not pass enough of the tests to be suitable for the defensive investor.  Its total score is 6 out of 8.

Enterprising:

1) Strong financial condition

Since the current ratio is not higher than 1.5, Pogo fails this test.

2) Earnings stability

Earnings have been positive for the last 5 years.  Pogo passes this test.

3) Dividend record

The company currently pays a dividend.  Another pass.

4) Earnings growth

Earnings are greater now than they were 5 years ago.  Pass.

Overall, with a score of 3 out of 4, Pogo is suitable for the enterprising investor.

Valuation:

Our valuation model finds a fair value to be about $84, so there is certainly room for this company’s price to rise as the intrinsic value and market price approach each other in the long-term.

Opinion:

Overall, we believe Pogo Producing Company to be suitable for the enterprising investor following Benjamin Graham’s value investing strategy, and at an attractive undervalued price.

Neither of us held a position in Pogo Producing Company at the time of publication.  Also, please read our disclaimer and Our Methods.

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Posted by Ben at 05:01 PM | Permalink | Comments (0) | TrackBacks (0)

Watsco, Inc. is a distributor of refrigeration, air conditioning, and heating equipment and supplies in the United States.  In this article we will review the business and management using Warren Buffett’s approach, then follow a modernized Benjamin Graham style of valuation to review the financial statements and value of the firm.  As always, our methods are outlined on our site.

Business and Management Review

1) Is the business simple and understandable?

Watsco is in the business of providing equipment and supplies to contractors.  The company operates out of over 360 subsidiary locations in 32 states, and currently serves over 38,000 contractors.  The nature of the business is simple - purchase the equipment from the manufacturers and distribute it to the contractors via the subsidiaries.  Essentially Watsco operates as a middleman for contractors. 

2) Does the business have a consistent operating history?

Watsco has always operated with a consistent business plan.  Today, over 99% of Watsco’s revenues come via its distribution segment.  We believe this is evidence of a focused and consistent business plan.  When the investor purchases a share of Watsco, the investor knows what he or she is purchasing – a distributor.

3) Does the business have favorable long term prospects?

Long-term, we believe Watsco is in good position.  With the housing market slumping, consumers will increasingly look to remodel their homes and improve their living quarters.  Watsco is in position to capitalize on that change in household positioning.  At the same time, when the housing market recovers, Watsco will be a solid provider for the contractors and home builders looking to manufacture new homes.  In our view, Watsco benefits from either a slump or a rise in the housing market.

4) Is management rational?

Management has done nothing to cause us to believe they operate in an irrational manner.  The company has performed well in the past, and as the management has remained fairly steady, similar performance can be expected in the future.

5) Is management candid with its shareholders?

Watsco does not have a very detailed website, but does provide all of the necessary and usual information on its Investor Relations page.  We would like to see the company provide more information about its history and strategy on its site for investors.

6) Does management resist the institutional imperative?

Albert Nahmad is the Chairman of the Board, President, and Chief Executive Officer of Watsco, and has held the position since 1973.  This long tenure, not to mention the company’s rise to the largest distributor of its kind, indicates that Mr. Nahmad has resisted the institutional imperative. 

Financial and Value Review

Defensive Investor:

1) Size of firm

Watsco’s market capitalization is $1.44 billion, below our $2 billion threshold for the defensive investor.

2) Strong financial condition

With a current ratio of about 2.75, Watsco passes this test.

3) Earnings stability

There has been stability in Watsco’s earnings through over 10 years of a positive net income.  Pass.

4) Dividend record

Watsco has paid a dividend for over 10 years so it passes this test as well.

Over the last 10 years, earnings have grown more than 1/3.  Once again, Watsco passes the test.

Using an average of earnings over the last 5 years, Watsco’s PE is 28.8.  Since the defensive investor requires a PE ratio of under 20, the company fails this test.

With a Price to book ratio of 2.82 and a combined PE and Price to book ratio (multiply PE by PB) of over 50, Watsco fails this test as well.

Overall

Watsco passed only 4 out of the 7 tests for the defensive investor, so the company is not suitable for investment by this type of individual.

Enterprising:

1) Strong financial condition

As stated above, Watsco has a strong current ratio, well above the enterprising investor’s target of 1.5.

Having earned a positive net income for the last five years, Watsco passes this test.

Since the company simply pays a dividend, this test is passed.

The company has grown earnings over the last 5 years, so it passes the final test for the enterprising investor.

Overall

Watsco passes all of the tests for the enterprising investor, and may be a suitable investment for the enterprising intelligent investor following Benjamin Graham’s value investing strategy.

Valuation:

Our valuation model determines a fair value of Watsco to be about $40.

Opinion:

Though Watsco is a strong company with good prospects and management, we do not feel that it is currently priced well for investment.  It is our opinion that Watsco is overvalued (though at a more attractive price this would be a very attractive company). 

Neither of us held a position in Watsco, Inc. at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Ben at 06:08 PM | Permalink | Comments (2) | TrackBacks (0)

Walgreen Co.

As always our valuation follows Warren Buffett’s approach for the business review, and Benjamin Graham’s method for equity valuation. Please note our methods are clearly described on our website.
Business and Management Review

1) Is the business simple and understandable?

Walgreen Co. is a retail drug business specializing in consumer goods and pharmaceutical items. The company operates roughly 5,500 stores in forty seven states including Puerto Rico. The overall business model is to stock items the consumer is seeking in a timely manor and conversely sell these same items while generating the greatest amount of turns per square feet of retail space.  

2) Does the business have a consistent operating history?

Walgreen’s has enjoyed over one hundred years of operations and has consistently outperformed competitors. More recently, over the past five years Walgreen’s has increased not only sales, but also market share nationwide. Net income has as well increased proportionately to sales dictating that the company is doing a fine job of increasing sales but not by increasing overall costs as well.

3) Does the business have favorable long term prospects?

We find that Walgreen will continue to perform to the level that investors have come accustomed to in the future. The company still has locations that will be opened in the near future, and potential market share that could be taken away from competitors. We feel that the company is still in a growth phase, even though the company is maturing over time, it sill has much room to grow in the future.  

4) Is management rationale?

There is no reason to assume that management is not rationale in their management decisions. Based upon the performance management has shown, we have faith they will continue to act in the best interest of the company and the investor. 

5) Is management candid with its shareholders?

Walgreen’s does have an investor relation page on their website, but we feel it falls short of disclosing easily the type of information an investor seeks. The page is limited to basic information readily available at third party sources, but the main grievance is the overall design of the page and the inability to easily extract information.

6) Does management resist the institutional imperative?

We find no reason to conclude that Walgreen’s is not resisting this urge that so many other companies fall victim. Their company governance profile assures this assumption as it outlines several key issues that the investor could have issue with.

Financial and Value Review
Defensive:
1) Size of firm

With market capitalization above $2,000,000,000 it passes this test as Walgreen’s currently has a market cap of approximately 44 Bil.

2) Strong financial condition

With a current ratio of 1.86 it fails the test of a 2.00 current ratio or higher. This may question the financial strength of the company.

3) Earnings stability

Earnings have been positive over the past ten years for Walgreen’s, therefore, it passes the test of earning stability which enforces the depth of the company and the ability for continued positive performance.

4) Dividend record

The company has paid dividends consistently over the past ten years, which for the defensive investor is a guideline that a company must adhere to.

5) Price to earnings analysis

With a trailing P/E ratio of 23, the company falls short of the necessary guideline of a P/E ratio below 20.

6) Price to assets analysis

This ratio is above the benchmark of 50 which could be an indication of the stock being overpriced in relation to the company’s assets. In Walgreen’s defense, however, the company retains minimal working assets as they are turned on a regular basis. The fixed assets the company holds are a mixture of lease agreements (which cannot be classified as an asset) and property ownership of some of their store fronts.

Enterprising:
1) Strong financial condition

The enterprising investor only requires a current ratio of 1.5 or higher, therefore, Walgreen’s passes this test.

2) Earnings stability

The enterprising investor only requires positive net income for previous five years, and Walgreen’s passes this test.

3) Dividend record

The company currently pays a dividend, and the enterprising investor only requires a current payout of a dividend not a history of doing so as the defensive criteria requires.

4) Earnings growth

Earnings are greater than five years ago which passes the last test for the enterprising investor.

Valuation:
Based upon the above mentioned information, Walgreen’s passes the test for the enterprising investor and should be considered based upon that fact. However, the defensive investor would want to avoid the company, because it failed the testing criteria for this type of investor.

The valuation we have calculated for Walgreen’s finds that the next few years Walgreen’s shares should reach $78 per share. Return on common equity is determined to be 18% showing the attractive return the company is generating for their shareholders.
 

