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Maui Land & Pineapple: Hawaii Land Owner with Development Catalyst

January 12, 2019 in Audio, Best Ideas 2019, Equities, Ideas, Micro Cap, North America

Michael Melby of Gate City Capital Management presented his in-depth investment thesis on Maui Land & Pineapple (US: MLP) at Best Ideas 2019.

Thesis summary:

Maui Land & Pineapple owns 23,000+ acres of land on the island of Maui in Hawaii. The owned acreage includes nearly 21,000 acres of land in and around the world-renowned Kapalua Resort, home to the Ritz-Carlton Kapalua. Most of the company’s land holdings were purchased in the early 1900s and continue to be held on the books at cost. Maui Land & Pineapple owns several fully-entitled parcels of land within the Kapalua Resort.

The company is likely to proceed with development of some of its premier land holdings within the next year. In addition to the land holdings, MLP also owns several buildings within the Kapalua Resort and operates a profitable leasing business. It also operates a water utility company and manages a spa within the Kapalua Resort. These segments generate FCF and provide financial flexibility as the company prepares to develop its land holdings.

MLP has a market cap of $190 million and no net debt as it utilized proceeds from the sale of non-core properties to repay $50+ million of debt over the past three years. MLP stock enables the buyer to purchase Hawaii land at a valuation of just over $8,250 per acre. Mike’s estimates intrinsic value at roughly $400 million or almost $21 per share, representing 100+% upside.

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About the instructor:

Michael Melby is the founder and portfolio manager of Gate City Capital Management, a micro-cap value focused investment firm. Before starting Gate City Capital, Michael worked as a research analyst at Crystal Rock Capital Management where he covered the consumer, restaurant, retail, and gaming sectors. Michael previously worked at Deutsche Bank Securities in their Debt Capital Markets group and at the University of Notre Dame Investment Office where he focused on natural resources, fixed income, and risk management. Michael earned an MBA from the University of Chicago Booth School of Business where he graduated with Honors and a BBA in Finance from the University of Notre Dame where he graduated Summa Cum Laude. Michael is a CFA Charterholder and has earned the Financial Risk Manager designation.

Brown-Forman: Entrenched Business, Driven by Jack Daniel’s Brand

January 12, 2019 in Best Ideas 2019, Best Ideas 2019 Featured, Consumer Staples, Ideas, Large Cap, North America, Wide Moat

Dave Sather of Sather Financial Group presented his in-depth investment thesis on Brown-Forman (US: BF.B) at Best Ideas 2019.

Thesis Summary:

Brown-Forman is an American spirits company that owns several brands, the largest of which is Jack Daniel’s.

Jack Daniel’s generates roughly 60% of the firm’s cases sold worldwide and has become a foundation for the growth of both new Jack Daniel’s products, such as Honey and Fire, and other brands owned by Brown-Forman.

The stock rarely trades at fair value but headwinds involving a 25% tariff on bourbon exports to Europe and a CEO transition have caused a 20% price decline since May. Given the inelastic demand of the industry and resilient staying power, the recent drop in price gives investors an opportunity to buy an extremely durable business at what Dave considers to be fair value.

The firm benefits from cost advantages associated with producing premium products and strong brand appeal which yields margins higher than competitors who generate revenue nearly 5x that of Brown-Forman. It’s existing value chain allows for newer brands to piggy back off of Jack Daniel’s in markets that are estimated to yield 10%+ CAGR’s over the next five years. Much of this growth stems from increased global demand, taking market share from global competitors, and consumer preference changes in the U.S. shifting from beer to higher end spirits.

Management has also prioritized returning value to shareholders by both reducing outstanding shares by 16% and more than doubling its dividend since 2008 and intends on continuing this capital allocation strategy. These factors have earnings estimated to grow between 10-15% over the next few years.

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About the instructor:

Dave Sather is a CFP and President of Sather Financial Group, a $600 million firm managing individual accounts, in Victoria, Texas. Dave has degrees in business from Texas Lutheran University and Texas A&M University. Dave is also Chairman of the Board of Business Bank of Texas and serves on the Investment Committee and Board of Regents at Texas Lutheran University. He developed and teaches the Bulldog Investment Company internship at Texas Lutheran University (www.BulldogInvestmentCo.com).

Tidewater: Leading Owner and Operator of Offshore Supply Vessels

January 12, 2019 in Best Ideas 2019, Best Ideas 2019 Featured, Energy, Ideas, North America, Small Cap

Bob Robotti of Robotti & Company presented his in-depth investment thesis on Tidewater (US: TDW) at Best Ideas 2019.

