National Research (NRCIB) trades on the Nasdaq. There are two classes of stock. Focus on the Class B shares.
Press Release (“Use of Cash”: 8/21/2013)
14A (Proposal 2: Page 22; Fairness Opinion Page 29)
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Nuclear Story With an Unexplosive End (free PDF of Grant’s Interest Rate Observer)
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Read moreI have 25% of my portfolio in Weight Watchers (WTW). My average cost is $37.68 a share.
A blog I read regularly, Punchcard Investing, took a closer look at Weight Watchers. The card remained firmly unpunched:
Read moreAt a 6% FCF/EV yield (on 2012 FCF), WTW is not particularly cheap. Further, this seems to be a stock market investment rather than a business investment. Mr. Gannon’s analysis turns on Weight Watchers P/E multiple increasing from 8 to 15. We don’t like to rely on a speculative change in investor sentiment. Instead, we like to rely on improving business results to carry the day. As the name of the blog would suggest, we are not comfortable buying a stock that we would not want to own forever. Otherwise, the risk of a “value trap” is simply too high. Here, WTW simply has no durable competitive advantages. In the turbulent weight management sector, this makes forecasting future cash flows impossible and far too risky of an investment.
A stock can be cheap in two ways:
A stock like Weight Watchers (WTW) promises a high annual return. Here is Weight Watcher’s past 11 years of free cash flow data presented as a percentage (yield) of its current market cap ($2.05 billion).
Minimum: 10.3% (2008)
Maximum: 17.4% (2011)
Median: 12.4% (2004)
Mean: 12.8%
Standard Deviation: 2.0%
Variation: 0.16
From a leveraged free cash flow perspective, if 2004 was a normal year for Weight Watchers the stock’s earning power is 12.4% of today’s price. If 2008 was a normal year, the stock’s earning power is 10.3% of today’s price. If 2011 was a normal year, the stock’s earning power is 17.4% of today’s price.
To avoid permanent impairment, a stock’s earning power should be at least 6.67%. This is because stocks often trade at 15 times earnings and 1 divided by 15 is 6.67%. So a 6.67% free cash flow yield is sufficient to support a stock price.
If a stock’s price declines while it persists in delivering 7% or more of your purchase price in free cash flow each year, it’s appropriate to consider your loss a purely “paper loss”. If your intention is to hold the stock indefinitely, you may never need to realize that loss.
Ben Graham defined safety as:
Protection against loss under all normal or reasonably likely conditions or variations.
Since a 7% free cash flow yield is an adequate protection against loss, we can substitute that number for Graham’s phrase “protection against loss”.
We can then define a stock’s safety as its:
Likelihood of delivering annual free cash flow of 7% or more of your purchase price under all normal or reasonably likely conditions or variations.
Leveraged numbers – like free cash flow yield (free cash flow/market cap) – show you annual return possibilities. They do not provide any hints about margin of safety.
Capitalization independent numbers do.
A stock like Weight Watchers does not provide a high (quantitative) margin of safety. Here is Weight Watcher’s past 11 years of EBITDA data presented as a percentage (yield) of its current enterprise value ($4.34 billion).
Minimum: 7.3% (2004)
Maximum: 13.3% (2011)
Median: 9.1% (2006)
Mean: 9.3%
Standard Deviation: 1.8%
Variation: 0.20
EBITDA is cash flow the company has available to make capital expenditures, pay interest, pay taxes, make debt repayments, and finally – only after these other things have been done – buy back stock and pay dividends to shareholders.
If 2004 was a normal year for Weight Watchers, the company’s EBITDA power is only 7.3% of today’s enterprise value. This EBITDA is what protects both the creditors and owners of the company from impairment. A 7.3% EBITDA/EV yield is low. It’s equivalent to an EV/EBITDA ratio of 13.7x. That’s unsustainable. So someone – like me – who owns Weight Watchers stocks must believe that the company’s future EBITDA will not be as low as it was 10 …
Read moreMurphy USA will trade on the NYSE under the ticker “MUSA”.
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Special Situation: The WP Stewart Rights…
Read moreAn investment operation is one which can be justified on both qualitative and quantitative grounds.An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return.Thorough Analysis: The study of the facts in the light of established standards of safety and value.Safety: Protection against loss under all normal or reasonably likely conditions or variations.Satisfactory Return: Any rate or amount of return, however low, which the investor is willing to accept, provided he acts with reasonable intelligence.
(Security Analysis, 1940)
To have a true investment there must be present a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience.
(The Intelligent Investor, 1949)
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Berendsen trades in London under the ticker “BRSN”.
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Miko NV: Coffee and Plastics – A Tasty Combination
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Read moreGeorge Risk trades over the counter under the ticker “RSKIA”.
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Is it Time to Dump George Risk?…
Read moreIn my last article I talked about the first 3 of the 7 things I look for before buying a stock – understanding, durability and moat. Today, I’ll talk about the other four areas I focus on.
First up is quality. We can look at quality a couple ways. One way – which I remember from reading Greenbackd and the book Quantitative Value Investing (which cites an article on the subject) – is using a metric from high up the income statement. Something like gross profits divided by NTA.
This is a good first check. A business should have high gross profitability. Most of the companies I look at have fairly high gross margins. However, all of these subjects are a little tricky because of the accounting definition of sales. Sales are defined in accounting terms for a company in ways that might not make sense from an economic perspective.
For example, Omnicom (OMC, Financial) doesn’t record billings as sales. Nor does DreamWorks (DWA) record box office as sales. However, some companies that buy and quickly resell – at very, very low margins – do count the transaction as a purchase and sale rather than a contracted service. I’m not knocking any of these approaches to accounting – we need one definite way of measuring sales. But it’s important to keep in mind that you can sometimes restate sales without restating anything – like earnings, cash flow, etc. – that actually matters.
What matters is the economic profits a company earns. Sales can be very useful comparisons between companies that use similar accounting. But, I’m not sure gross profitability means the same thing across all industries. For example, I would not be concerned with gross profits at ad agencies, defense contractors, or drug distribution. This is just common sense. For example, AmerisourceBergen (ABC, Financial) hasn’t posted a gross margin above 5% at any point in the last 10 years. Yet, return on equity has rarely been below 10%. That’s unusual. And it reinforces the need for using common – human – sense rather than relying on a screen.
When looking at a company economically – rather than as an accounting entity – we often want to ask what spending at the end of the chain is on these products, what sales by others dependent or controlled by the company etc.
Economically, a DreamWorks movie should be broken down from the ticket price collected from the moviegoer, then we look at the take for the theater, the agreement with the distributor, and then finally DWA’s revenue number comes into play.
In other words, we can – using widely available data that isn’t in the financial statements – easily create a picture of how a movie makes money. We should do that. Just as we should consider the quality of an auto parts maker in terms of the price of their product relative to the price of the product it’s going into and what it …
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