January 31, 2007
January 30, 2007
In its fourth quarter report, Whole Foods cautioned investors that fiscal year 2007 was going to be transitional for the company, and its growth rate was going to revert back to its historical range. This was clearly not good news for a growth-story stock like Whole Foods, which has traded at a premium price-to-earnings multiple for some time. In the wake of Whole Foods' fourth quarter report, growth investors who bid up WFMI shares to its high-flyer multiple were selling out of their positions because they realize the days of superior growth are over for Whole Foods.
So how did Whole Foods get to this point of transition? Simply put, the company is a victim of its success. WFMI’s impressive growth over the last several years demonstrated that the company was taking full advantage of the growing demand for organic foods. However, its competitors also recognized this demand and began to sell more organic foods in their stores. This set the stage for a more difficult sales growth and profit margin expansion.
Mueller has a strong competitive position, with one of the largest installed bases in the US and 74 per cent of sales coming from products with number one or two market positions.
Adjusted for one-time charges, its operating margin was 14 per cent in its latest fiscal year and revenue, earnings before interest, tax, depreciation and amortisation and operating income grew 11 per cent, 30 per cent and 42 per cent, respectively. Future growth prospects are excellent, as the crumbling US water infrastructure – the American Society of Civil Engineers gave US drinking-water and wastewater infrastructure a grade of “D-” in 2005 – will require billions of dollars of new investment during the next few decades.
So what is Mueller worth? Using three different valuation methodologies – private market value, peer public company multiples and a sum-of-the-parts analysis, we think Mueller shares are worth in the mid-$20s, versus under $15 today. We think that is plenty cheap for a stable, high-quality business and have been buying aggressively at today’s prices.
January 26, 2007
January 24, 2007
Shares of PetMeds Express (PETS) plummeted today on news of a quarterly earnings shortfall. Sales were a better-than-anticipated $31.4 million, with a shift toward greater online sales (63% of revenue vs. 57% last year).
[So I don’t reinvent the wheel from here, feel free to check out my initial post on PetMeds.]
From a business perspective, I find the increase in online sales to be both good news and bad news. The bad news is simple: the market for online pet pharmaceuticals is fragmented and competitive, making targeted keywords increasingly more expensive and search engine rankings more difficult to build.
As more pet pharmacy retail operations try to steal market share, online customer acquisition costs will increase and price competition could further erode margins.
The good news is a bit counterintuitive. Allow me to explain.
What is somewhat striking about the online increase is that the company’s website traffic is down significantly from a year ago. The company has seen website traffic decline noticeably year-over-year, which is disappointing given the more than 50% increase in advertising expenses. My guess is that they are doing one or both of the following things to accomplish a sales increase in light of lower traffic:
1) Targeting their advertising better, leading to higher conversion rates from visitors.
2) Getting visitors to spend more money at the site, whether through upselling, cross-selling, a broader product offering, etc.
3) Getting customers who initially purchased via telephone to place orders on the web instead
All of these are good things (#1 and #2 for obvious reasons, and #3 due to the lower administrative expense to complete an order on the web vis-à-vis on the phone with a representative). Unfortunately, the aforementioned bad news may largely offset these benefits, and presents some looming challenges in building the PetMeds brand success. But more on that later.
Looking further into the numbers, PetMeds traffic was around 7.4 million visitors for the quarter, based on the Alexa.com statistics. With 130,000 new orders (presumably around 63%*130,000=81,900 from the web), 1.1% of the visitors were new customers. This conversion rate alone is higher than the standard retail website and probably industry averages, and given that a large chunk of traffic probably represents returning customers that need not be “acquired,” the conversion for new visitors was likely substantially higher.
So even while online acquisition costs are increasing, it appears the advertising money is being well spent.
Furthermore, investors shouldn’t lose sight of the PetMeds television marketing campaign. I believe the company is the only of its kind to do this (and maybe the only able to actually afford a national campaign), which gives it an added leg up. So while online marketing costs are increasing and competition stiffens, PetMeds has an extra edge through this media while all must suffer equally under the online sphere.
With greater financial resources, a stronger brand recognition, and successful television ads (including the new Betty White campaign), I still believe that PetMeds will come to dominate the industry and be the trusted, go-to source for pet owners. And now, with the shares having suffered what I would consider a correction, the stock may be at bargain levels (refer to my last post for more info).