Opinion:
Based upon all of the information provided we find this company to be undervalued and consideration should be given. We find that the company is generating consistent returns on equity, dividends, and earnings over the past five to ten years. The company should continue to generate returns that meet or exceed current standards, and we are favorable for the long term prospects of the firm. We determine that the company will outperform the market in the future and we reaffirm our future price target of $78/share.

Neither of us held a position in Walgreen Co. at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Jon at 04:04 PM | Permalink | Comments (2) | TrackBacks (0)

This week’s overvalued company of the week is Papa Johns International Inc. (PZZA). We will analyze this company using Warren Buffett’s approach for the Business and Management Review, and use Benjamin Graham’s methods for equity valuation.

Business and Management Review

1) Is the business simple and understandable?

Papa Johns is in the business of operating and franchising of carry out and delivery pizza restaurants. The main competition of Papa Johns is other “fast food” pizza operations including Pizza Hut and Dominos. The principle foundation of this business is simple to understand; they take orders, prepare the food, and deliver the product to the customer. It has typical franchise problems including store location, consistency of product, and hiring and training of staff.

2) Does the business have a consistent operating history?

Papa Johns sales, net income, and EPS have been turbulent over the past five years. Sales have been relatively stagnant which is negative for the company showing the lack of ability to increase business and grow the brand name. Net income significantly dropped off in 2003 and 2004 questioning the vulnerability of the company. Finally EPS, not surprising, followed the trend and flow of net income and fluctuated greatly over the past few years. 

3) Does the business have favorable long term prospects?

Given the increased competition and the never ending pizza wars, which are reminiscent of the carbonated beverage battle, leads us to believe that Papa Johns does not have the brand recognition of their competitors. We also believe that Papa Johns needs to focus more on their franchised restaurants, after looking at their provided sales data comparing to the corporate stores. The franchised locations have consistently under performed the corporate owned locations, meaning something is going on within those franchised stores that are not favorable.   

Posted by Jon at 03:38 PM | Permalink | Comments (0) | TrackBacks (0)

The company of the week this week is Finish Line Inc. (FINL), a mall-based specialty retailer offering men’s, women’s, and children’s brand name footwear.  As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review.  We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.

Business & Management Review

1.  Is the business simple and understandable?

     Finish Line is in the simple business of retail.  Not much else to say here.  This isn’t a complicated quantum physics company or anything.

2.  Does the business have a consistent operating history?

     The company was founded in 1976 with a “niche market to sell name brand athletic shoes and clothing at a competitive price.”  This is the same niche market they operate in today.  Management throughout the company’s history has not veered from the overall vision of the founders.  This is not to say that the company is stagnant in its operations strategy.  To the contrary, it has consistently looked for ways to evolve with the industry.  A company brand apparel line was recently introduced, the Finish Line Blue Lapel.

3.  Does the business have favorable long-term prospects?

     Finish Line has grown considerably the last 10 years, and it appears that growth should continue into the future.  Long-term, we believe the company should look to adapt slightly as it seems the era of the shopping mall is coming to an end.  We would like to see more free-standing stores opening.  The international market is also a potential area for continued growth.

4.  Is management rational?

    The two founders of the company, Alan Cohen and David Klapper, are still involved in the company, as the Chairman / CEO and Senior Executive Vice President, respectively.  We view this as a good sign.  The two have a proven record as the managers of the firm, having grown it from nothing to the second largest athletic apparel retailer worldwide.  We trust that their performance will continue to excel and the company will benefit going forward.

5.  Is management candid with its shareholders?

     Finish Line has a very candid investor relations site, providing all the essential information as well as a detailed company history and timeline in an easy to navigate format.  The only thing we would like to have provided on the investor relations site is biographies of executives.

6.  Does management resist the institutional imperative?

    We believe the management’s track record over the last 30 years suggests they resist the institutional imperative.  It isn’t easy to grow a company as well as they have without striving to do things differently than competitors.
 

Financial and Value Review

Upon our review, we find Finish Line Inc. to be suitable for the enterprising investor but not the defensive investor following Benjamin Graham’s value investing strategy.  The company’s size and lack of consistent dividend payments over a 10 year period eliminate it from the defensive investor’s portfolio.  With a PE ratio (see Our Methods) of 9.6 and a PB ratio of 1.24, we believe this is an excellent investment opportunity.

We believe the company has potential to reach $16/share in the next few years. 

Neither of us held a position in Finish Line Inc. at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Ben at 11:05 AM | Permalink | Comments (1) | TrackBacks (0)

The overvalued company of the week is Clear Channel Communications Inc. (CCU). We will analyze using Warren Buffett’s approach for the Business and Management Review as well use Benjamin Graham’s model of valuation of a company.

Business and Management Review

1) Is the business simple and understandable?

Clear Channel is the operator of roughly 1,100 radio stations within the United States. Its other business lines include outdoor advertising both internationally and domestically. Their radio stations are fairly easy to understand, as it is driven by advertising dollars paid during the commercials. The value the advertiser see’s is that the radio station is ranked highly in industry rankings and targets the same audience as the advertiser. The outdoor advertising is done through the ownership of billboards and other public displayable assets that can be rented for periods of time.

2) Does the business have a consistent operating history?

All figures concerning the company have been unpredictable, especially sales and net income which have scattered across the board in recent years. We feel this is primarily due to increased competition in the marketplace as well the emergence of different types of media for delivery of the same content. Part to blame of these figures was the spin off of its live entertainment division in 2005, but the main driver for the company is its radio stations.

The company of the week this week is Dollar General Corporation (DG), a discount retailer that offers an assortment of general merchandise.  As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review.  We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.

Business & Management Review

1.  Is the business simple and understandable?

     Dollar General Corporation is in a simple business of providing goods to consumers at a low price.  The company operates in a niche market of “profitable small stores delivering convenience and value.”  The general store has been a simple and easy to understand business for centuries, and that is no different today.  Dollar General focuses on obtaining as much quality as possible while maintaining the lowest possible price.

2.  Does the business have a consistent operating history?

     The company was founded in 1955 as a pioneer in the dollar store concept.  The original stores offered all merchandise for a price of $1 or less.  While not all of their products sell for $1 or less, the overall operating strategy has not changed over time.  Dividends have been paid consistently for at least the last 20 years.  Today, the company operates over 8,200 stores in 35 states. 

3.  Does the business have favorable long-term prospects?

     Dollar General appears to have favorable long-term prospects.  The company has grown well throughout its history, and has room to continue its growth.  Since it only operates in 35 states, there is ample room left in the United States to at least make a push for a larger market share in 15 states.  We were surprised to find that there is not a single store in California.  It is our belief that opening stores in California would be favorable long-term.  In addition, the company recently began to open Dollar General Market stores, a larger version of their traditional stores that includes an expanded food section.  With success in the Market stores, the company has potential to grow this division.

4.  Is management rational?

    We are encouraged with management’s performance the last few years.  The company has grown substantially, and the management is using excess cash to increase dividends and buy back stock – actions that are very pleasing to the value investor.  We are also encouraged with the way management responded to a decrease in same-store sales in the fourth quarter of 2005.  Management did not panic and seek vast changes to their operating strategy, but kept the strategy focused while fixing minor tactical issues in their operations.

5.  Is management candid with its shareholders?

     We were happy to find management providing Free Cash Flow figures in annual reports.  By being open with shareholders and providing this information straight out, it is clear that management understands that it is in everyone’s best interest to be candid in all manners of business.  We believe all companies should adopt policies to provide GAAP statements and reformulated statements for financial analysis.  Instead of all the manipulation accountants do to cover up various financial issues, it all should be disclosed in the open (not the footnotes) in an easy to understand format.

6.  Does management resist the institutional imperative?

    Management appears focused on placing the most talented individuals as possible in positions of importance.  This resists the institutional imperative all by itself.  How often have managers put the shareholders’ interests aside in order to hire friends?  We believe that in order to be successful in business, managers must hire subordinates who are more talented than themselves.  Dollar General seems to follow this trend, and over time the individuals that work for the company will steadily improve in talent, thus leading to a more successful company in the long-term.
 

Financial and Value Review

Upon our review, we find Dollar General Corporation to be suitable for the enterprising investor but not the defensive investor following Benjamin Graham’s value investing strategy.  The company’s current ratio, failure to increase EPS on a significant level over the last 10 years, and its price to book ratio eliminate it from the defensive investor’s portfolio.  With a PE ratio (see Our Methods) of 14.35 and an ROIC of 11.14%, we believe this is an excellent investment opportunity.

We believe the company has potential to reach $20/share in the next few years. 