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About the instructor:

Bob Robotti is the Founder, President and CIO of Robotti & Company Advisors, a registered investment advisor based in New York City. Guided by the classic tenets of value investing, Robotti & Company Advisors uses a proprietary research approach to identify companies with solid balance sheets and the ability to generate significant amounts of free cash flow, yet are misunderstood, neglected, or just out-of-favor. Once identified, Robotti’s investment team focuses on deep primary industry and company research to select investment holdings through the lens of a long-term business owner. In this capacity, Bob currently sits on the boards of Panhandle Oil & Gas Inc. (NYSE:PHX), AMREP Corporation (NYSE:AXR) and Pulse Seismic Data Inc. (TSX: PSD) for which he also serves as Chairman. Prior to founding Robotti & Company in 1983, he was the CFO of Gabelli & Company. Bob holds a BS from Bucknell University and an MBA from Pace University.

Enzo Biochem: Debt-Free Company with Strategic/Litigation Optionality

January 12, 2019 in Best Ideas 2019, Health Care, Ideas, Micro Cap, North America, Transcripts

Jim Roumell of Roumell Asset Management presented his in-depth investment thesis on Enzo Biochem (US: ENZ) at Best Ideas 2019.

Thesis Summary:

Enzo Biochem is a debt-free company with a strategically located clinical lab footprint in the NY/NJ/CT Tri-state area in a consolidating industry. The company has significant IP assets, a therapeutics business Jim expects to be monetized in H1 2019, significant IP litigation optionality, and a vertically integrated clinical lab platform with gross margin expectations of 65% versus a current 35% model.

ENZ’s recent enterprise value is roughly 90% of what the company has collected in IP litigation in the past several years. The company has won settlements and royalty payments of $100 million ($67 million net) in recent years, highlighting its rich IP assets. The company has seven outstanding IP lawsuits, six of which are financed on a contingency basis with the law firm that has already won ENZ suits against Illumina, Thermo Fisher Scientific, and Siemens.

ENZ possesses multiple ways to win. The stock price has dropped from $10+ per share two years ago to sub-$3 per share recently because of dramatically reduced reimbursement payments (Medicare and private pay insurers) for clinical lab services.

While there is near-term pain associated with the reimbursement issue affecting ENZ’s lab business, the company appears well-positioned to be a winner with its low-cost Ampiprobe lab platform. Smaller, independent labs are being squeezed particularly hard, and ENZ offers an outsourced diagnostic solution.

At a price of $2.75 per share, ENZ’s market cap is $130 million and EV is $77 million, reflecting $53 million in net cash.

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About the instructor:

Jim Roumell entered the securities industry in 1986. Before founding the firm in 1998, he was a Registered Principal at Raymond James Financial Services, Inc. Mr. Roumell is a frequent contributor to Manual of Ideas Global and has been featured in such publications as Barron’s, Kiplinger’s, Value Investor Insight, Financial Planning Magazine, and The Washington Post. He is listed and quoted in “The Art of Value Investing: How the World’s Best Investors Beat the Market.” Mr. Roumell was selected to participate in, and won, two consecutive Wall Street Journal stock picking contests in 2001 and 2002. He is a Board Member and Chairman of the Investment Committee of Wayne State University Foundation. He is also a Board Member and serves on the Investment Committee of Amalgamated Casualty Insurance Company. Mr. Roumell is a graduate of Wayne State University in Detroit, Michigan.

Semler: Medical Diagnostics Testing Firm with Growth Trajectory

January 12, 2019 in Best Ideas 2019, Best Ideas 2019 Featured, Health Care, Ideas, Micro Cap, North America, Transcripts

Niraj Gupta of GCI Partners presented his in-depth investment thesis on Semler Scientific (US: SMLR) at Best Ideas 2019.

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About the instructor:

Niraj Gupta has over 25 years of experience analyzing and investing in publicly traded companies as a buy-side analyst/portfolio manager and a sell-side research analyst, with particular expertise in the technology, media and telecom industries. Prior to starting GCI Partners in 2008, Niraj was associated with Pequot Capital, Citigroup, Schroders and Goldman Sachs.