January 22, 2007
I'm interested in hearing what others think Netflix will look like in 2017. I'm probably going to hold my shares that long, so the question is an important one for me. Putting on my way-future goggles requires a little looking back first, and a really long post. I apologize in advance for the length, but this was pretty fun to write, so if you don't want to read the reasons, you can skip to the end where I sum up my predictions. I suppose I could use a good editor.
First, I want to talk about Pepsi and Coke. Coke, for years, offered it's unsettlingly addictive drink in a 6oz (yes, it was that small) bottle. They dominated the soda market, their branding rocked, and the trademarked bottle design remains with us today.
Enter Pepsi, and they... Double the size you can buy for the money to 12oz. Advertise to African-Americans in the 40's. Publicize with public taste tests. Hook the youth market with snazzy ads and pop music stars. Pepsi took Coke's old-fashioned market dominance and made itself look new and cool, eventually becoming the clear winner as a company, even as their namesake drink flails in popularity. Netflix has a similar future ahead of it if it moves into digital content and away from DVDs, and they definitely have an edge over unpopular BBI in terms of coolness factor.
Soda is a commodity product. You could probably make it in your basement. These Pepsi and Coke are billion dollar brands and companies because of marketing power and customer satisfaction. Period.
I saw it said by another poster that eventually movie downloads will be commodity products. I beg to differ, but even if you assume this is true, which we must as cautious investors, the two things that Pepsi and Coke have -- brand power and a highly satisfied customer base -- are the keys to maintaining large, powerful, and relevant businesses spanning decades.
So, when I say (and I do) that Blockbuster will go into bankruptcy, I'm very serious about that. However, I do not think that BBI will disappear from the landscape. They will undoubtedly restructure, and I suspect that investors and bond holders will lose out, but BBI is too important to our movie distribution system to go away completely. BBI learned some hard lessons from Netflix about customer satisfaction, and they are executing to make changes. They could be the greatest turn around story since 90's Marvel emerged from bankruptcy.
When they work through their financial troubles, Netflix and BBI will continue to be the Coke and Pepsi of the movie rental marketplace. Why? Because when you want to 'rent' a movie, you think BBI or NFLX. You don't think, "Oh, I'll rent from Apple or Microsoft tonight."
Now back to the present. Remember Microsoft and Apple? They're both engaged in their own wars, both fighting with consumer preconceptions to get their OS's into our living rooms. Really, do you need a DVD player, CD player, video game machine, and DVR lined up next to your TV? Heck no. All you need is one box, discretely hidden next to your 200 watt receiver. MS and Apple (and Sony -- PS3 anyone?) want to own that operating system. They want to own your living room experience. Apple has the styling and convenience edge. Microsoft has the ubiquity and familiarity edge. One or all will succeed in changing customer behavior in the next 2-5 years to make sure that you have a web browser available on your HD flatscreen.
Netflix does not need to develop a box. It would be irrelevant if they did so, in fact. They can (and should) be agnostic about whose box we consumers choose, just as they can remain agnostic in the HD format war. They've got a Flash system for Bob's sake. It runs on Internet Explorer and probably on Firefox and maybe even Opera. It will run on whatever MS or Apple manage to coax in front of the family -- so long as it isn't a video game system with proprietary access such as the XBox Live system. While this kind of exclusive video game box could gain popularity, I doubt they will be the first and best choice for consumers.
Since you have YouTube, Netflix, and probably BBI wanting to be the main rental/immediate gratification providers today, and Apple and other download sellers trying to download to your hard drive, when the masses start to demand this service, they will want a home media box that allows multiple formats to play from any internet connected source company. Users won't want to be restrained by a one-company system if there's a choice.
In 3 years, a cheap computer with a killer graphics and sound card will probably cost $2-300. Will we bother buying a PS3 or Xbox at that time when we can get a great experience from this inexpensive equipment without being bound to Sony or Microsoft licensed content? Most people won't.
This is why people are waiting to buy Xboxes and PS3s and Wiis. They're unsure which will have the best content. With Netflix and other providers sending content, it's a no brainer. Buy a cheap computer and hook it up.
This is where cable companies will fall down, and where Sony and MS will fall down if they try to lock users into a box that restricts their access to content.
So, I think that Netflix's choice to ride a browser window will leverage any popular boxes, should they appear. If they do not, no biggie. Their core DVD rentals will continue for years with it or without it (I suspect disc based media will still comprise at least 50% of revenues in 15 years, even with an internet based box by the TV, since consumer habits are hard to change and our bandwidth limitations in the US).