Neither of us held a position in Dollar General Corporation at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Ben at 04:34 PM | Permalink | Comments (1) | TrackBacks (0)

The overvalued company of the week is Boston Beer Company Incorporated (SAM), the brewer and seller of brands of beer including Samuel Adams. We will analyze using Warren Buffett’s approach for the Business and Management Review as well use Benjamin Graham’s model of valuation of a company.

Business and Management Review

1) Is the business simple and understandable?

     Boston Beer has a very simple and understandable business model, as they manufacture and distribute alcoholic beverages to liquor stores, grocery chains, and restaurants and bar’s.

2) Does the business have a consistent operating history?

     Boston Beer has had troubles in recent years as the influx of micro-breweries has taken a more aggressive approach in marketing their products and distinguishing themselves from the larger breweries. Regional micro-breweries where once localized, but they are quickly expanding as the American public’s preferences have changed. Boston Beer’s main product line, Samuel Adams, has attempted to distance itself from the larger beers including Budweiser and Miller Light, but more and more they are becoming synonymous.

Posted by Jon at 06:51 PM | Permalink | Comments (0) | TrackBacks (0)

The company of the week this week is First Data Corporation (FDC), a provider of electronic commerce, payment services, and customer account management services.  As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review.  We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.

Business & Management Review

1.  Is the business simple and understandable?

     The company is in a relatively simple industry.    First Data Corporation provides services that make it easier for consumers to make purchases, and easier for businesses to make sales.  First Data Corp could be considered a catalyst to business transactions.

2.  Does the business have a consistent operating history?

     First Data Corp was purchased by American Express in the 1980s but spun off and went public in 1992.  Since then, the company has grown to provide its services on an international basis.  Throughout the company’s history, it has remained focused on providing services that assist the parties involved in business transactions, making the transfer of payment safer, easier, and more secure.

3.  Does the business have favorable long-term prospects?

     It appears that First Data Corp’s business plan will remain a viable approach and its products will remain in demand for the long-term.  As long as there is a capitalistic society requiring funds to be transferred during transactions, First Data Corp will have a role to fill in the process.

4.  Is management rational?

     The management appears to be rational.  When CEO Charlie Fote retired, the board brought in former CEO Henry C. Duques to lead the company while a search is made for a long-term replacement.  Duques has made it clear that while it is only temporary that he will be in charge, his focus remains on the long-term health of the company.  

5.  Is management candid with its shareholders?

     First Data has an above average investor relations page.  All of the pertinent information is available, as well as a few extra items.  Our favorite feature of their investor relations page is the RSS feed of webcasts, investor presentations, and other alerts from the company.  However, we are less enthused about the navigation of the page.  It was a little difficult to find things, and the navigation bar changed frequently, requiring us to backtrack often.

6.  Does management resist the institutional imperative?

    We have no evidence to suggest that the management is falling into the trap of mimicking the behavior and techniques of other managers.  It appears that management is innovative in its approach to business.
 

Financial and Value Review

Upon our review, we find First Data Corporation to be suitable for the enterprising investor following Benjamin Graham’s value investing strategy, but not suitable for the defensive investor.  The company’s current ratio is too low, and the price to book ratio is too high to be suitable for the defensive investor.  Other than that, the company would be suitable for both defensive and enterprising investors.  We find the company to be trading at a PE (please see Our Methods) of 11.1, and a price to book of 2.53.

We believe the company has potential to reach $42/share in the next few years. 

Neither of us held a position in First Data Corp at the time of publication.  Also, please read our disclaimer and Our Methods.

Please discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Ben at 06:56 AM | Permalink | Comments (0) | TrackBacks (0)

This week’s overvalued company of the week is Hewlett-Packard Company (HPQ). HP is a manufacturer and provider of computer solutions for individuals and companies. We   will analyze this company using Warren Buffett’s approach for the Business and Management Review, and use Benjamin Graham’s methods for equity valuation.

Business and Management Review

1) Is the business simple and understandable

     Hewlett-Packard is a computer manufacturer producing personal and corporate computing solutions, as well auxiliary items for consumer use. Hewlett-Packard in its current state is the result of the acquisition of then rival, Compaq Computers. The business is fairly simple to understand, however, it does become somewhat blurry as to the reasons and rationale for Hewlett-Packard to be engaged in certain product lines. The acquisition of Compaq was as well confusing and hard to understand the reasoning for acquiring a computer maker that had dwindling market share.

2) Does the business have a consistent operating history?

     The operating history of HP has been unstable. EPS has been very volatile in the past few years averaging down -14.55% over the past five years. Net income has also been a wild card for the company, as it has seen negative net income in 2002 followed by positive gains in 2003 and 2004, but net income again dropped in 2005, down 30% year over year. Overall, net income has averaged a decline of -8.45% over the past five years.  

3) Does the business have favorable long term prospects?

     Hewlett-Packard is in deep competition with Dell computers, and in the foreseeable future Dell will continue to run ahead of HP. The small, but increased market share of Apple Computers has also diluted the marketplace further. Hewlett-Packard has an image problem, especially with its Compaq division, long known for lacking in quality in comparison to other competitors. We feel that Hewlett-Packard will continue to struggle against other competitors and its market share will not increase enough to make a run towards greater profitability for shareholders. HP does have a wonderful reputation in its printer division, even with companies such as Dell trying to compete in that market.

4) Is management rationale?

     Taking the obvious current crisis in Hewlett-Packard aside (corporate spying scandal ) Hewlett-Packard still has some management problems to address. Firstly, and most importantly the acquisition of Compaq for $20 billion+ made little sense to investors and a long and costly fight within Hewlett-Packard eventually failed and the acquisition proceeded. It was obvious that HP earnings would suffer initially due to the cost of acquiring Compaq, but here we are five years later still waiting for the implied profits to begin commencing. Of course, the management that was in place for the merger is no longer around, but there is still a culture which is evident from the spying scandal that Hewlett-Packard needs to clean house and bring in fresh new management that will uphold the shareholder’s interests.

5) Is management candid with its shareholders?

     As typical with most companies with a dominant web presence it is easy for them to communicate with their shareholders. Hewlett-Packard does the same (investor relations) providing the typical information one would expect from a company the size of HP. From current stock prices, to annual reports and audio and video files of conference calls, HP provides in depth information for the investor.

6) Does management resist the institutional imperative?

     Hewlett-Packard does a poor job of avoiding such actions which is evident from the acquisition of Compaq and a general lack of attention paid to shareholders.

Financial and Value Review

Hewlett Packard does not meet the criteria for either the defensive or enterprising investor. The company’s size, current ratio, lack of positive net income for the past 10 years, and high P/E and P/B ratios eliminate it from being attractive for a defensive investor. With a (see Our Methods) P/E ratio of 52.53 and ROIC of only 6.66%, Hewlett Packard does not pass any of our tests to identify a valuable stock selection. We find that the current share price is between 250-270% above the intrinsic value.

We would not feel comfortable owning Hewlett-Packard for more than $14/share. This given price is on a purely valuation process and still may not be a suitable price if the above mentioned issues are not resolved or in the process of doing so.

Neither of us held a position in Hewlett-Packard Company at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Jon at 12:44 PM | Permalink | Comments (0) | TrackBacks (1)

The company of the week this week is Brookfield Homes Corp. (BHS), a homebuilder with operations in California and Washington.  As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review.  We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.

Business & Management Review

1.  Is the business simple and understandable?

Posted by Ben at 07:58 AM | Permalink | Comments (1) | TrackBacks (0)

4 Weeks Ago- Stein Mart (SMRT)

Stein Mart has had a very good month since we targeted it as our Undervalued Company of the Week.  When we reviewed it, the company was trading at $12.09 (9/1/06).  Today it is at $16.03 - a 33% gain.  In our article, we particularly liked the company's lack of long-term debt, and the PE and PB ratios were attractive at the time.  The increase in price reflects the fact the company has beat earnings expectations the last few quarters, and was recently upgraded to a strong buy by an analyst.

We believe Stein Mart is still a good value for the enterprising investor following Benjamin Graham's strategies.  We believe Stein Mart has potential to reach $18 within the next few years, but must caution that the company's stock is currently trading within our margin of safety and may actually be fairly valued.

Neither of us held a position in Stein Mart at the time of publication.  Also, please read our disclaimer.

Please register and discuss this article in our forum.  Your input is appreciated.

Posted by Ben at 04:51 PM | Permalink | Comments (0) | TrackBacks (0)

This week’s overvalued company of the week is Applebee’s International Inc. (APPB). Applebee’s business is the operation and franchising of casual dining restaurants featuring moderately priced entrees with a neighborhood feel to the establishment. We will analyze this company using Warren Buffett’s approach for the Business and Management Review, and use Benjamin Graham’s methods for equity valuation.

Business and Management Review

1) Is the business simple and understandable?

