This lecture includes the 2005 10-K of Lear Corp starting on page 15. Begin reading the 10-K to determine if this is a good business; the price at $33 offers value and what risks are there in this investment. The lecture is here at:
http://www.scribd.com/doc/64823792/Lecture-3-a-Great-Investor-Discusses-Lear-Corp
There are many philosophical question and lessons in the discussion of Lear and what happened in this investment.
Ready to earn your wing-tips? Advise your client as an investment banker how to restructure and save his business.
http://www.scribd.com/doc/64702086/Case-Study-Munsingwear
Ironically, the students who have had the must trouble with this case study are business school graduates. Use common sense and think about what information is provided without jumping to assumptions or projections.
Good luck.
The answer will be emailed to you if you so request.
Please go to http://www.scribd.com/doc/64698012/Class-Notes-2-Intro-and-Duff-and-Phelps-Case-Study.
We continue on from lecture one focusing on two questions, “Is this a good business?” and “What price do I pay.”
There is a case study on valuing Duff & Phelps using what has been taught so far. Of course the valuation is “down and dirty” meaning the valuation is done quickly to see if there is potential to go further. Many assumptions would need to be further scrutinized.
A great movie to see how an activist investor values a business is Other People’s Money starring Danny Devito.http://www.youtube.com/watch?v=MfL7STmWZ1c&feature=related
Here is the script of a scene where Devito values New England Wire & Cable.
START
Well, let’s put it this way:
Back in New York, I got a computer. Her name is Carmen. Every morning, right after I brush my teeth, I punch out: Carmen, computer on the wall, who’s the fairest of them all?”
Now, most mornings, she spits out, “Garfield, you’re the fairest.” But three weeks ago, she said: “Garfield, Garfield, scratch your balls.
New England…” Pardon me. “New England Wire and Cable is the fairest of them all.”
New England Wire and Cable?
I said, “What’s it worth?” So she showed me the numbers.
You got equipment here that costs $120 million. Even at salvage, it’s worth $30 to $35 million.
– Can I use that blackboard over there? – Yeah, go ahead.
Thank you.
Come with me. Carmen will educate us. Let’s put down $30 million.
– How many acres you got? – A hundred and ten.
Carmen and I figure, even as farmland, grazing land…..it’s worth $10 million.
– Is that fair?
– Yeah.
Let’s lay the $10 under the $30. That makes $40 million.
You bought some other companies, didn’t you, Bill?
You have a plumbing, an electrical and some kind of adhesive company.
Boring, but all making a decent profit.
Carmen says they’re worth another $60 mil.
Let’s put the $60 under the $40.
And you have working capital of $25 million, $10 of it in cash.
Let’s put down $25 million, add them up and see what you got.
$125 million.
The only bad news is…
…that this wire and cable division isn’t making a profit…
…and all the other divisions have to support you.
Now, as a stockholder, that doesn’t make me very happy.
Are you finished, Mr. Garfield?
No, I’m not, Bill.
Let’s say Carmen was suffering from premenstrual syndrome.
No offense. A little nuts.
Let’s say she was too optimistic.
Let’s knock off $25 million. Here we go.
Let’s make it… $100 million. A nice round number. I like nice round numbers. Any debt? No. Any lawsuits? Any environmental bullshit? You throwing your garbage in the water? Of course not. Not you. What about pension liabilities? Carmen says you’re fully funded.
You people are dreams.
—
– I think this meeting is over.
– No, no, wait a minute.
Here comes the fun part.
– How many shares outstanding you got?
– Four million.
Divide 4 million shares of stock into $100 million, what do you get?
– Twenty-five.
– Good.
That means each share is worth $25.
But that was all foreplay. Let’s go for the real thing.
The stock was $10 when I woke up three weeks ago. That’s a $10 for a $25 item. What a sale!
Something worth $25 I can buy it for $10.
The company’s not for sale, Mr. Garfield.
I don’t want your company, Jorgy.
I just want what every other stockholder wants:
– I wanna make money.
– You are making money, Mr. Garfield.
You bought the stock at $10. It’s now $14.
The stock is $14 because I’m buying it.