Arcadis: Engineering Design Services Firm with Margin Expansion Potential

January 12, 2019 in Audio, Best Ideas 2019, Best Ideas 2019 Featured, Equities, Europe, Ideas, Large Cap

Gary Mishuris of Silver Ring Value Partners presented his in-depth investment thesis on Arcadis (Netherlands: ARCAD) at Best Ideas 2019.

Thesis summary:

Arcadis offers consulting and engineering design services without taking on project execution risk. The company is under new management, with the board having removed the prior CEO and brought in the ex-COO of Fluor, an engineer by training.

The business had previously averaged ~10% operating margin, but due to a combination of execution issues and a decline in oil-related infrastructure demand, the business operates closer to a 7% margin. Management actions should restore the margin partway to historical levels, aided by low single-digit organic sales growth.

The stock has a high short interest, with short-sellers claiming the company overstates earnings and understates debt (recently at ~2.5x net debt to EBITDA). Gary has spoken to some of the short-sellers, analyzed their assertions, and concluded that the company’s finances are sound.

At less than 10x run-rate depressed earnings and less than 7x Gary’s estimate of normalized mid-cycle EPS/FCF, the shares trade at less than half of Gary’s base case value estimate, with ~30% downside to the worst case.

Risks include potential inability to improve margins, Gary’s balance sheet analysis proving incorrect, and a global recession lowering profitability in the medium term.

Listen to this session:

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About the instructor:

Gary Mishuris is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm with a concentrated long-term intrinsic value strategy. Prior to founding the firm in 2016, Mr. Mishuris was a Managing Director at Manulife Asset Management since 2011, where he was the Lead Portfolio Manager of the US Focused Value strategy. From 2004 through 2010, Mr. Mishuris was a Vice President at Evergreen Investments (later part of Wells Capital Management) where he started as an Equity Analyst and assumed roles with increasing responsibilities, including serving as the co-PM of the Large Cap Value strategy between 2007 and 2010. He began his career in 2001 at Fidelity as an Equity Research Associate. Mr. Mishuris received a S.B. in Computer Science and a S.B. in Economics from the Massachusetts Institute of Technology (MIT).

Thor Industries: Recreational Vehicle Leader at Attractive Valuation

January 12, 2019 in Audio, Best Ideas 2019, Consumer Discretionary, Equities, Ideas, Mid Cap, North America

Danilo Santiago of Rational Investment Methodology presented his in-depth investment thesis on Thor Industries (US: THO) at Best Ideas 2019.

Thesis summary:

Thor Industries is the parent company of a collection of RV brands in North America. Over the past two years, the company produced and sold close to 250,000 RVs in the region. The most recent acquisition in the U.S. market was Jayco, which significantly increased THO’s market share in the country. Now Thor has close to 50% of the U.S. market (by units).

The most significant competitor, Forest River, which holds close to 35% of the market, is owned by Berkshire Hathaway. Warren Buffett’s companies rarely engage in price wars, which means that Thor’s biggest competitor should behave rationally. Therefore, although the RV industry will always be a competitive one, the risk of a devastating price war is small.

Thor became more difficult to analyze as the company announced the acquisition of Erwin Heymer Group, the biggest RV manufacturing company in Europe. After the deal closes at the beginning of 2019, Thor will have 75% of their sales in the U.S. and 25% in Europe. Analyst estimates do not incorporate an increase in EPS due to the deal.

The market has been disappointed with declining sales in the wholesale channel, as retailers need to adjust their inventories since the North American market appears to have reached a plateau. The risk is that the decline may spread to the retail channel.

Even when modeling a significant recession in a year or so, the potential cash flow Thor can generate implies that long-term investors can buy the shares with an implied IRR of 16+% (doubling one’s capital in 5 ½ years).

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About the instructor:

Danilo Santiago is the founder of Rational Investment Methodology (RIM), that focuses on a quasi-static group of approximately 60 publicly traded, liquid US stocks – most of these companies, defined as RIM’s Circle of Competence, have been followed for more than a decade. RIM employs extensive industry research and analysis, building highly detailed proprietary discounted-dividend models, which are used to determine “fair values” of companies based on different scenarios. Lastly, RIM constructs “rules-based” model portfolios (long-short, long-only or long- aggressive) with a company-specific margin of safety relative to “fair value”, using its proprietary Odysseus Portfolio Construction Tool. Selected model portfolios are replicated into clients’ accounts, using Interactive Brokers’ platform, adjusting the number of shares in each client’s portfolio in a pari-passu manner. Mr. Santiago is a MBA from Columbia University and has a B.S. in Electrical Engineering from the University of São Paulo.