    Applebee’s is a restaurant chain, and in that respect the business is fairly simple. They prepare and serve food (lunch and dinner only) to customers by offering the greatest value for the food received. Applebee’s currently operates 1,813 freestanding restaurants in 49 states, and in 14 countries (data as of 2-8-06). Applebee’s is not a complicated business to understand, it is in the food industry which incorporates a simple business model for laymen to understand.

2) Does the business have a consistent operating history?

    Applebee’s does not have a consistent operating history with quarterly earnings fluctuating substantial at times. Second quarter 2005, the EPS was $1.36 versus this year of only $1.19, or a decline of 12.50%. Another concern we see is the Accounts Receivable/Days ratio has steadily increased from 10.86 in 2001 to 13.22 in 2005. Also, Applebee’s does not seem to be turning its inventory as quickly as it had in years past, as inventories days held has increased from 7.89 in 2001 to 11.42 in 2005. The dividend payout rate has fluctuated over the years as well, further increasing the uncertainty of this company.

3) Does the business have favorable long term prospects?

    With the continued uncertainty of discretionary spending by consumers, we feel that Applebee’s will suffer in the future from this alongside other factors. The earnings estimates have dropped eight cents per share over the past three months. Same store sales as well fell in August dropping 2.70%. We feel as well that the growing competition in middle-income restaurants is increasing, and will continue to do so in the future.

4) Is management rationale?

    It is questionable whether management is acting in the best interests of the shareholders. There is, however, no agency problems as the Chairman and CEO are two different individuals so that is positive for the shareholders. We think that the company should try to re-create itself and further distinguish itself from its competitors in any form necessary. Perhaps slowing the growth of opening new stores, or closing non-performing stores may help the company long term. They should try to saturate the markets of each individual restaurant and have regional and individual store management be held responsible for continued growth of their respected territories. 

5) Is management candid with its shareholders

    Applebee’s has a very informative website for investors (investor relations). With the advent of the internet it is much easier for companies to have a more direct communication route to all investors than before. Applebee’s site has all the basic and even some nice touches including audio files of conference calls.

6) Does management resist the institutional imperative

    Applebee’s does resist this urge of many professionals. We find no reason to have concern of this company.

Financial and Value Review

After reviewing Applebee’s we find that the company is currently overpriced significantly and is unsuitable for either the defensive or enterprising investor. We find the P/E ratio at 18.21 too high for this given company as we are paying too much for the small earnings they are producing (see our methods). The current price of $21.51 is valued at 144.78% of the company’s intrinsic value. At 6.96% we also find that the Return on Invested Capital (ROIC) too low given the risk of the company.  

We would not feel comfortable paying any more than $11.00/share for this stock.

Neither of us held a position in Applebee’s at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Jon at 12:56 PM | Permalink | Comments (0) | TrackBacks (0)

The company of the week this week is Quanex Corp. (NX), a producer of engineered carbon and alloy steel bars, and other various products primarily serving the vehicular products and building products markets.  As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review.  We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.

Business & Management Review

1.  Is the business simple and understandable?

     Absolutely.  Quanex manufactures and supplies materials to two markets – vehicular products and building products.  For the vehicular products market, the company produces steel bars that are commonly used in a long list of auto-parts including engine/motor components, gear box components, drive train components, and other various parts.  The building products division provides aluminum flat rolled coiled sheets for use in the production of building/construction products, consumer durables, electrical products, machinery/equipment, and transportation.  Overall, Quanex products have a wide range of use.

2.  Does the business have a consistent operating history?

     Quanex was founded in 1927 and has maintained a steady strategy of “growing by focusing on specialized, manufacturing processes to produce value-added metal products for original equipment manufacturers.”  Though the individual products that Quanex produces may have changed over their 75 years in operation, the basic strategy and business has remained the same.  Over the years, the company’s operating history and success has seemed to oppose the expected results of a manufacturer.  Despite being founded just before the Great Depression, the company managed to grow quickly, and attained sales of over $1 million in 1935.  In addition, the last 20 years have seen manufacturers fall from their golden days, but Quanex has continued to grow stronger.

3.  Does the business have favorable long-term prospects?

     The wide range of applications of Quanex products will lead to strong long-term operations.  In addition, as a component manufacturer, the company is not limited to how the consumer market views their products – meaning if consumers no longer want to buy a certain type of car, Quanex should not be affected.  In addition, we see the cyclicality of Quanex’s business smoothing out over the long-term.  The company’s products are being used in more and more end-user products, which leads to smoother sales. 

4.  Is management rational?

    The current management has done an excellent job over the last five years.  We are very pleased with the direction management intends to pursue.  The Chairman’s Message on their website provides an excellent outlook on their “Game Plan.” It is clear to us that management is rational in their approach, as they are focused on remaining “an inch wide but a mile deep” rather than “a mile wide and an inch deep.”  The company has a focused strategy and approach to its business, and that will reward shareholders in the future.

5.  Is management candid with its shareholders?

     We are very pleased with the investor relations webpage of Quanex Corp.  Readers can gain an insightful look at how management intends to compete going forward, and explanations of past actions.  We are especially pleased with the Direct Stock Purchasing Plan offered by the company, which allows individuals to purchase stock directly with minimal transaction costs.

6.  Does management resist the institutional imperative?

    We believe the company’s performance over the last few years is evidence that management is excelling above and beyond the management at competitors and other firms, and is indeed resisting the institutional imperative.
 

Financial and Value Review

Upon our review, we find Quanex Corporation to be suitable for the enterprising investor but not the defensive investor following Benjamin Graham’s value investing strategy.  The company’s size, current ratio, and lack of a positive net income for 10 straight years eliminate it from the defensive investor’s portfolio.  With a PE ratio (see Our Methods) of 6.48 and an ROIC of 12.66%, we believe this is an excellent investment opportunity.

We believe the company has potential to reach $57/share in the next few years. 

Neither of us held a position in Quanex Corporation at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Ben at 07:49 AM | Permalink | Comments (0) | TrackBacks (0)

4 Weeks Ago- Johnson & Johnson (JNJ)

Johnson & Johnson has had a very flat month.  When we initially looked at it, it was trading at $64.58 - today it closed at $64.82 for a big gain of 0.3%.  The stock started the month down but has since recovered.  With any company this size, there are a number of news stories almost every day, but the most recent big news is that Johnson & Johnson has sued rivals Boston Scientific, Guidant, and Abbott Labs.  The lawsuit claims that the rivals reached an agreement on the acquisition of Guidant by Boston Scientific because of information leaked to Abbott.  We do not believe this lawsuit will negatively affect Johnson & Johnson in the long-run, but instead may be beneficial to the company as it could be detrimental to their competitors.

We believe Johnson & Johnson is still a very good value for the enterprising investor following Benjamin Graham's strategies.  We believe Johnson & Johnson has potential to reach $81 within the next few years.

Neither of us held a position in Johnson & Johnson at the time of publication.  Also, please read our disclaimer.

Please register and discuss this article in our forum.  Your input is appreciated.

Posted by Ben at 08:11 PM | Permalink | Comments (1) | TrackBacks (0)

The overvalued company of the week is Southwest Airlines Co. (LUV), the discounted airline company that proved to out-run the larger airlines and beat them both price wise and in some consumers opinion’s service as well. We will analyze using Warren Buffett’s approach for the Business and Management Review as well use Benjamin Graham’s model of valuation of a company.

Business and Management Review

1) Is the business simple and understandable?

     Southwest is obviously in the airline industry, and this industry is an extremely volatile business that has several factors affecting profitability. Firstly, is the load factor, or the amount of seats filled on average, which presents industry specific problems we will not go into detail, but it can be said that is a complex portion of the business. Secondly, are the fixed costs associated with running an airline, including fuel, maintenance, and gate costs or fees. These issues create too much volatility and uncertainty, even though Southwest has proved to perform better than the pack over the years.

2) Does the business have a consistent operating history?

     Historically speaking, yes, Southwest has performed nicely over the past few years as they have proven to control their fixed costs, mainly fuel, effectively. The issues we see in the future are the rising labor costs that will begin to affect Southwest as it has other airlines. The increased union workers, and their benefit packages will drain the company of cash and but a crunch on earnings. Particularly, the increases this country is seeing in health costs and the continued uncertainty in fuel costs will all play into this equation.

3) Does the business have favorable long term prospects?

     Again, as stated prior for the same reasons, we feel that Southwest’s glorious run is going to be coming to an end. We still believe that Southwest will continue to be a powerful and profitable company, but just feel that currently their share price is overvalued for the reasons mentioned. The airline industry is in a sore position post- 9/11/01, and we feel that the industry as a whole will continue to suffer with the continued concern of global terrorism. Any airline based terrorism strike would invalidate the small recovery that Southwest has experienced.