Next, let's talk about IPTV and VOD. Should the cable companies manage to grab government sponsored monopolies on digital content through IPTV using their considerable bribery (Ahem, I mean lobbying) of government officials, the monopolies will likely create user dissatisfaction and high prices. This would be bad all around, and probably not be a happy place for movie and TV distributors, as the cable companies would have undue holds over them. If the DVD disappears, as we all believe it will, those companies will need to make up their margins somewhere. They will need to squeeze it out of the Netflix's and the Cable providers. Therefore, I believe that Hollywood favors a competitive end-user distribution landscape if they can't keep it to themselves. So, I don't feel that cable can monopolize IPTV in the real world, no matter how hopeful the Verizons and AT&Ts are about their futures.
Should the telecoms and cable companies not gain power to restrict IPTV content to themselves, they will become just one other VOD content provider, just like Netflix and the other competitors.
They will also lack the customer content decisioning system that Netflix already has in place. Netflix moved first in creating a recommendation system for customers, and they have never lost their lead. The lead means that Netflix customers will be the happiest customers, since Netflix will have the most customer data from which to pull relevant recommendations.
BBI will start to frustrate customers once again as it closes more stores and goes through its internal struggles. TA customers are now in the Honeymoon period. They love their free movies. When their local store closes, their satisfaction will plummet. This will be unavoidable. Cable companies also have long histories of poor customer relations, and have no experience in creating a strong customer-based interface tool. They would need to design one, and try to steer clear of Netflix's patent, unless they wish to join Blockbuster as a defendant. Also, they will probably want to puts ads on much of their content, which will continue to differentiate Netflix.
So, what does this mean for the future?
BBI will continue TA for as long as they can keep their loan payments going, at break even. Subscriber acquisition numbers will start to drop in a few months as store renters are mostly converted and the well runs dry. Then it will be all advertising, and both Netflix and BBI will fight it out in a battle to rival the Cola Wars. Netflix will allow all users streams on 1000-2000 titles. They will continue to meet their stated subscriber and income goals most quarters.
BBI will have to end TA at some point, or close enough stores as to render TA valueless to 50% of their current users. We will reach a store closure tipping point around this time. Netflix will offer streams on 3000-6000 titles. They may have to dig into their Line of credit to do so, but will be easily able to make payments and continue growing income at about 50% per year. Canadians and possibly Mexicans with decent internet connectivity will be able to start streaming meaningful amounts of content from Netflix and possibly BBI (assuming BBI's recent announcement about 'maybe' getting into digital distribution isn't complete bull). This will open up the previously closed Mexican market, as their existing postal service is a joke. It will also allow Canadians to rent despite their lack of local distribution centers.
Netflix will start advertising in video games, and will roll out a beta of their first phone video preview service.
IPTV will roll out in major metropolitan areas such as NY, LA, SF, Chicago, Boston, Houston, Miami, and San Antonio. These rollouts will likely serve small (read: affluent) percentages of every zip code, and will not roll fiber to the home, but more cheaply to the curb. Still, IPTV will become a reality for most left-wing blue-state pinkos like myself. The government will take a wait-and-see approach to regulating the cables and telecoms, but by this time will likely have created some unruly regulation system that slightly favors cable companies while keeping competition open on the internet. The regulations will probably make no sense and be in the courts for years as technology and user behaviors outpace the law even as the new president signs it. Netflix will offer 10-20 thousand titles through VOD and 150,000 via hard media, of which about 300-500 will be proprietary content comprised of small independent titles. Some users will experience DVD or higher quality resolutions through their new FOTC networks, others will have to suffer with DVD quality only.
Blockbuster will have worked out its financial woes by now, one way or another. Despite their best marketing, BBI's subscriber base will lag at half of Netflix's. BBI will have closed at least half of their stores by now, and remaining leases will have been modified or shortened. Video games will finally be recognized as art and should have a more episodic feel and come out with smaller modules, more often. Computer supported design will speed delivery to market and a few will even be as compelling as 24 or LOST. Video games and other interactive entertainment (read: porn) will start to cut substantially into consumers' TV time.
Fiber optic should run to 60-80% of the US, and most of Europe. Asia will probably institute a huge infrastructure rollout by then that will bring high-speed access to their expanding middle-classes. Netflix will still rent 50-70% of its content via physical media, as more non-tech-savvy individuals realize that online renting is easier than online banking, but are still unable to set the time on their DVD player. Television episodes will expand to be 50% of the rental market, as the sheer quantity of TV shows on DVD will greatly outnumber the number of movies available by then. Studios will not control their end user distribution, but will license content to the major providers, who will be Netflix, its clones, and telecom/cable companies. Most home televisions will support widescreen 1080i or better resolutions, and we'll be debating the next generation of video or holographic imagery and what kind of storage space will be required to deliver near-realistic wall-sized images on these boards. Home projection systems will be commonplace, but considered a luxury item. Wii3 users will have dents in their walls instead of cracked TV displays.
