Posts In:

Andrew Kuhn December 30, 2019

Familiarity Breeds Success: Why Members of Congress Do Best When Buying Local Stocks

From 12/21/2010 Here’s an interesting article from BusinessWeek about how members of Congress do best when picking stocks from their own districts. While cynics will jump to the conclusion these representatives must be trading on inside knowledge gleaned from lobbyists, or just outright favoring local companies, I have to say I have a better record investing in New Jersey companies. I was born and raised in New Jersey. I still live and work here. I know the place. And I do best when investing in New Jersey...

This content is for Regular Membership and Annual Membership members only. Please login or register to view our content.
Log In Register
Read more
Warwickb December 17, 2019

Suria Capital Holdings Bhd (KLSE:Suria): A Cheap, Conservatively FInanced Port Concession Operator

Writeup by Warwick Bagnall www.oceaniavalue.com Suria has some sell-side analyst coverage so I wouldn’t say it is a totally overlooked stock.  But it has several features which make it a quick pass for many investors: top line revenue is up and down by >50% in many years (the company reluctantly books some capex as revenue), it is small (~116 MM USD market cap) and it is illiquid (~4% annual share turnover).  You can’t buy more than a few thousand USD per day of stock without...

This content is for Regular Membership and Annual Membership members only. Please login or register to view our content.
Log In Register
Read more
Geoff Gannon December 14, 2019

Truxton (TRUX): A Small, Fast Growing Private Bank with Extremely Low Net Non-Interest Expense

by PHILIP HUTCHINSON Overview Truxton is a small, fast growing private bank with extremely low net non interest expenses due to its wealth management business and very high level of deposits per branch Truxton Trust is a one-branch private bank and wealth management firm in Nashville, Tennessee. It was founded in 2003 by a group of founders (some – though not all – of whom are also executives at the company) who appear to be a mix of very well-connected members of the Nashville business...

This content is for Regular Membership and Annual Membership members only. Please login or register to view our content.
Log In Register
Read more
Geoff Gannon December 14, 2019

Canterbury Park (CPHC): A Stock Selling for Less than the Sum of Two Parts – A Card Casino and 127-Acres of Land (Plus You Get a Horse Track for Free)

Canterbury Park (CPHC) is a sum of the parts stock. After our experiences – and when I say “our”, I mean my decisions to buy – Maui Land & Pineapple, Keweenaw Land Association, and Nekkar – Andrew has a sticky note on his desk that says: “When thinking about SOTP, think STOP”. Canterbury Park (CPHC) is a sum of the parts (SOTP) stock. Since we’re thinking “SOTP” should we also be thinking “STOP”? Yes, Canterbury Park is a sum of the parts stock. But… That...

This content is for Regular Membership and Annual Membership members only. Please login or register to view our content.
Log In Register
Read more
Geoff Gannon December 7, 2019

Stella-Jones: Long-Term Contracts Selling Utility Poles and Railroad Ties Add Up to A Predictable, Consistent Compounder that Unfortunately Has to Use Debt to Beat the Market

Stella-Jones mainly provides large customers with pressure treated wood under contractually decided terms. The customers are mainly: U.S. and Canadian railroads, U.S. and Canadian electric companies, U.S. and Canadian phone companies, and U.S. and Canadian big box retailers. Stella-Jones has some other sources of revenue – like selling untreated lumber and logs – that provide revenue but no value for shareholders. The company also has some more niche customers – probably buyers for using wood in things like bridges, piers, etc. – that probably do...

This content is for Regular Membership and Annual Membership members only. Please login or register to view our content.
Log In Register
Read more
Andrew Kuhn December 6, 2019

One Ratio to Rule Them All: EV/EBITDA

By Geoff Gannon

06/07/2012

 

For understanding a business rather than a corporate structure – EV/EBITDA is probably my favorite price ratio.

 

Why EV/EBITDA Is the Worst Price Ratio Except For All the Others

Obviously, you need to consider all other factors like how much of EBITDA actually becomes free cash flow, etc.

But I do not think reported net income is that useful. And free cash flow is complicated. At a mature business it will tell you everything you need to know. At a fast growing company, it will not tell you much of anything.

As for the idea of maintenance cap-ex – I have never felt I have any special insights into what that number is apart from what is shown in actual capital spending and depreciation expense.

When looking at something like:

  • Dun & Bradstreet (DNB)
  • Omnicom (OMC)
  • Carbo Ceramics (CRR)

I definitely do take note of the fact they trade around 8x EBITDA – and I think that is not where a really good business should trade. It’s where a run of the mill business should trade.

I guess you could get that from the P/E ratio. But when you look at very low P/E stocks – like very low P/B stocks – you’re often looking at stocks with unusually high leverage. And this distorts the P/E situation.

 

Which Ratio You Use Matters Most When It Disagrees With the P/E Ratio

The P/E ratio also punishes companies that don’t use leverage.

Bloomberg says J&J Snack Foods (JJSF) has a P/E ratio of 21. And an EV/EBITDA ratio of 8. Meanwhile, Campbell Soup (CPB) has a P/E of 13 and EV/EBITDA of 8. One of them has some net cash. The other has some net debt. J&J is run with about as much cash on hand as total liabilities.

They can do that because the founder is still in charge. But if Campbell Soup thinks it can run its business with debt equal to 2 times operating income – then if someone like Campbell Soup buys J&J, aren’t they going to figure they can add another $160 million in debt. And use that $110 million in cash someplace else.

And doesn’t that mean J&J is cheaper to a strategic buyer than its P/E ratio suggests.

That only deals with the “EV” part. What about the EBITDA part? Why not EBIT?

 

Don’t Assume Accountants See Amortization the Way You Do

The “DA” part of a company’s financial statements is usually the most suspect. It’s the most likely to disguise interesting, odd situations.

Look at Birner Dental Management Services (BDMS). The P/E is 21. Which is interesting because the dividend yield is 5.2%. That means the stock is trading at 19 times its dividend (1/0.052 = 19.23) and 21 times its earnings. In other words, the dividend per share is higher than earnings per share. Is this a one-time thing?

No. The company is always amortizing past acquisitions. So, the EV/EBITDA of 8 is probably

Read more
Geoff Gannon December 5, 2019

Points International (PCOM): A 10%+ Growth Business That’s 100% Funded by the Float from Simultaneously Buying and Selling Airline Miles

Points International (PCOM) is a stock Andrew brought to me a couple weeks ago. It always looked like a potentially interesting stock – I’ll discuss why when I get to management’s guidance for what it hopes to achieve by 2022 – but, I wasn’t sure it’s a business model I could understand. After some more research into the business, I feel like I can at least guess at what this company is really doing and at how this helps airlines. My interpretation of what the...

This content is for Regular Membership and Annual Membership members only. Please login or register to view our content.
Log In Register
Read more