Tag Archives: Sotheastern

Finding Value. More on JCP. Dell at 2xs Earnings?

How to find value (Video Lecture) http://youtu.be/MxgGHJ2K0xQ   Basic, but a good review. To download the presentation go here: http://www.asx.com.au/resources/asx-podcasts-2012.htm  http://rogermontgomery.com/about/

Century Management Valuation Video http://centman.com/insights/2012/11/jim-brilliant-play-all-3236/

More on JCP 

Michael Price: http://www.businessweek.com/news/2012-09-21/price-bullish-on-j-dot-c-dot-penney-on-pent-up-demand-tom-keene  In the video Price mentions $15 per share of real estate value. (Don’t take that on faith.)

AckmanJCP and a recent review of the last quarter from an intelligent investor http://www.gurufocus.com/news/196924/jc-penney–my-thoughts-on-q3 (He refers to the Ackman presentation.)

JCP Tilson Analysis

My take: Turn off the price news and just look at the business as if you owned it. It is a tale of two cities (Dickens). The old JCP (which is the majority of sales/profits) is sliding faster than expected as the typical/traditional customer is confused, while the new JCP is doing well. In the long run this is good news but in the short run the news is worse.

Ron Johnson had this to say about the future of Penney’s on the conference call: “It’s really becoming a tale of two companies… one is J.C. Penney, a promotional department store; the other is jcp, which is a start-up, which is a specialty department store. And it turns out what’s good for one isn’t necessarily good for the other – and that’s why we’ve seen this year, J.C. Penney has performed tougher than we’ve expected… but the good news is jcp is much better than we imagined. As we wind down J.C. Penney over the next 36 months, my job is to deliver as best it can and generate as much cash as possible to fund the new jcp.”

Will management just do the same thing if sales keep dropping at the same rate? Probably they will look to sell some of their real estate while being more aggressive on a simple discount plan.

Yes, I agree with a reader that JCP is a “special situation” or transformation. You have a good vs. bad business here. But you also have hard assets of decent real estate and a balance sheet that isn’t too indebted so there may be replacement value for the real estate. However, retail is a very difficult business. More “value” investors hit the rocks in this industry than in any other except financial.  Be very careful to get a rediculous price or stay away. It is hard to buy a lot of JCP when you have CSCO, INTC and other franchises at decent prices.

However, institutions who have owned this stock probably want out so expect continuous pressure and volatility with the stock price which is good for patient buyers. There might be an opportunity to see JCP trade at its real estate value with little or no value imputed to the new JCP.  But if you are confused or uncertain of the value or the risk/reward, then walk away. Learn from the outcome.

The main lesson to be gleaned is to focus on the numbers and what the company is trying to do not the pundits.  Let’s revisit in 2014.

Southeastern 3 Q 2012: Longleaf_09_30_12

Few stocks detracted from returns. Dell fell 21% over the last three months, and the stock’s 33% decline in 2012 made it the primary detractor to the Fund’s performance for both periods.

The primary challenge over the last two quarters was a larger than-expected decline in End User Computing (EUC) revenue due to several pressures. Tablets and other mobility devices displaced notebooks more rapidly than anticipated; demand in India and China shrunk, where Lenovo aggressively priced to take share in these geographies; and commercial purchases slowed because of general economic weakness and the anticipated release of Windows 8. In spite of the decline in notebooks and PCs, margins held up in EUC, a testament to the company’s successful cost cutting and variable cost structure.

Far more importantly, the growing, higher margin Enterprise Solutions and Services (ESS) business had strong networking and server growth with servers gaining market share. While ESS represents about one-third of revenues, it constitutes over half of profits and a far higher share of our appraisal. The company’s transformation to a solutions-based company is well underway and leverages Dell’s direct distribution advantage of over 20,000 employees responsible for customer relationships with small and mid-size businesses. Interestingly, IBM successfully refocused its business over a ten year period starting in the early 1990’s from mainframe hardware to multifaceted technology solutions for large-scale customers. The head of IBM’s mergers and acquisitions was Dave Johnson, who joined Dell in 2009 to lead its strategy to enhance solutions offerings and has purchased a number of companies and products that have grown through Dell’s expansive distribution.

VALUATION: If we assume that EUC continues its rapid decline and has no value, we appraise the remaining ESS business at over twice the current stock price. With adjusted cash earnings of $2.00/share and an enterprise value of less than $3.50/share (share price minus net cash and DFS), the stock trades at less than a 2X adjusted P/E for a growing business (ESS) with good margins and an owner/operator as CEO who is focused on growing value per share.

Wow, I am skeptical Dell is that cheap. The question to ask is: “Does ESS have a competitive advantage? Because only then will growth matter.