Microsoft will own the living room, to Steve Jobs dismay. The 4 inch iPod will be a quaint antique, like a Walkman tape player.
Realistic HD worlds will exist online, and with motion control, people will immerse themselves in Warcraft type games to keep fit. Interactive neuro-stimulators will allow game players to feel hits and environmental effects without actual harm to your body. This technology will, of course, be embraced by the porn industry first, and will be outlawed by states like South Carolina and Georgia. (You think I'm kidding, but I'm dead serious about this prediction. Ten years.)
15 years) (Okay, what follows is mainly fantasy...) Network speeds will be faster still, with the increased speed of servers and components, but infrastructure rollouts will be expensive and difficult. Cable companies will have had difficulty getting return on their infrastructure capital investments, once again. Medium range WIFI peer networks, which I expect to start out by distributing data to rural areas, should by now cover most of the country as cheaper, upgradable alternatives to upgrading copper from the curb to the home. All data equipment from phones to computers (if such a distinction even exists then) will be wireless and use battery power for extended periods (I already have NIMH batteries that charge in 15 minutes and provide about 30 hours of play time). Cars will still run on gasoline (and Iraq will be the 52nd state, after Israel (Just kidding)). Small robots in swarms will accomplish meaningful tasks such as physical security and perhaps harvesting and planting crops, but still won't be as cost effective as labor in poor countries for textile and detailed equipment manufacturing. Netflix will probably have upward from 30MM subscribers throughout North America. Their recommendation software will decide what to send or download to you next as an option, and it will make better decisions than you would if you did it on your own. They will still have the highest customer satisfaction in the world, and they will never open a Kiosk or a physical store location.
That's my story, and I'm stickin' to it. For this week.
January 19, 2007
Commentary from January 18
Back in December, the FDA placed a partial hold on Exelixis’ (EXEL) Phase II XL999 cancer program due to cardiovascular events and its share price took a dip and has bounced back. Exelixis is optimistic that Phase II studies can resume in the first half of 2007 using lower doses and slower infusion rates in lung cancer and acute myelogenous leukemia patients who have shown benefit from XL999. More importantly, XL999 has shown early Phase II clinical activity.
In addition, Exelixis will likely present proof of concept data to GlaxoSmithKline (GSK) by mid-2007 on small molecule cancer drug candidates XL647, XL999, XL784, and XL880. The company expects that GSK will choose one or two of these for further development, with the remaining two to three returning to Exelixis. Upon making a selection, GSK will make a milestone payment to Exelixis of approximately $75 to $85 million and assume all further clinical responsibilities.
The Phase II programs for XL880 in papillary or hereditary renal cell carcinoma and XL647 in a subset of first-line non-small cell lung cancer (NSCLC) patients will each generate data in the first half of 2007. Exelixis plans to initiate further Phase II trials with XL880 in head and neck cancers, and with XL647 in first-line NSCLC, Tarceva-refractory NSCLC, and breast cancer in the first half of 2007.
Multiple other programs are advancing into clinical development. Among these, the Phase II program for XL784 in diabetic nephropathy is expected to be fully enrolled by mid-2007 with possible data available in the third quarter of 2007. Phase II trials will also be initiated for pipeline drugs XL184 (solid and hematologic cancers) and XL820 (potentially in gastrointestinal stromal tumor, ovarian, and melanoma cancers) in the first half of 2007. Nadine Wong and her team believe the remaining Phase I and preclinical pipeline will also move forward in 2007, and up to eight Phase I trials could be ongoing by mid-2007.
With seven compounds in clinical development and another six likely to enter over the next 12 months, Exelixis shares will outperform as multiple candidates progress through clinical testing.
Recently, Exelixis has entered into a couple of partnerships. Exelixis agreed to collaborate with Bristol-Myers Squibb on discovery, development and commercialization of cancer treatments. Under the collaboration, Exelixis will use its drug discovery platform and will identify and be responsible for preclinical development of small molecule drug candidates. Bristol- Myers Squibb will have the right to select up to three investigational new drug candidates against three different targets and will lead all global activities. The two parties will co-develop and co-commercialize the programs in the U.S., Bristol-Myers Squibb will pay Exelixis $60 million in cash upfront, and Exelixis will also receive $20 million for each of up to three different drug candidates selected by Bristol-Myers Squibb.
