Exxon, Berkshire, K-Swiss Pass My 15-15 Screen: John Dorfman

Exxon Mobil Corp., Berkshire Hathaway Inc. and K-Swiss Inc. all pass a simple but important test.

Their earnings have been growing at a pace of at least 15 percent annually the past five years. Even so, their shares are inexpensive, selling for less than 15 times the past four quarters' earnings.

To read further: Bloomberg.

It is good to know that John Dorfman likes my recommended shares: Berkshire Hathaway and K-Swiss.

Happy learning,

Dah Hui Lau (David)

Warren Buffett's car sells for $73,200 on eBay

An eBay bidder bought Warren Buffett's Lincoln Town Car for $73 200 on Friday, almost five times the 2001 vehicle's worth. Along with the car, the winner will get Buffett's "THRIFTY" license plate and an engraved plaque bearing the investor's signature. Buffett also will pick up the winner at the Omaha airport when he or she comes to claim the car.

The winning bid was submitted by "billzanker".

To read the complete article.

The 400 Richest Americans

This list of 400 richest Americans have been published.

Source: Forbes.

Investing Mistakes

There are great discussions on MSN BRK Shareholders' board on investing mistakes and what to avoid.

Thank you for sharing,
David

SmartMoney: What Would Warren Buy?

THESE ARE SCARY TIMES on Wall Street. There's fear of inflation. Fear of Middle East tumult. Fear of slowing economic growth. But savvy investors have a different view: They call it Buffett Time.......

Berkshire Hathaway
......Based on his estimate of profit growth at the various companies in the conglomerate, plus Berkshire's $42 billion cash hoard, Tilson believes the stock is undervalued by 30%. That's what we call a margin of safety.......

HSBC
......As they have with the other megabanks, investors have dismissed HSBC as stodgy and boring. But Buffett acolytes know that a conservative culture and straightforward style usually lead to lasting returns. "There are no glossy photographs in their annual report," Winters says.....

American Express
.....AmEx also has a wealthier customer base than Visa, MasterCard and Discover, and a virtual lock on the corporate sector. "If you are going to do any business with corporations, you really need to accept the American Express card," says Greenblatt......

UPS
.....UPS has been developing its extensive logistics network, which includes every address in the United States, for nearly 100 years, and it's expanding around the world. "It's basically a proxy on global trade," Auxier says......

Scotts Miracle-Gro
.......Scotts's stable of brands is impeccable. Each one is the leader in its category, with a collective market share of more than 50%.........

Mohawk Industries
........A mainstay of Buffett's investment strategy is to buy simple businesses that make things people can easily understand. A prime example is Mohawk Industries, which has a duopoly on the flooring business alongside Buffett holding Shaw Industries........

Wal-Mart
......Based on 7% to 9% in new-store growth and 1% to 3% in same-store sales, Tilson estimates Wal-Mart can deliver about 10% sales growth over the next five years and 12% annual earnings-per-share growth. Last year Wal-Mart earned $11.2 billion, or $2.68 per share, on sales of $316 billion. At 14 times earnings estimates — near its lowest P/E in a decade — Wal-Mart stock might just be as much of a bargain as its merchandise........

To read the complete article.

The battle of the billionaires

You don't become a billionaire by making a lot of bad bets. But two of the world's richest men are now on opposite sides of a wager that may see one of them lose a fair chunk of change.

The two men: Warren Buffett, whose mastery of value investing has helped him accumulate more than $40 billion, and Carl Icahn, the corporate raider who has earned more than $8 billion with astute and aggressive stock plays.

To read the complete article.

To follow this discussion on MSN BRK Shareholders' board.

So, who is right?

David

My personal view on Dell

A friend of mine asked me recently what do I think of Dell now....and this is my reply...

Regarding Dell, there are so many bad news that come out already. Batteries recalls, SEC subpoena, etc. I would presume that the price that we see now is as depressed as it could be. Most importantly, Dell's moat is still intact. Dell's situation now seems a bit like Geico in the past or American Express with the salad oil scandal. Some similarity. In fact, Dell is much better position and financially stronger in comparison with Geico or American Express. Rationally speaking HP or IBM or Acer could not take away all Dell's market share. Impossible. Plus, Dell now realized that they need to beef up its customer services and thus, invested $150M to do just that. Dell also realized that price is not the only focus by customers and the experience and personalised service. As long as Dell acknowledges its mistakes and improves on them, it would be a very formidable company.

The most important question is whether to invest in Dell or not. The biggest risk is their turnaround take too long. As importantly, as a small investor is may be more profitable to concentrate digging for smaller caps with potentially higher returns. Dell is almost a $50B company and it is very hard to triple in size in comparison with a company with $1B size.

