Dolby (DLB)

Founded by Ray Dolby (wife Dagmar Dolby, son David Dolby). The founder is dead and the company is still largely owned by the family.

The company has two classes of shares A (which is traded) and B (which is largely owned by the family). They are each  50M in numbers. Holders of Class A shares have 1 vote while the holders of class B have 10. The family owns ~ 100% of class B and ~ 0% of class A. Hence, they have ~ 90% voting power.

They develop sound/imaging technologies, patent them and then earn money by licensing them to OEMs (like Samsung for their cellphones, Microsoft for Surface, Movies etc). They do face competition in these. For example, they were not included in Windows 8 or in Samsung Galaxy S5.

There are several open source models and it is difficult to judge for me if they will continue to have the moat. No one buys a mobile, laptop because it has Dolby on it.

The second main problem I see is from the management point of view. The founding family has rightly hired Kevin Yeaman (CFO 2005-2009 and then CEO 2009-), to run the business and are paying him very well, mostly in stocks ( ~ 18M in the last 3 years in total, out of which $9M in options and $6M in stocks). Unfortunately, with the founding member gone and the son controlling the voting power, I am unable to handicap the politics either.

Disclosure: No position. No plan to start one.

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America’s Car Mart (CRMT)

I started a position in America’s Car Mart at ~ 33$.

Management

The insiders hold 12.9% of the shares according to the 2015 proxy and the CEO William H. Henderson holds 5.3%.
The management has been quite stable with Mr Henderson as CEO since 2002.
The company pays no dividends and the management wants to return value to shareholders via share buybacks. The shares-outstanding has gone from ~12M to ~9M in the last 10 years.
The management sees the company as “growth” and has target numbers in terms of dealerships going forward.

Balance Sheet

The company has a safe balance sheet with ~ $100M long term debt financed by revolving credit facility.
The company has $229M in equity with book value $25.44/share.

Business

The company gives cars to people with bad credit scores (default risk is ~ 30%). Then, it concentrates on collection. This is a finance and people relations business.

For fiscal year 2015, we increased unit sales by almost 10% and grew revenues by 8.4%, added over 5,000 active accounts and $38 million in finance receivables, opened seven great new dealerships and completed our software conversion with capital expenditures of $4 million, increased inventory levels by $4 million to support higher sales volumes and repurchased another 5% of our company for $20 million. These investments totaled $66 million and only required $5.7 million in additional borrowings.

Our current plans are to have 200 dealerships by the end of 2020. Even though we admittedly operational improvements to make, we want to plant trees for our future in the form of new dealerships. We believe we can get dealerships and at the same time improve operations at our existing dealerships by focusing on general manager turnover rates, controlling expenses and improving our lot level blocking and tackling in the collections area of our business.

The Company’s average retail sales price was $9,680 per unit in fiscal 2015.

By selling vehicles at this price point, the Company is able to keep the terms of its installment sales contracts relatively short (overall portfolio weighted average of 30.2 months), while requiring relatively low payments.

 

Lesson: Arcelor Mittal (MT), Posco (PKX)

Why did I buy MT ?

  • Cheap on EV/EBITDA. Started buying around $18 and kept it up until $10. Sold at $7.
  • Management owns ~ 40% shares.

I coat-tailed in PKX because of Mohnish and because this is also cheap over EV/EBITDA.

What I learned ?

  • Importance of the business. The iron & steel business is difficult, capital intensive and is a commodity business.
  • I did not want to sell PKX because I think it  has a competitive advantage. But, I feel uncomfortable because I have problems understanding the management culture especially after some of them are being sued.

Distribution Now (DNOW)

Awesome balance sheet (Q2, 2015)

$114M cash/$1.9B equity/$457M Goodwill/$80M LT Debt.
EV ($18) = $1.7B

Management

Same people who ran National Oilwell Varco (Pete Miller, CEO of NOV for 13 years, is executive chairman).

Valuation

A 5% net margin is quite achievable. With P/S of 0.5 at the moment one is paying a P/E of 10.

Business

Pipe, valves and valve automation, fittings, instrumentation, mill and industrial supplies, tools, safety supplies, electrical products, drilling and production equipment, fabricated equipment, and industrial paints and coatings.

Colfax Corp (CFX)

Background: read about Danaher and the Rales brothers [The Outsider]

CEO was changed this year but the previous and the next guys are related to Danaher. The older CEO was around 59 year so it is not very clear why he moved (was CEO since 2012).

Management Compensation:

Screen Shot 2015-09-09 at 10.13.00 PM

Shareholding 2014

Screen Shot 2015-09-09 at 10.15.28 PM

Shareholding 2013

Screen Shot 2015-09-09 at 10.19.24 PM

So, BDT as well as Rales have sold shares in the last two years.

Balance Sheet

$305M cash/$2.8B goodwill/$1.5B LT debt/$3.3B equity.
No debt convenants. There are some clauses about interest coverage but this seems quite safe.

Valuation

EV = ~ $6B ($37/share)
EBITDA = 600M
EV/EBITDA = 10x

Business: Fluid handling, equipment/filler metal for welding, precision air and gas handling equipment.

Hunter Douglas

Business

Maker of window coverings and architectural products.

Management

The Sonnenberg family owns 28,764,039 common shares (81.2%) and 34,242,517 preferred shares (99.4%). CEO Ralf Sonnenberg’s two sons work as COO and Co-president.

Balance sheet

$373M Long term debt/$160M cash/$1B equity.

Valuation

EV ($1.5B)/ EBITDA ($281M) ~ 5.33

Mullen Group (MTL.TO)

Business

Oilfield services vs Trucking/Logistics (2:1 revenue).
Oilfield services: transportation, drilling, well-servicing, dewatering.

Balance Sheet

$700M LT-Debt. $248M cash. $900M equity.
Covenant: Total-debt < 3.5 x OCF
It is currently at 2.42.

Management

Shares +2%/year (last 7 years).
CEO Murray Mullen owns 2.8M shares. CEO since 2001.
Good shareholder letters.
Read [Chairman’s Message, 2015]

Valuation

D&A ~ 80M/year
Income before tax ~ 110-192M
EV = $2.2B
EBITDA = 200M – 280M
EV/EBITDA = 7.8x – 11x
Not very cheap ! Something to keep on radar.