4) Is management rational?

     We feel that management currently in place is the right group for the job. They have proven themselves in the past and have done a remarkable job in a very tough industry. The future, though, will be the testing ground as Southwest enters a more mature state of a company and begins to experience the same types of problems other airlines are currently.

5) Is management candid with its shareholders?

     Southwest has an outstanding investor relation page (investor) that really performs above and beyond that of other companies. The typical investor information is included, but what is really interesting is the addition of the ownership profile nicely available on the Southwest site itself. Further, the dividend information page is concise and easily obtained as well.

6) Does management resist the institutional imperative?

     It seems that Southwest does in fact operate in the interests of shareholders. Further, it seems to be that the company respects and invites community involvement. There seems to be no indication of not revisiting the institutional imperative.

Financial and Value Review

Upon review, we found Southwest to be moderately overpriced and unsuitable for either the defensive nor enterprising investor. Its current P/E ratio is 31.90 which is high, but not drastically, but we would like to see it lower before we would execute a buy recommendation.

We find an appropriate buy price to be $12/share.

Neither of us held a position in Southwest at time of publication. Please review our disclaimer, and our methods.

Posted by Jon at 08:25 PM | Permalink | Comments (4) | TrackBacks (0)

Mercury General Corporation (MCY) 

The company of the week this week is Mercury General Corporation (MCY), the insurance company engaged primarily in auto insurance in California.  The company also sells a variety of products outside of California.  As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review.  We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.

Business & Management Review

1.  Is the business simple and understandable?

     Insurance is and always has been a simple and understandable business.  From the customer’s view, the customer pays a little bit of money each period in exchange for the assurance that in the event of unplanned occurrence, they will be provided with the funds they need.  From the insurer’s view, each customer is analyzed based on risk factors that determine the amount of premium the customer has to pay.  Then the insurer takes in more in premiums than they expect to pay out in claims and keeps the difference.

2.  Does the business have a consistent operating history?     

Mercury has operated as an insurance agency since its inception in 1961.  The company has had a positive net income for over 10 straight years, has paid a dividend for over 10 straight years, and has increased earnings by over one third in the last 10 years.  According to its latest annual report, the company has “created shareholder value by adhering to underwriting standards, focusing on cost controls, effectively managing our claims process and developing strong partnerships with our independent agents. Historically, this uncompromising commitment has enabled us to perform better than most of our competitors. Mercury’s attention to detail, embedded in our culture, has served our shareholders, employees and customers well over the past 40 plus years. We will continue to focus on these standards.”

3.  Does the business have favorable long-term prospects?

     Insurance itself is a product that will be needed by individuals and institutions for the rest of time.  The products may change as technologies change (will automobiles be the same in 100 years as they are today?), but the overall concept will remain.  Mercury has historically been one of the pioneers of risk-based insurance.  The people in Florida and California face different premiums and policies than the people in Illinois due to the different risks involved.   In addition, Mercury is well diversified geographically across the nation.  Geographic diversity is critical for an insurance agency to prevent catastrophic losses from natural disasters.  We believe that the concepts of risk-based insurance and geographic diversity give Mercury a strong business plan and favorable long-term prospects.

4.  Is management rational?

    Mercury is still led by its founder, George Joseph.  During his tenure, the company has grown considerably, and has increased dividends at an average rate of 20% on an annual basis since 1986 – a difficult feat to accomplish over a 20 year period.  The management is focused on building their non-Californian premiums in an attempt to become even more geographically diverse.  Mercury currently maintains a combined ratio of 91.9% compared to the industry average of 95% (anything below 100% means the company is achieving profitable underwriting).  We believe these accomplishments are evidence that management has acted rationally in the past and can be assumed to continue to act rationally. 

5.  Is management candid with its shareholders?

Management appears to be candid with its shareholders.  In the latest annual report’s letter to shareholders, the management mentions its position and plans regarding the Krumme vs. Mercury litigation, a lawsuit the company is involved in considering the charging of broker fees.  The company also has an average investor relations page.

6.  Does management resist the institutional imperative?

    As stated above, Mercury has been a pioneer of risk-based premiums and other insurance industry methods.  Throughout our research of Mercury, we have found no evidence to suggest that Mercury has behaved in a manner consistent with following the institutional imperative.
 

Financial and Value Review

Upon our review, we find Mercury General Corporation to be suitable for the defensive and enterprising investor following Benjamin Graham’s value investing strategy.  The company has a sufficient size, earnings stability, dividend record, and earnings growth.  In addition, we find the PE ratio to be 12.66, and the PB ratio to be 2.04, both levels below our limits for defensive investors.  We believe all companies that are suitable for defensive investors are also suitable for enterprising investors.

We believe the company has potential to reach $80/share in the next few years. 

Neither of us held a position in Mercury General Corporation at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Ben at 07:38 AM | Permalink | Comments (2) | TrackBacks (0)

4 Weeks Ago- McClatchy Company (MNI)

McClatchy Company has had a down month.  The stock is down 3% since we proclaimed it to be our Undervalued Company of the Week.  The big news of the month was that August Revenues slid on lower circulation and advertising.  However, as we predicted, the company is making a transition into a greater online presence.  Online advertising was the bright spot for the company's report, having jumped 19.9% over last year's figure.

We believe McClatchy is an even greater value today than it was 4 weeks ago.  The company still has low PE and PB ratios.  With its high Return on Invested Capital, we believe McClatchy has potential to reach $62 within the next few years.

Neither of us held a position in McClatchy at the time of publication.  Also, please read our disclaimer.

Please discuss in our forum, your input is appreciated.

Posted by Ben at 07:48 PM | Permalink | Comments (0) | TrackBacks (0)

The overvalued company of the week is Apple Computer, Inc. (APPL) the computer manufacturer that has exploded in growth following the cult like status of their iPod MP3 player. As always we will analyze using Warren Buffet’s approach for the Business and Management Review as well use Benjamin Graham’s method of valuing the company.

Business and Management Review

1) Is the business simple and understandable

     Apple’s business is simple when looking at the marketing and product’s it produces. Apple manufactures and distributes personal computing devices as well the iPod. I specified the iPod because truly it is the only reason why anyone over the past three years has paid any attention to the company. The iPod is the cornerstone of Apple and the product that saved the company from its continued decline. Their personal computing devices historically have been more of a novelty and niche device used in certain trades including graphic design and music production. However, the business is simple to understand as it sells consumer products and accessories both directly (modeling Dell) and through retailers (modeling traditional computer companies).

     The actual design and production of the products is complicated and is beyond the scope of the investor, but we can eliminate this concern as the company is large enough to assume their internal hiring is bringing in intelligent individuals in that field of expertise.

2) Does the business have a consistent operating history?

     This is where Apple has performed extremely poorly. As mentioned before the iPod, Apple was on a downward spiral as it maintained a fraction of marketshare (some estimates below 10%) of the personal computing market. It was not until the iPod and the mere brilliance in marketing and advertising that propelled Apple into the starlight it enjoys currently.

3) Does the business have favorable long term prospects? 

     Apple has peaked out in our opinion and will see new companies enter the market of portable MP3 music players in the future. Apple has attempted to lock in iPod users and convert them into Apple computer users, but this seems to not taken off as anticipated. For example over this summer Apple was offering a free iPod with any laptop purchase by college students. We feel that once Apple sees sales decline due to price competition, Apple’s earnings will drop significantly and the company will be back in the same position it was in the pre-iPod world (See Forbes article relating).

4) Is management rational?

     Steve Jobs (bio) has done a remarkable job with marketing the Apple name and that can never be taken away from the man. However, it is unfortunate that Apple has resisted the calling to open up the company to allow the computing sector to have access to the programming codes in order to create more consumer software that is compatible with Apple. Recently, however, Apple finally allowed their computers to run both Apple operating system and Microsoft Windows, but this is too little too late in creating a lasting image of user friendly to the novice computer. Further Apple retail presence has been a strange journey in of itself. For instance for the longest time iPod’s where not available at traditional retail stores such as Best Buy and Circuit City. Further still the computers are only available either online or through a corporate Apple boutique store which is far and few between in terms of location.

5) Is management candid with its shareholders?

     Apple has a fairly typical investor relation page with traditional information you would expect. The site includes stock price, corporate governance, Q&A, calendar, and contact information for investors. It is somewhat hidden however as on the main page one must enter through the media relation tab at the bottom of the home screen.

6) Does management resist the institutional imperative?

     Here Apple truly does act responsibly, as corporate officers have been known to take pay cuts with the rank and file employees during hard times. Apple has been a leader as well in giving computers to educators in underprivileged neighborhoods. Apple still maintains the “cool” working environment that other companies including Google (GOOG) have come to appreciate and mimic.