In my opinion, Dell is a good buy for big institutional investors i.e. Mason Hawkins who manages billions of funds. As for private investors, we should search for the next hidden gems. Having said that, I recommended Dell on my blog because I truly believe that it is a market beating company in the next few years. I also want to inform you that I do not own any Dell shares, but my position may change if price plunges! :)

All the best,
David

Columbia Greenwald Class Lectures.

Recording of Bruce Greenwald's Columbia GSB guest lectures with Michael Price, Glenn Greenberg, Tom Russo and others.

To visit the archive.

Thank you bonechip of MSN BRK Shareholders' board for the excellent link.

Happy learning,
David

Investment success like the masters

George Soros and Warren Buffett are the world's most successful investors. Can ordinary investors learn anything from their investment habits? John McCrone finds out.

To read the complete article.

Happy learning,
David

The Buckle Inc. (BKE) at $35.10

Step 1: Do you understand The Buckle Inc.’s business?
Incorporated in Nebraska in 1948, the Company commenced business under the name Mills Clothing, Inc., a conventional men's clothing store with only one location. In 1967, a second store, under the trade name Brass Buckle, was purchased. In the early 1970s, the store image changed to that of a jeans store with a wide selection of denims and shirts. The first branch store was opened in Columbus, Nebraska, in 1976. In 1977, the Company began selling young women's apparel as well and opened its first mall store. The Company has experienced significant growth over the past ten years, growing from 164 stores at the start of 1996 to 338 stores by the close of fiscal 2005. The Company changed its corporate name to The Buckle, Inc. on April 23, 1991.

The Buckle, Inc. is a retailer of medium to better−priced casual apparel, footwear and accessories for fashion conscious young men and women. The Company markets a wide selection of mostly brand name casual apparel including denims, other casual bottoms, tops, sportswear, outerwear, accessories and footwear. The Company emphasizes personalized attention to its customers and provides customer services such as free alterations, free gift−wrapping, easy layaways, The Buckle private label credit card and a frequent shopper program.

Most stores are located in regional, high−traffic shopping malls, and this is the Company's strategy for future expansion. All of the Company's central office functions, including purchasing, pricing, advertising and distribution, are controlled from its headquarters and distribution center in Kearney, Nebraska.

Throughout the years many changes have occurred in fashion, retail, and within the company but one constant has driven Buckle’s success…..the mission "to create the most enjoyable shopping experience possible for our guests".

The Company provides merchandise designed to appeal to the fashion conscious 12 to 24−year old. Denim is a significant contributor to total sales (42.7% of fiscal 2005 net sales) and is a key to the Company's merchandising strategy. The percentage of net sales contributed by denim has increased from 36.2% (2003) to 42.7% (2005).

The average store is approximately 4,900 square feet (of which the Company estimates an average of approximately 80% is selling space), and stores range in size from 2,600 square feet to 8,475 square feet.

The top four members of this buying team combined, have over 90 years of experience with the Company. The experience and leadership within the buying team contributes significantly to the Company's success by enabling the buying team to react quickly to changes in fashion and by providing extensive knowledge of sources for branded and private label goods.

As of April 11, 2006, the Company operated 341 stores in 38 states, including 4 stores opened and 1 closed during fiscal 2006. The existing stores are in 4 downtown locations, 11 strip centers, 16 lifestyle centers and 310 shopping malls. The Company anticipates opening approximately 17 new stores in fiscal 2006. For fiscal 2006, nine of the new stores are expected to be located in higher traffic shopping malls and eight of the new stores are expected to be located in lifestyle centers.

As of January 28, 2006, the Company had approximately 6,500 employees − approximately 1,227 of whom were full−time. The Company has an experienced management team and substantially all of the management team, from store managers through senior management, commenced work for the Company on the sales floor. None of the Company's employees are represented by a union.

Step 2: What are the potential risks of owning BKE?
The men's and women's apparel industries are highly competitive with fashion, selection, quality, price, location, store environment and service being the principal competitive factors.

The Company's success is largely dependent upon its ability to gauge the fashion tastes of its customers and to provide merchandise that satisfies customer demand in a timely manner. The Company's failure to anticipate, identify or react appropriately and timely to the changes in fashion trends would reduce the Company's net sales and profitability. Misjudgments or unanticipated fashion changes could have a negative impact on the Company's image with its customers, which would also reduce the Company's net sales and profitability.

Many of the Company's competitors are considerably larger and have substantially greater financial, marketing and other resources than the Company, and there is no assurance that the Company will be able to compete successfully with them in the future. Furthermore, while the Company believes it competes effectively for favorable site locations and lease terms, competition for prime locations within a mall is intense.

The distribution function for all of the Company's stores is handled from a single facility in Kearney, Nebraska. Any significant interruption in the operation of the distribution facility due to natural disasters, system failures or other unforeseen causes would impede the distribution of merchandise to the stores.

