Answer to Case Study: So What Is It Worth?

If you haven’t tried the case study, go here:

After 20 minutes to complete the case study, go here for my comments and analysis:

The above scribd document has an Appendix on page 20 where you can find other links to more indepth studies of the company. A diligent student can continue to hone their analytical skills.

If you are not willing to read the primary documents like a company’s 10-K to understand the operational and financial characteristics of the company, then be prepared to feel like this (without a parachute) when investing:

Again, this case study should drive home the points of asking simple questions, walking away from the difficult and finally, showing humility. The legions of MBA and CFA analysts who blew up their clients may have more to do with the fact that they have neither competence nor humility rather than pure intelligence.



4 responses to “Answer to Case Study: So What Is It Worth?

  1. PS: My method is not the only way, of course, to analyze a company. I use a short-cut method like in this case study to quickly segment companies for the circular file or for further study. 95% of the companies I look at are of no interest.

  2. A great case study. I missed many items you pointed out (like doubling of assets!).

    I noticed the declining margins, low ROA, & didn’t like the shares outstanding growing at about 10% per year. Still, in the spirit of “even a bad business may be a good investment at the right price”, I computed what price would be about a 6x EV/EBIT and got around $5.40 per share. If the company had been trading somewhere near that, I might have decided it was worth it to look deeper.

    NOW HERE IS MY DILEMMA: the lazy side of me likes the directive to swing at the fat pitches and move on to the next company if the financial statements look complicated. Yet Greenwald et al teach that portfolios built by screening for excellence under-perform those built by screening for disaster (specifically mentioning low margins, low ROE in Chapter 2 of Value Investing).

    And further from Chapter 4: “…simple companies produce financial statements with no place (for value) to hide. Complicated organizations, by contrast, have financial statements full of dark corners and secret passageways, terrifying to the novice but potentially rich in treasure for the seasoned explorer.”

    What to do?

    • Dear Lumilog:

      Practice is important and as you look at more and more companies, this will be easier for you to do. My advice is stay with simple and obvious since you don’t get graded for degree of difficulty (Buffett). Be slothful.

      Yes, as the case Hudson General showed, complexity can be your friend. As you gain experience, you look at a value-line on a company with average returns on capital but three divisions. Immeditately you might look to see if one of those divisions is producing 50% return in ketchup and condiments while losing money in another division. You set an alert for a news item indicating any corporate restructuring since, if they sell of the losing division, the remainder might be interesting–a good business.

      But your capital is precious, so stay simple until your experience/skills improve over time.

      The 6 x EV/EBIT is fine to note, but there is no majic in multiples. This business has non-economic returns on its assets so you would need to look for a restructuring, but then if you looked at the terms of their debt then you would have to walk away since only a higher power would be able to untangle the mess.

  3. Thanks much for your reply & the example – very helpful.

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