Financial and Value Review

Upon our review, we found Apple to be severely overpriced and unsuitable for either the defensive or enterprising investor. Its current price to earnings ratio is 115.42 which is extremely high for either investor. The company pays no dividend which altogether eliminates the defensive investor. We find the stock to be trading at over 230% of its intrinsic value.

We find an appropriate buy price to be $24/share.

Neither of us held a position in Apple at time of publication. Please review our disclaimer, and our methods.

Also, please register and discuss this among all articles. 

Posted by Jon at 10:04 PM | Permalink | Comments (1) | TrackBacks (1)

The company of the week this week is Intel Corporation (INTC), the semiconductor chip maker whose products are the building blocks for computers, servers, and networking communication devices.  As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review.  We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.

Business & Management Review

1.  Is the business simple and understandable?

     For Intel, this depends on what part of the business you want to understand.  The actual design and construction of semiconductor chips is an extremely complex realm to be involved in, but since Intel has qualified employees, we do not believe it is necessary for the investor to understand the process himself (or herself).  While it would certainly be beneficial to know how to do it, investors should instead focus on the overall business plan of the company. 

     The company designs the chips that form the “brains” of countless technological devices.  The devices themselves are often designed and created by other firms, but that cements Intel’s role as a part manufacturer.  It may be easier for some investors to think of computers and semiconductors in a way similar to automobiles.  Intel creates the transmission and provides the product to a number of companies who design their own makes and models.

2.  Does the business have a consistent operating history?

     Intel has been operating in the semiconductor business since its inception in 1968.  A glance through the company’s timeline reveals a consistent history of being innovative.  It seems every year or two Intel has introduced a new product that is the first of its kind.  The company has paid a dividend consistently for over 10 years, and has reported 18 consecutive years of positive net income. 

3.  Does the business have favorable long-term prospects?

     Though the company is facing increased competition from Advanced Micro Devices Inc (AMD), Intel is still finding ways to grow.  The last 10 years have seen rapid growth in their international operations.  The company has also developed one of the strongest brands in the world.  According to Business Week, the Intel name is the 5th most valuable brand name.  Coupled with the company’s dominance in their industry, we believe Intel to have developed a very distinguished franchise situation that leads to favorable long-term prospects.

4.  Is management rational?

    We believe management to be rational.  It is important for management of the company to focus on long-term efforts to maximize shareholder return, rather than focus on keeping the stock price high in the short-term.  This is a task that the management at Intel takes to another level.  The management is consistently outlining future plans for the company (see Platform 2015), and targeting certain production levels and technology innovations.  This is a rational view of the business world.  When management fails to look forward and instead focuses on the present entirely, there is cause for concern.  Intel’s management appears to be focused on long-term actions.

5.  Is management candid with its shareholders?

Posted by Ben at 08:40 AM | Permalink | Comments (2) | TrackBacks (0)

4 Weeks Ago- Microsoft Corporation (MSFT)

Roughly a month ago we reviewed Microsoft as our company of the week. Our original posting had Microsoft trading at $24.43, as of close on 9/13/06 it is trading at $25.98 which represents a 6% (5.966% to be exact) gain since our first mention. Microsoft has performed extremely well over the past few weeks producing gains that are impressive. News that has come about includes Microsoft announcing today (9/13/06) that they will be increasing their quarterly dividend by one cent ($0.01), creating a quarterly dividend of $0.10/share.

Microsoft is continuing to increase its EPS, and is in healthy financial state. We stand by our analysis and believe that Microsoft has plenty of upside potential remaining. The stock has outperformed the indexes and we believe still has the potential to reach a share price of $37 within a few years. It continues to be suitable for the enterprising investor, but not the defensive.

Jon holds a position in Microsoft, please read our disclaimer.

Please discuss in our forum, your input is appreciated.

Continue reading "Review of Previous Companies of the Week" »

Posted by Jon at 08:29 PM | Permalink | Comments (1) | TrackBacks (0)

This new feature of Modern Graham will look at companies that in our mind are over valued according to the principles of Value Investing and Benjamin Graham. This week’s choice is Time Warner Inc. (TWX), the conglomerate that includes America Online, cable companies, filmed entertainment, networks, and publishing. We will continue our analysis following Warren Buffett’s approach for the Business & Management Review. We will continue using Benjamin Graham’s investing styles to look at the financial aspect of the company.

Business & Management Review

1.      Is the business simple and understandable?

    Time Warner in its current state is due to the merger with America Online and since this action the company has suffered greatly. In the go-go late 1990’s it seemed practical for any company to merge or acquire any other just for the sake of doing so. Time Warner had no business entering the business that America Online was engaged in and this has proven correct in the fact that not only has the stock suffered, but there are serious talks of spinning off American Online in the near future.

2. Does the business have a consistent operating history?

    Time Warner has historically been a strong company with its publishing and media divisions performing nicely in years past. This, however, came to a halt with the merger with AOL in the late 1990’s as it has affected share price and earnings. Only in the past three fiscal years has Time Warner had positive net income, and this can be correlated with the deal with AOL.

3. Does the business have favorable long-term prospects?

    Unless Time Warner can get the figurative monkey off its back that is America Online, unfortunately they will continue their downward spiral with this loosing sector. America Online is continuing to loose market share to new ISP (Internet Service Providers) and this will only continue as prices decline and competitors increase. Years past, America Online offered a unique service to its members, but now it is obsolete. AOL has even come to admit this by offering what used to be pay services free of charge to anyone. The internet is becoming not a subscriber based marketplace, but has matured into an advertising epicenter.

4. Is management rational?

    We believe that management is making some correct decisions in looking into accepting defeat and admitting their mistakes with AOL, but there is still much work that needs to be done to regain shareholder respect and trust. The company really needs new management to come in, reorganize the company, and restructure it taking advantage of the sectors that are money makers for Time Warner including HBO among others.

5. Is management candid with its shareholders?

    This is one point that Time Warner is particularly efficient on, as it really provides their investors with a wealth of information. It provides not only typical annual and quarterly results, but debt holder information, stock splits and dividend information, and a nice question and answer section. The location of this site is:  http://ir.timewarner.com/.

6. Does management resist the institutional imperative?

    Looking at past actions, no, management has fallen victim to this. However, if management can reorganize the company, eliminate non producing sectors, become leaner and more profitable, then yes they can avoid this.

Financial and Value Review

Upon our review we find Time Warner to be unsuitable for both the enterprising as well defensive investor following Benjamin Graham’s principles. For the enterprising investor it does have a dividend history that supports it, but it does not have earnings stability, or in a general financial strong situation.

We believe the company is significantly overpriced and find it to be trading at over 300% of its intrinsic value.

Neither of us holds a position in Time Warner at time of publication. Also, please read our disclaimer, and our methods.

Posted by Jon at 10:19 PM | Permalink | Comments (1) | TrackBacks (0)

The company of the week this week is Westwood One, Inc. (WON), the radio communications company that provides News, Sports, Traffic, and other programming to numerous affiliates across the nation.  As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review.  We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.

Business & Management Review

1.  Is the business simple and understandable?

     The company sells advertising space on its radio station affiliates across the nation in exchange for the programming it provides to those affiliates.  In the past this has been a simple business and though the landscape of the industry is changing, the overall business plan remains the same.

2.  Does the business have a consistent operating history?

     The company was founded in the 1970s and has grown over the last 30 years to be one of the largest radio networks.  Financially, the company has provided a positive net income for over 10 straight years, has grown its earnings per share over the last 10 years, and recently began paying a dividend.

3.  Does the business have favorable long-term prospects?

     The last couple of years the company has faced an increase in competition with the advent of satellite radio and mp3 players.  The industry has changed, and so must the company’s approach.  During my research on the company, I discovered a past article from The Wall Street Journal.  The article mentions the problems the company is facing, and highlights the approach new President and CEO Peter Kosann is taking.  According to the article, “Mr. Kosann has cut around 100 jobs, recruited new executives and introduced initiatives to get Westwood onto new platforms, such as iPods and mobile phones.  But his biggest plan is simply trying to improve the programming lineup.”  We believe Mr. Kosann is right on target with his plan.  Technology has improved – the company must adapt itself to the changes, but first and foremost must ensure its programming is the best it can be.  Westwood One appears to be setting itself in position to move forward and resume its growth.

4.  Is management rational?

    As mentioned in the previous point, it appears that management is on the right track and is rational in realizing that its previous approach to the business will not entirely fly in the future.  With the significant changes in radio and music technology, the management must rethink its strategy.  The board of directors was wise to put a young sales executive at the helm of the company – an action that instantly injects youth into the company.