Takigami: Construction Firm with Improving Governance Below Liquidation Value

January 12, 2019 in Asia, Audio, Best Ideas 2019, Equities, Ideas, Micro Cap

Brian Grosso of JBF Capital presented his in-depth investment thesis on Takigami Steel (Japan: 5918) at Best Ideas 2019.

Thesis summary:

Takigami Steel is a micro-cap construction company at a discount to liquidation value, with improving governance and capital allocation.

The core construction business is profitable and the stock trades at one-third of liquidation value. Most of the assets are non-core and invested in stocks, bonds, real estate, and cash.

In the last six years, corporate governance in Japan has improved considerably, and there are many visible improvements at Takigami since the founding family took back control of management in 2010. The company has raised the dividend and deployed cash for share repurchases, real estate investments, and a small acquisition — all at good prices.

While no liquidation or other value-unlocking event like a management buyout has been announced, the governance improvements are promising. In recent years, numerous other small Japanese companies have suddenly unlocked shareholder value with little notice. Even if one must wait eight years, value is accumulating and the expected return approximates 270%, or ~18% annually.

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About the instructor:

Brian Grosso manages a sub-account and sources outside investment managers for a family office with $400mm under management. He is a global, deep value investor and very open-minded and opportunistic in the hunt for bargains. He passed the CFA Level 2 Exam in June 2018 and plan to finish the program in 2019.

Despegar: Top Online Travel Agent in Latin America at Bargain Price

January 12, 2019 in Audio, Best Ideas 2019, Best Ideas 2019 Featured, Equities, Ideas, Small Cap, South America

Samir Mohamed presented his in-depth investment thesis on Despegar.com (US: DESP) at Best Ideas 2019.

Thesis summary:

Despegar, an Argentina-based, U.S.-listed company, is the largest online travel agent in Latin America. With its two-sided network of travelers on the one hand and travel suppliers (airlines, hotels) on the other hand, the company benefits from network effects and is gaining market share in a fragmented market. Despegar has a broad travel product portfolio with direct booking capability, giving the company several advantages over travel meta search engines like Trivago or Kayak.

With revenue of $524 million in 2017 at a 13.6% EBIT margin the company has a long growth runway to reach scale over the next 6-10 years. Due to macroeconomic challenges in Argentina and investor’s risk aversion towards Latin America the company’s share price has declined 50+% since the IPO in September 2017.

In a conservative forecast the company would have an EV/EBIT of about 3x in 2025 at the recent share price.

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About the instructor:

Samir Mohamed started with value investing in 1999 and manages a private family fund, full time since 2016. He focuses on good businesses with temporary problems and suppressed stock prices. Samir enjoys collaborating with other value investors regularly via in-person meetings or Skype calls. He was global head of the product management teams of a 170 Mio. EUR industrial business at Siemens. He worked at Siemens for 13 years. Samir has a master’s degree in Management, Technology, and Economics and a bachelor’s degree in material science, both from ETH Zurich. He recently relocated from Switzerland to Cyprus.

The Joint: Top U.S. Chiropractic Chain, with Strong Unit Economics

January 12, 2019 in Audio, Best Ideas 2019, Equities, Health Care, Ideas, Micro Cap, North America

Edward Chang of Pledge Capital presented his in-depth investment thesis on The Joint Corp. (US: JYNT) at Best Ideas 2019.

Thesis summary:

The Joint Corp. is the largest chiropractic chain in the U.S., employing over one thousand of the sixty thousand licensed chiropractors in the country.

The largely franchised chain has a low-cost direct-payor model that eliminates most paper-work and is focused on short convenient visits. Their clinics charges less than the out of pocket expense or co-payment / consumer’s share of co-insurance; and significantly less than total fee charged by other chiropractors. This has helped the chain grow franchise system sales from ~$22 million to ~$150 million in the last five years, a ~45% CAGR.

With new unit economics improving, unit growth is accelerating. There is still substantial room for the chain to grow into its long-term unit potential (4x+).

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About the instructor:

Edward Chang is the founder and portfolio manager at Pledge Capital. He is a graduate of New York University Leonard N. Stern School of Business with a Bachelor’s degree in Finance & Accounting. He also completed a Master’s degree in accounting during the same time. Before founding Pledge Capital in 2016, he worked on the sell side at UBS Equity Research covering consumer retail companies. He had previous work experience covering a wide breath of companies on the buy-side as well. He is also a CPA.

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