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...… Read more
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...… Read more
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...… Read more
By Geoff Gannon
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
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...… Read more
By: Geoff Gannon
July 25, 2008
The introduction to Security Analysis is a treasure trove of Grahamian thought. It is impossible to fully plumb the depths of this Grahamian gold mine in a single post. Therefore, I have separated my comments into two posts. This post explores the opening paragraph of the introduction with special attention to Graham’s style.
We should begin with the most general point made in Graham’s introduction: It is impossible to completely separate analysis and action, theory and practice. Therefore, while the title of Graham’s book is Security Analysis, the scope is necessarily wider:
Although, strictly speaking, security analysis may be carried on without reference to any definite program or standards of investment, such specialization of functions would be quite unrealistic. Critical examination of balance sheets and income accounts, comparisons of related or similar issues, studies of the terms and protective covenants behind bonds and preferred stocks – these typical activities of the securities analyst are invariably carried on with some practical idea of purchase or sale in mind, and they must be viewed against a broader background of investment principles, or perhaps of speculative principles.
This is vintage Graham. In many ways, it is a sort of cold open into the book and the mind of the man who wrote it. He begins with a logical and overly literal opening sentence; to Graham, “strictly speaking” means speaking strictly – nothing more or less. He adds a word we wouldn’t think necessary – “definite” – but in Graham’s mind it is a necessary and meaningful modifier. Finally, he interjects his personality with the word “quite”, which we will see repeated again and again throughout Security Analysis (Graham was born in Britain).
Next, we have a catalogue. The activities Graham lists are all activities he’ll cover in Security Analysis. If you wonder what Graham means by security analysis, look no further than these lines. He lists three main activities: “critical examination” of corporate financial statements, “comparisons of related or similar issues”, and finally “studies of the terms” of senior securities.
This is an especially excellent introduction for the modern reader, because we learn just how different Graham and his book are from what we might expect – and we learn our lesson well within the first few sentences.
What is the most unusual feature of this paragraph? Can you find the words almost no other writer would have included?
I’ll give you a hint. In Graham’s list of activities undertaken by the security analyst, there are two words that stick out like a sore thumb – a seemingly redundant sore thumb – can you find them?
Here they are:
“Critical examination of balance sheets and income accounts, comparisons of related or similar issues, studies of the terms…”
These two words tell you more about Graham and Security Analysis than anything else in that opening paragraph.
Because they are peculiar. What tells most is often what is said least. The appearance of these extra words
Today’s initial interest post really stretches the definition of “overlooked stock”. I’m going to be talking about Sydney Airport. This is one of the 20 to 25 biggest public companies in Australia. It has a market cap – in U.S. dollar terms (the stock trades in Australian Dollars) – of about $13 billion. It also has a lot of debt – including publicly traded bonds. So, not what you’d normally consider “overlooked”. On the other hand, Andrew and I have a couple standard criteria we...… Read more
Burford Capital is complicated to value; and so vulnerable to opportunistic short sellers, but this weakness offers opportunities to long term investors.
Stephen Gamble, writer and analyst, 12th October 2019.
Figure Above: shows how each of 74 concluded matters in period 2009-2016 contributed to profits in this period – 4 matters make up 50% of gross profits, 11 matters make up 75% of gross profits
Burford Capital is in litigation finance, a relatively new industry in a growth phase, with complex assets. The recent attack from short sellers give rise to opportunity for longer term investors.
Lawsuits are risky for companies: they have to commit large amounts of capital up front to pay for expensive lawyers, they can take years to settle, and the return on their investment is unknown until the end, and binary: either a large cash windfall, or else a total loss, and they may even face a liability for costs of the other party. Furthermore, once litigation has started, it has to be seen through to the end in order to prevent a total loss of money invested. This often takes multiple appeals, making the total cost difficult/impossible to ascertain at the start. In summary, lawsuits can be difficult to justify to shareholders since the duration, cost and outcome are inherently uncertain. However, they are often desirable in order to protect key business interests – so the companies are left with a difficult choice when considering whether to litigate or not.
It is at this point that companies considering a lawsuit, are increasingly turning to a third party litigation finance company. They can provide capital, to avoid the problems discussed above, and in return, they take a slice of the outcome. Therefore they do not need to spend money at any point in the litigation process, e.g. on lawyers etc. since the litigation finance company will spend its money instead. This changes litigation from an uncertain and risky enterprise into a simple opportunity cost – that they might have made more money, if they had paid the lawyers themselves. It also incentivises companies to pursue litigation that they might otherwise have deemed too risky. For the company, the cost of making ~30% less money in victory or settlement, is much preferable to the risk of committing an unknown amount of money for an unknown duration, where if the commitment is not followed through to the end, all the money invested is lost. Furthermore, in many cases the company still retains some control over the litigation, and can input into the strategy pursued – without having any financial risk. Litigation finance can be crudely characterised as a ‘corporate no win, no fee,’ claims industry.
This industry is a relatively immature one compared to the personal claims one, which …Read more
Today’s initial interest post is a company I like a lot. It’s trading at a price that could be justifiable – possibly – based on that company’s past performance. But, it’s not a stock I’m going to give a very high initial interest level too. The reason for that is uncertainty about the future. I’ll get to that uncertainty in a second. First, I want to describe what FW Thorpe does. The company makes lights. I won’t go into too much detail here. You can...… Read more
Gamehost: Operator of 3 “Local Monopoly” Type Casinos in Alberta, Canada – Spending the Minimum on Cap-Ex and Paying the Maximum in Dividends
Today’s initial interest write-up is a lot like yesterday’s. Yesterday, I wrote about an Alberta based company paying out roughly 100% of its free cash flow as dividends. In fact, that company was paying almost nothing in cap-ex. Today’s company is doing the same. It pays almost everything out in dividends. And it doesn’t spend much on cap-ex. So, cash flow from operations translates pretty cleanly into dividends. And like yesterday’s stock being written up (Vitreous Glass) – today’s stock being written-up (Gamehost) probably attracts...… Read more