The other agreement is with Genentech for the worldwide co-development of XL518, a small-molecule inhibitor of MEK. Exelixis submitted an Investigational New Drug application for XL518 to the FDA on MEK, also known as mitogen activated protein kinase (MAPK), a key component of the AS/RAF/MEK/ERK pathway, which is frequently activated in human tumors. Inappropriate activation of the MEK/ERK pathway can promote tumor growth and survival.
Exelixis’ pipeline has great potential.
January 9, 2007
January 8, 2007
January 5, 2007
So what happened? A legal settlement with truck maker Navistar, for which Caterpillar makes engines, took a bite out of earnings, and the rest fell to higher manufacturing costs. More troubling, management said that it saw a macroeconomic slowdown coming in 2007, which put a damper on future expectations.
It wasn't really that bad a quarter, with 21% year-over-year earnings growth, but the market wanted more, and the stock price dropped like a rock. Caterpillar still lingers in that lower trading range today, so it's not too late if you want to grab some shares of the big Cat on sale. The next earnings report is due in about three weeks, and that's when we'll start to see whether this shortfall was a one-time stumble or a deeper malaise. I still believe in what I said about the company's prospects back in October:
"Caterpillar is for you if your investment horizon goes beyond the next few quarters and into the next decade. Even if earnings shrink a bit, Caterpillar has a solid income stream and massive cash flows. Management feels confident enough in the company's future to carry on with a generous share repurchase program, as well as a 20% dividend boost earlier this year. It's hard to find anything fundamentally wrong here."
Last month, when Harris & Harris (Nasdaq: TINY) was trading around $14.60 a share, I reminded readers that the payoff from an investment in this venture capital firm -- which specializes in nanotechnology -- would require a dose of patience, because the market for high-tech IPOs could remain tepid for the foreseeable future. Partly as a result of this reality, the stock has drifted lower.
Yesterday, though, Harris & Harris' stock plunged 12%, and it is now trading at just less than $12 a share. This latest drop, however, has nothing to do with the broader market and appears to be a gross overreaction to news earlier in the week that the company's president, Doug Jamison, was exercising some additional stock options.
Part of the problem was that the news of Jamison exercising 10,000 options came on the heels of reports that both he and Harris & Harris chairman Charlie Harris had exercised 25,000 and 28,000 options, respectively, the previous week.
In many situations, dumping such blocks of shares would be a legitimate cause for concern. This, however, is not one of those times.
To begin, the sales were quite modest; in total, just more than 60,000 options were exercised. The shares were optioned at $10.11 and then exercised at around $12.35 a share, which means that Mr. Jamison netted something in the neighborhood of $70,000 and Mr. Harris about $60,000. This is a nice chunk of change, but it is hardly the stuff that signals a lack of confidence in the company's future. If anything, the sales smell more to me like an end-of-year tax move.
Second, I would remind investors that the sales were conducted under a pre-arranged trading plan and, if anything, they should be considered good news for investors because they are non-dilutive in nature and actually net the company a modest amount of new money that can be used toward other nanotechnology-related investments.
Harris and Harris has a great deal going for it, and I continue to be bullish about its investments in Nantero, Evolved Nanomaterials, Cambrios, and Molecular Imprints. If you believe, as I do, that nanotechnology will play a transformative role in the economy of the 21st century, there remain few better nanotechnology investments than Harris & Harris.
I am still preaching patience for long-term investors, but this is one of those times investors might want to buy on the dip because the market has overreacted to a non-event.
SeaBright Insurance Holdings, Inc., through its subsidiary, SeaBright Insurance Company, is a leader in providing quality niche specialty workers' compensation products and services to maritime employers, organized employers requiring collectively bargained workers' compensation insurance, construction contractors and other selected employer segments.
SEAB exceeded analysts’ earnings expectations in four out of the past five quarters by an average margin of 16.7%. In three out of the four quarters, the company surprised by a double-digit percentage.
On Oct 24, SEAB reported third-quarter profits of $9.1 million, or 44 cents per share, compared to profits of $5.1 million, or 30 cents per share in the prior-year period. Furthermore, the result topped the Street’s estimate of 38 cents by a solid 15.8%. Total revenues jumped 19.2% to $52.8 million versus $44.3 million in the third quarter of 2005.