I’m doing my part. Now you do yours. Get rid of this wire and cable division. It’s a financial cancer.
| Liquidation Valuation in $mils. |
Low |
High Estimate |
| Equipment at salvage |
$30 |
$35 |
| Land as grazing land |
$10 |
$10 |
| Sub-total |
$40 |
$45 |
| Other Profitable Businesses |
$60 |
$60 |
| Sub-total |
$100 |
$105 |
| Working Capital |
$25 |
$25 |
| Sub-total |
$125 |
$130 |
| Round Down conservatively |
$100 |
$130 |
| Number of Shares |
4 mil. |
4 mil. |
| Price per share |
$25 |
$32.5 |
| Purchase Price |
$10 |
$10 |
| Discount from Intrinsic Value |
60% |
69% |
END
Questions, thoughts and discussion are welcome.
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“Investment is most intelligent when it is most businesslike.” – Benjamin Graham, The Intelligent Investor, 1973
“Life is tough. It’s tougher if you’re stupid.” –John Wayne, Western Film Icon.
“As to methods, there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man, who tries methods, ignoring principles, is sure to have trouble.” – Ralph Waldo Emerson, Essayist and Poet.
CSInvesting’s purpose is to help self-directed, independent-thinking, skeptical individuals become the best they can be in investing and business analysis. Here they will find readings, videos, links and case studies on search strategies, valuation, risk mitigation, Austrian economics as applied to investing, fractional reserve banking, booms and busts, strategic analysis, special situations and portfolio management, but also tangential topics like philosophy and mental models. My goal will be to have my reference library on the web for access to all. That said you should follow this ancient wisdom:
“Do not believe in anything simply because you have heard it. Do not believe in anything simply because it is spoken and rumored by many. Do not believe in anything simply because it is found written in your religious books. Do not believe in anything merely on the authority of your teachers and elders. Do not believe in traditions because they have been handed down for many generations. But after observation and analysis, when you find that anything agrees with reason and is conducive to the good and benefit of one and all, then accept it and live up to it.” –Buddha (Hindu Prince Gautama Siddharta, the founder of Buddhism, 563 – 483 b.c.)
Or listen to one of our modern philosophers, Public Enemy perform Don’t Believe the Hype! www.youtube.com/watch?v=aCLrPieciJo&feature=related before taking anything you read at face value.
Finally, the great investor, Philip Fisher dedicated his book, Paths to Wealth through Common Stocks (1960) to investors, large and small, who do not adhere to the philosophy: “Everyone seems to believe it, so it must be so.”
With all the quotes I am hoping to instill that the only way YOU will become a great investor is to be unique. Take these principles, case studies and learn to apply them to your own opportunities and situation.
The Search for Bargains
“The best bargains are not stocks whose prices are down the most, but rather those stocks having the lowest prices in relation to possible earnings power of future years.” –John Templeton
“To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest ultimate rewards.” –Sir John Templeton.
You do not want to be an investor caught in a panic or mania on Wall Street: http://www.youtube.com/watch?v=5Lu8194ajkI&feature=relmfu
OK, all those common sense suggestions for investing are nice to know but how do we implement such an approach. How do we figure out intrinsic value and a margin of safety? Warren Buffett said that if he were teaching an investment class, he would focus on A. Valuing a business and B. How to think about prices. We need to think through distinguishing between valuing assets and valuing a franchise, being cognizant of what we pay for growth in an investment and how do we manage risk of a permanent loss of capital. I will start with a series of investment lectures which will include case studies and then different investment problems will be analyzed in separate readings, links or videos.
Finally let me state my biases upfront. I don’t believe one must graduate from business school, have gone to college, and have an MBA, CPA or CFA to be a great investor. In fact, I would wager that if a person wanted to really learn about investing, he or she could take a few introductory accounting courses through a free web program like http://www.khanacademy.org/, read Buffett’s Shareholder Letters http://www.berkshirehathaway.com/letters/letters.html), and subscribe to www.grantspub.com for the hefty price of $950 or so but cheap compared to a $150,000 business school tab. At Grant’s Interest Rate Observer http://www.grantspub.com/ you could download and study all past issues since 1982 while learning how a thoughtful, articulate Graham and Dodd investor approached various market cycles through specific investments. Of course, as an ambitious student you would download the financials from the SEC’s website to look at the various companies Grant’s mentions as well as reading many of the books he suggests. Now I admit the person who applies himself to such a project would not be your typical person, but I am suggesting one way to learn.
“Self-education is, I firmly believe, the only kind of education there is.” –Isaac Asimov, Author of over five hundred books.
“Many who are self-taught far excel the doctors, masters, and bachelors of the most renowned universities.” – Ludwig Von Mises, Austrian Economist and author of Human Action.
Let’s begin the journey.