5.  Is management candid with its shareholders?

6.  Does management resist the institutional imperative?

    As the management of the company has only recently been hired, it is difficult to ascertain whether they will resist the institutional imperative.  However, we are optimistic that the management will resist blandly following the methods of fellow executives and be innovative into the future.
 

Financial and Value Review

Upon our review, we find Westwood One to be suitable for the enterprising investor following Benjamin Graham’s value investing strategy, but not suitable for the defensive investor.  The company is too small for the defensive investor, does not have a significant dividend history, and does not have a current ratio high enough for the defensive investor.  However, we find the company to have a PE ratio of 7.66, and a price to book ratio of 0.88. 

We believe the company has potential to reach $16/share in the next few years. 

Neither of us held a position in Westwood One at the time of publication.  Also, please read our disclaimer and Our Methods.

Please discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Ben at 09:02 AM | Permalink | Comments (0) | TrackBacks (0)

4 Weeks Ago - Marine Products Corp (MPX)

About a month ago our very first company of the week was Marine Products Corp (MPX).   In our article, we highlighted the fact that the company's total revenue has doubled since 2001, net income has tripled in the same time frame, the company's lack of long-term debt, and other fundamental features about the company.  We also noted that the company was trading at a low PE ratio, relatively low price to book ratio, and had a moderate dividend yield.  We stated our price target for the next few years to be $11.58. The price on 8/7 when we published our article was $8.49.

Since that day, the company's stock price has risen to a high of $9.10 on 8/17, but has come back down to its current price around $8.73.  This represents a gain of 2.8% over the month - versus a 1.9% gain over the period by the S&P 500. 

There has not been any significant news about the company since we last wrote about it.  We reaffirm our belief that this company may be suitable for the enterprising intelligent investor following Benjamin Graham's value investing strategy.

 Neither of us held a position in Marine Products Corp (MPX) at the time of publication.

 Please register and discuss this article in our forums.  Your contributions to discussion helps mold our future posts.

Also, please review our disclaimer and Our Methods. 

Posted by Ben at 01:32 PM | Permalink | Comments (0) | TrackBacks (0)

The company of the week this week is Stein Mart (SMRT), a retailer offering fashion merchandise at a discount to larger department and specialty stores.  As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review.  We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.

Business & Management Review

1.  Is the business simple and understandable?

     Yes.  The company’s overall operating plan is simple:  sell quality finished goods at lower prices than their competitors. 

2.  Does the business have a consistent operating history?

     The company was founded in 1908 by Sam Stein, the current chairman’s grandfather.  Since then, the company has operated under the same basic plan.  The company has had a positive net income for over 10 years, but only recently began offering a dividend.

3.  Does the business have favorable long-term prospects?

     In the latest annual report, management claimed that the year was the most profitable on record.  Though they recently reported their same-store sales had declined by 2.8% (analysts had estimated a decline of 2%), we believe this is just due to market fluctuations and the fact that the prior year had such high sales.  Long-term, we believe Stein Mart will continue to face growing sales and profits.  In the event of a recession, the target upscale customers would not be affected significantly and would still have disposable income.  In fact, with Stein Mart’s prices being lower than traditional department stores, it could be expected that in a time with lower disposable income available, customers may spend more time at Stein Mart than other stores.

4.  Is management rational?

     In 2003, the company faced a number of difficult decisions that would hurt the company in the short term but benefit the long term.  The management behaved rationally and focused on the long-term goals.  Though inventory levels were declining as planned, sales and earnings were below the management’s expectations.  However, the management did not abandon their plan and continued to make the changes that were necessary for the future of the company.  12 new stores were opened that year while 16 unprofitable stores were closed.  It is very pleasing to see management that is willing to close stores that are not profitable instead of keeping them for the sake of having a higher number of stores.

5.  Is management candid with its shareholders?

     We are not very thrilled about the management’s investor relations website, as it has limited information about management, but it does provide earnings reports, past annual reports, press releases, and other useful information. It can be found at:  http://ir.steinmart.com/index.cfm

6.  Does management resist the institutional imperative?

    The management resists the institutional imperative every time they expand without taking out long-term debt.  The company currently holds no long-term debt, and plans to continue that trend by funding all expansions with internally generated cash.  This is a strategy that goes against the grain in today’s business atmosphere.
 

Financial and Value Review

Upon our review, we find Stein Mart to be suitable for the enterprising investor following Benjamin Graham’s value investing strategy, but not suitable for the defensive investor.  The company is too small for the defensive investor, does not have a significant dividend history, and has not increased earnings per share over the last 10 years enough for the defensive investor.  However, we find the company to have a PE ratio of 16.75, and a price to book ratio of 1.95.

We believe the company has potential to reach $18/share in the next few years. 

Neither of us held a position in Stein Mart at the time of publication.  Also, please read our disclaimer and Our Methods.

Please discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Ben at 08:30 AM | Permalink | Comments (0) | TrackBacks (0)

The company of the week this week is Johnson & Johnson (JNJ), a manufacturer of a range of products in the healthcare field.  As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review.  We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.

Business & Management Review

1.  Is the business simple and understandable?

     Though over the years the products and research methods of the company have become more sophisticated as technology has improved, the overall business plan has stayed the same.  The company is in the business of providing products that help improve the quality of life from a health and personal care standpoint.  The company is well diversified across the healthcare industry, but has remained focused on segments related to its overall business plan.

2.  Does the business have a consistent operating history?

     Johnson & Johnson was founded in 1886 and has been a driving force in developing state of the art healthcare solutions ever since.  Dividends have been paid to shareholders every year since 1944, and have increased each year for 44 straight years.  Sales have increased each year for 73 years, and the company has experienced double-digit earnings increases for 21 consecutive years. 

3.  Does the business have favorable long-term prospects?

     The company’s customers will always have a need for healthcare products.  This persistent need is evident in the company’s low beta of about 0.21.  The real question is whether or not the company can continue to grow consistently into the long-term future.  We believe it can.  In the developed world, the average lifespan is increasing as well as the number of elderly overall.  In the developing world, the need for healthcare products will increase as cultures become more open to using the products and economic situations improve for consumers to afford the products.  These two factors combined lead to favorable long-term prospects for Johnson & Johnson and the rest of the pharmaceuticals and healthcare industry.

4.  Is management rational?

     In the latest annual report, management addresses the fact that they had informed shareholders in the previous annual report of their intent to purchase Guidant Corporation.  However, over the year events changed leading to the acquisition price of Guidant to increase significantly.  After the increase, management was remained rational and focused on the needs of shareholders and determined that a purchase was no longer in the interests of their shareholders.  This is very rational behavior among management that is all too often missed in many managers today.  Frequently, managers will become determined that a particular action is best for shareholders, and refuse to reexamine the action as time goes by and the situation changes.  Johnson & Johnson’s management clearly was rational in this situation and can be expected to remain rational in the future.

5.  Is management candid with its shareholders?

     Johnson & Johnson has an extensive investor relations page on their website, which can be found at:  http://www.investor.jnj.com/  We feel that William Weldon, Chairman and CEO, also provides a rather in depth and candid letter to shareholders in the company’s annual reports that is worth mentioning.

6.  Does management resist the institutional imperative?

    The company has a history of being a leader in their industry, and often is the first to develop a new product or approach to healthcare for their customers.  It seems that instead of following the institutional imperative and replicating the performance and processes of other managers, the management at Johnson & Johnson has historically been extremely innovative.
 

Financial and Value Review

Upon our review, we find Johnson & Johnson to be suitable for the enterprising investor following Benjamin Graham’s value investing strategy, but not suitable for the defensive investor.  The company is currently trading at a PE ratio of 23.09 and price to book ratio of 6.29 – other than these two factors, all aspects of the company’s financial situation and our valuation look good.

We believe the company has potential to reach $81/share in the next few years. 

Neither of us held a position in Johnson & Johnson at the time of publication.  Also, please read our disclaimer and Our Methods.

Please discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Ben at 08:30 AM | Permalink | Comments (0) | TrackBacks (0)

This week we will review our selection of Microsoft as the Company of the Week.

1 Week Ago - Microsoft Corp (MSFT)

This has been a very good week for owners of Microsoft stock.  When we selected the company last week, the stock price was $24.43.  Today's closing price was $25.67, a gain of 5.1%.  Last week, the company ended its stock repurchase auction and announced they will only be buying back about 1/5 of the shares they originally planned to repurchase.  The fact that holders of the stock did not want to sell at the top-end price of $24.75 illustrates the widespread belief that the price of the stock will rise in the coming months, reaffirming our selection.