For the first nine months of the year, profits came in at $24.4 million, compared to $12.0 million for the same period in 2005. Total revenues soared 23.6% to $147.8 million from $119.6 million for the first nine months of 2005.
The company’s combined ratio for the quarter, a measure of profitability for insurance companies, was 77.4% compared to 85.0% for the same period in 2005. For the first nine months of the year, the combined ratio was 78.8% compared to 87.1% for the same period in 2005. A ratio less than 100% indicates that the company is turning an underwriting profit, while a ratio greater than 100% indicates one that is paying out more money in claims versus receiving via premiums.
The consensus earnings estimate for this year rose three cents to $1.58 over the past 60 days. Profit forecasts for next year increased by a larger magnitude—eight cents to $1.72 over the same period of time. Earnings per share are projected to grow 15% over the next 3-5 years, while the industry is expected to grow by 14%.
SEAB is currently trading at a valuation of 11.6x trailing 12-month earnings and at 10.6x current fiscal-year estimated earnings. The market, as represented by the S&P 500, is trading at a valuation of 17.3x trailing 12-month earnings and at 15.7x its current fiscal-year estimated earnings. The company has a price-to-book ratio of 1.6, compared to 4.8 for the market. Its PEG ratio currently sits at 0.71.
The company’s return on equity of 15% betters the industry average of 13%.
This company also showed up on a stock screen at Forbes.com as a company with a PEG under 1.0 and positive free cash flow
Members of Fat Pitch Financials Contributor’s Corner have been following my investment in the recent Alberto-Culver Co. (ACV) spinoff, Sally Beauty Holdings (SBH). If you haven’t heard, Alberto-Culver, the beauty and hair care products company that makes VO5, TRESemme, St. Ives, and more, gave their shareholders one share in the newly spun off Sally Beauty, for each share of ACV they owned. The new Sally Beauty is one of the largest beauty supply distributors in the world. The deal was completed after the market closed on November 16th.
I started following this spinoff opportunity on November 14, 2006. Right after I researched the details of this opportunity, I got that tingling feeling in my head that I too could be a stock market genius. I wouldn’t be surprised to hear that Joel Greenblatt, the master of spinoff investing, also bought into this opportunity.
Let me list the details about why I got so excited by this spinoff:
- Institutions don’t want it. I discovered that Sally Beauty would not be added to the S&P Composite 1500 index. This means that index funds will have to dump the shares of Sally Beauty that they receive and thus depress the market price of this stock.
- Insiders want it. It looks like the new management of Sally Beauty will be highly motivated to boost the value of this stock since they will be receiving generous stock option grants.
- A previously hidden investment opportunity is uncovered by the spinoff transaction. Because Alberto-Culver produced many of the products that Sally Holdings distributed, other beauty and hair care product manufacturers that would potentially use Sally Beauty to distribute their products were concerned about potential conflicts of interest. This spinoff frees up Sally Beauty and allows it to now more fully compete to expand their distribution of a wider range of products from a larger base of manufacturers. This seems like a great move to me. I still remember when Wal-Mart spun off their food distributor and Warren Buffett snatched it up. (Hmm… Maybe he’ll be interested in snatching up Sally Beauty as well. One can only dream.)
- Leverage! Sally Beauty will also be loaded up with debt ($1.85 billion) and thus be highly leveraged, which is a good thing for spinoffs according to Greenblatt. This leverage will act to turbo charge returns to shareholders if the company is able to generate returns greater than their costs of capital. Based on the numbers I’ve seen for Sally Holdings, I don’t think this will be a problem.
- Margin of Safety. Based on my real rough calculations of future earnings for Sally Holdings, I estimate that the intrinsic value of SBH shares is about $10.
These five factors made Sally Beauty a fat pitch. Even though it is not the first spinoff I’ve invested in, it is the first to be added to the Special Situations Real Money Port. I added 300 shares of Sally Beauty Holdings at $7.42 a share to the Special Situations Real Money Port on last Friday, November 17, 2006. Sally Beauty Holdings closed today (Nov. 21, 2006) at $8.75. I’m already up 18 percent in less than a week on this stock.
That boost has raised the performance of the Special Situation Real Money Port. Based on today’s closing value for my son’s Coverdell ESA account ($7,574.02), it has earned a 15.9% annualized rate of return since inception (Oct. 19, 2004) and 19.5% annualized rate of return year to date. You can get timely information on the special situation opportunities I’m researching and my latest transactions over in Contributor’s Corner.