Net working Capital (NWC) / Sales has been increasing slowly over the years. Other competitors such as Abercrombie & Fitch (ANF) (11.4%), American Eagle Outfitters (AEOS) (4.4%) and Limited Brands (LTD) (8.3%) have better NWC / Sales.

Year Net Working Capital / Sales (%)
01/06 12.5
01/05 12.2
01/04 12.0
01/03 12.0
01/02 11.7
01/01 10.9
01/00 11.4
01/99 10.8
01/98 10.2
02/97 11.2

Inventory increased by 32% over the last quarter from $68.7M to $90.9M. However, in comparison to 2nd Quarter last year, the inventory level was actually lowered ($100.9M 2nd Qtr 2005).

Step 3: Insider Holdings
Insiders hold significant amount of stocks, approximately 55%. The Chairman and founder’s son, Daniel Hirschfeld, holds 9.4M of shares, which are equivalent to about 48% of the company. Dennis Nelson, who is the Chief Executive Officer, owns approximately 1.79M shares or about 5% of the shares outstanding.

It has been shown that companies with significant insider holdings, especially with the presence of founders, flare better over long term.

Step 4: Is BKE a good Company?
A good company is a company that has high return on invested capital (ROIC) and performs consistently over a long period of time. Looking at BKE, it is an excellent company despite in an extremely competitive industry. Net income compounded at 16% and 8.3% for 9 years (1997 – 2006) and 5 years (2001 – 2006) respectively.

Year Sales (m) Net Income (m)
01/06 501.1 51.91
01/05 470.94 43.23
01/04 422.82 33.68
01/03 401.06 32.08
01/02 387.64 32.64
01/01 393.25 34.8
01/00 375.53 34.03
01/99 337.92 34.03
01/98 267.92 23.33
02/97 206.39 13.62

Return on equity (ROE) and return on asset (ROA) are good.

Year ROE(%) ROA (%)
01/06 17.3 13.9
01/05 13.0 10.7
01/04 11.5 9.5
01/03 12.3 10.1
01/02 14.0 12.3
01/01 17.9 15.1
01/00 22.9 18.8
01/99 23.3 18.3
01/98 21.6 16.1
02/97 17.5 13.4

Net profit margin is impressive with most current one over 10%.

Year Net Profit Margin (%)
01/06 10.4
01/05 9.2
01/04 8.0
01/03 8.0
01/02 8.4
01/01 8.8
01/00 10.0
01/99 10.1
01/98 8.7
02/97 6.0

BKE has solid balance sheet; net cash/equivalent of $123M on April 2006. It is a great cash machine; earning free cash flow of $50.5M (2006), $55.9M (2005) and $37.6M (2004).

Step 5: Is BKE management shareholders-orientated?
Of course BKE management is shareholders-orientated, especially when founder’s son and current Chairman, Daniel Hirschfeld, owns approximately 48% of the company. Dividend payments almost tripled in 2 years from $4.3M (2004) to $11.8M (2006). BKE has also repurchased significant amount of shares last year; totally $82.4M, which is more than 10% of its market capitalisation.

BKE is led by dedicated management; Daniel Hirschfeld has been with the company since 1965 while Dennis Nelson (President and CEO) has been with the company for over 30 years. He began as a part-time salesman while he was a college student and continued full time after graduation. He has helped lead the company to over 300 stores and is actively involved in all phases of the company’s operations. Executive Vice President, Jim Shada has been with the company 25 years. Kari Smith, Vice-President of Sales, has been with the company for 25 years.

Step 6: Does BKE have a Moat?
Unfortunately, no.

Step 7: Does any superinvestor invest in BKE?
Third Avenue Management LLC holds 1.5% of the company.

Step 8: Is BKE undervalued?

Method 1 (EV/(EBIDTA – MainCapex):
Price per share = $35.10
Enterprise Value (EV) = $563M
EBIDTA – Maintenance Capital Expenditure (EBIDTA – MainCapex) = $54.3M

Thus, EV/(EBIDTA – MainCapex) = 10.4X

Method 2 (Adjusted FCF yield vs. Treasury yield (30 years):
Free Cash Flow (FCF) = $50.5M
Adjusted FCF = $48M
Adjusted FCF is calculated by deducting after tax interest income from FCF.

Thus, adjusted FCF / EV yield = 8.5%
Treasury yield (30 years) = 4.92%

Conclusions:
The Buckle Inc (BKE) is an interesting retailer with excellent management, solid balance sheet and undervalued. Current pessimism over sales, net profit margin and comparable sales declines provides opportunity for long-term value investors to invest.

To conclude, let me quote our famous investor, Warren Buffett… “The most common cause of low prices is pessimism -- some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.”

Happy investing,
Dah Hui Lau (David)
dahhuilaudavid@gmail.com