In other news (Wall Street Journal Article), the company reached a deal with Facebook Inc. to be the sole provider of ads for the popular social networking site.  This news was very surprising mainly because the company Facebook sold the ads to was not Google.  Could this be a sign that Microsoft will be able to compete successfully with Google going into the future?  We believe it is.  Facebook is a major website that many college students use - including the authors of this site and virtually all of their classmates - and the fact that Microsoft controls the ads instead of the more "hip" Google appears to be a sign of things to come.

We reaffirm our belief that the stock has the potential to reach $37/share in the next few years and is suitable for the enterprising investor following Benjamin Graham's value investing strategy.

Jon currently holds a position in Microsoft (MSFT).  Also, please review our disclaimer.

 Please discuss this post in our forums.  Your contributions help mold our future articles.

Posted by Ben at 05:03 PM | Permalink | Comments (0) | TrackBacks (0)

The company of the week this week is McClatchy Company (MNI), a newspaper publisher.  The company owns and publishes 32 newspapers in Minnesota, California, the Carolinas, and the Northwest (Alaska and Washington).  As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review.  We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.

Business & Management Review

1.  Is the business simple and understandable?

     The newspaper industry is very simple and understandable.  Events happen in the world, whether local, national, or international, and must be reported to individuals.  We all (well, most of us at least) are interested in what happens in our surroundings.  McClatchy Company and other newspapers focus on reporting that news and rely on advertising revenues.

2.  Does the business have a consistent operating history?

     McClatchy Company has been publishing newspapers since 1857.  Over the years the company has acquired numerous newspapers and today is the second largest newspaper company in the United States, in terms of circulation.  The company has never deviated significantly from this operating focus.

3.  Does the business have favorable long-term prospects?

     The newspaper industry is currently in a state of renewal and change.  With the growth of the internet, the need for news delivered daily by paper has diminished.  It may seem that newspaper companies have reached the downslide of the business life-cycle.  However, the management of McClatchy has done an excellent job of transitioning to the internet age, having created Nando.net (now McClatchy Interactive), in 1994.  Over time, this online presence will likely lead to continued prosperity and growth by McClatchy Company.

4.  Is management rational?

     The management of McClatchy is very rational, and open to change – as evidenced by their focus on growing their online presence and acceptance that the future is the internet, and newspapers are the past.

5.  Is management candid with its shareholders?

     McClatchy Company has an extensive investor relations section on their website, which can be found at:  http://www.mcclatchy.com/.

6.  Does management resist the institutional imperative?

     Though most newspaper companies have been following the same approach by moving the bulk of their content online, we believe that this is not evidence that management is following the institutional imperative.  Rather, the management is realistic, willing to change, and realizes that they must adopt very similar approaches as their competitors in order to continue to operate and have favorable long-term prospects.
 

Financial and Value Review

This company appears to be very stable financially.  The company has had a positive net income for over 10 straight years, has paid dividends for over 10 years, and has increased their earnings per share by more than one-third over the last 10 years.  Following Graham’s approach, this stock appears suitable for the defensive intelligent investor.

We believe this company is also significantly undervalued.  The company has a low PE ratio and a low PB ratio.  In addition, the company has a high return on invested capital (calculated by using Buffett’s Owner Earnings and Contributed Capital).  We believe McClatchy Company has potential to reach $62.54 within the next few years.

Neither of us held a position in McClatchy Company at the time of publication.  Also, please read our disclaimer.
 

Please discuss this article in our forums.  Your comments help us mold our future articles.

Posted by Ben at 07:00 AM | Permalink | Comments (0) | TrackBacks (0)

Well this is the first week that we have had a previous company of the week to review, so we will be reviewing Marine Products Corp (MPX).  You can read the original write-up on Marine Products Corp. here: http://moderngraham.com/blog/2006/08/company_of_the_week_marine_pro.html

As of the close yesterday, the stock was trading at $8.85.  This is a 4.2% increase since we first mentioned the company (last week).  

There has been no new news on the company since we wrote about it.

We still believe Marine Products Corp. may be a suitable investment for the enterprising intelligent investor follow Benjamin Graham’s value investing strategy.

Neither of us holds a position in Marine Products Corp.  Also, please remember to read our disclaimer.

Discuss this post in our forum.

Posted by Ben at 09:21 AM | Permalink | Comments (0) | TrackBacks (0)

This week I thought I’d use a little bit different approach to the company of the week.  Specifically, I wanted to bring Warren Buffett’s approach and strategy into play a little more.  So, using Robert Hagstrom’s The Warren Buffett Way, I have a list of Business and Management Tenets to consider with the company.  Hagstrom also mentions Financial and Value Tenets, but these are in essence the same as Benjamin Graham’s teachings.

Business & Management Review

1.  Is the business simple and understandable?

I believe this is a question that is dependent upon each investor’s understanding of the business.  For Warren Buffett, Microsoft probably would not pass this test, as it is a technology company and he has traditionally stayed away from technology for this very reason.  However, I feel that I understand Microsoft’s business plan, strategy, and believe it to be simple enough to be worthy of my further research.

2.  Does the business have a consistent operating history?

Microsoft has now been in business for 30 years, and has been an industry leader for over 15.  The company has not changed its approach significantly over time, but has gradually adopted new strategies and opportunities.  Overall, I believe the company has had a very consistent operating history.

3.  Does the business have favorable long-term prospects?

Long-term, I believe Microsoft will continue to be an industry leader.  Though competition is growing from other operating systems for computer servers, it is hard to imagine a world where the majority of computers do not run a version of Microsoft Windows.  The company is also pursuing other endeavors, in attempts to compete with Apple Computers (AAPL) and Google Inc (GOOG).

4.  Is management rational?

Recently, Chairman and Chief Software Architect Bill Gates announced that he will be stepping down and taking a reduced role with the company.  Current Chief Executive Officer Steve Ballmer will be increasing his control over the management of the company.  While on the surface this appears to be a change that could cause uncertainty over the future of the management of Microsoft, I believe that the approach the company is using to ease the transition will be beneficial long-term.  It is apparent that the company has been rationally preparing for this change of leadership for some time now, and Steve Ballmer’s history with the company and friendship with Bill Gates will lead to a smooth change.  You can read more about this transition in this Wall Street Journal article:  http://online.wsj.com/article/SB115405072580419987.html.

5.  Is management candid with its shareholders?

Microsoft has a very extensive Investor Relations page, located at http://www.microsoft.com/msft/default.mspx.

6.  Does management resist the institutional imperative?

I believe that the company does resist the institutional imperative.  Essentially, Buffett describes this phenomenon as when a company’s management tends to mimic the behaviors of other managers.  Microsoft in the past has tended to create its own approach to different situations, and clearly does not resist change – as evidenced by their recent announcement to enter the MP3 market to compete with Apple’s iPod.

Financial and Value Review

Microsoft has had a good financial history.  The company has had a positive net income for over 10 years, has a good current ratio, has increased EPS from 10 years ago by over 1/3, and currently pays a dividend.  Microsoft may be a suitable company for enterprising intelligent investors, but not defensive investors. 

Upon my review of the company, I have found that the company seems to be significantly undervalued, and believe there is strong potential for the company to reach $37/share within the next few years.

Jon currently holds a position in Microsoft (MSFT).  Also, please read our disclaimer.

Posted by Ben at 10:23 AM | Permalink | Comments (1) | TrackBacks (0)

Marine Products Corp (MPX) is a manufacturer of powerboats.  The company was founded in 1965 under the name Chaparral Boats.  In 1986 the company was purchased by RPC Energy Services, from which it was spun-off in 2001.  Marine Products Corp immediately purchased Robalo early in 2001, and continues to operate with subsidiaries called Chaparral and Robalo.  The management is dedicated to "improvements in manufacturing efficiency, customer service, and refinement of product offerings" and has grown the company's market share from 5.53% in 1999 to 8.7% in 2003 according to their website, http://www.marineproductscorp.com. 

A few tidbits from the company's financial statements:

• Total Revenue has more than doubled since 2001.
• Net Income has nearly tripled since 2001.
• Company has no long-term debt.
• 5-year average growth rate in Net Income is 13.44%.
• Current Ratio is 4.15
• Has paid a dividend since it was spun-off in 2001.
  

Basic Stock information:

• Price:  $8.49
• PE Ratio:  13.34
• Price-Book Ratio:  3.5
  
• Market Cap:  321.47 Million
• Dividend Yield:  2.37%

We believe this stock may be a suitable investment for enterprising intelligent investors seeking to follow a value investing strategy.  The stock appears to be undervalued, and we believe it has the potential to reach $11.58/share within the next few years. 

Neither of us holds stock in Marine Products Corp (MPX).  Also, please read our disclaimer. 

Posted by Ben at 07:56 PM | Permalink | Comments (2) | TrackBacks (1)