Saturday, February 22, 2003

Fundamental data is of 12/31/02
Ambassadors International
Ticker: AMIE
Exchange: NASDAQ
Price: $8.62(2/21close)
Market Cap: 85(millions)
PE Ratio: 30
Shares Outstanding: 9.9 (million)
2002 sales: $14.7 (million)
Net Income: $1.6 (million)
Book Value per share: $10.16

Ambassadors Intl. is another company you have probably never heard of, although you are probably familiar with the company's Chairmen (and 14% owner): None other than Peter Ueberroth, former Commissioner of Major League Baseball. The company is best described as a travel services compnay, that also markets and runs uncentive programs. In March, 2002, the company spun-off its educational travel segment, Ambassadors Group, which now trades separately on NASDAQ.

The company recently reported 2002 earnings of $ 1.57 million on sales of $14.7 million, for a decent profit margin, although, $2.5 million was non-operating income. There is not a lot of news on this company, and its average daily trading volume is just 30000 shares. The real story here is the balance sheet, as you will see later.

Improving economy
The market discovering this company's asset story
An uptick in the company;s operating businesses

THE NCAV STORY (data as of 12/31/02)
Current Assets: 113(million)
Current Liabilities: 11
LT Debt: .0
Other LT Liabilities: 0
NCAV: 102
MKT Cap: 85
NCAV/MKT cap: 1.2 (ratio of NCAV to Mkt cap)

The story here, is cash and short-term investments, the current amount of which is $107 million. or nearly $11 per share. There is a minimal amount of accounts receivable, and no inventory to speak of. If you buy this stock at the current price of $8.62 (be careful of bid/ask spreads, this company averages just 30000 shares per day), you are theoretically buying $10.83 in cash, and getting the long term assets (excluding goodwill of $6.8 million) including property, plant and equipment, and other assets worth 68 cents per share, for free.

Inventory: 0
Receivables: 2.6
Other: 3
Cash Per Share:$10.83

Fixed and other Assets: 7 (million) excludes goodwill of 6.8 million)

Keep an eye on AMIE, and remember, the story here is cash. An improvement in the company's operating business
should keep cash burn to a minimum. With all that cash, a takeover is not out of the question

Friday, February 14, 2003

Fundamental data is of 3rd quarter 2002
Blair Corp
Ticker: BL
Exchange: AMEX
Price: $22.00 (2/14close)
Market Cap: 177 (millions)
PE Ratio: 10
Shares Outstanding: 8 (million)
2002 sales: $580.7 (million)
Net Income: $9.3 (million)
Dividend Yiels:2.73% ($.15/quarter)
Book Value per share: $31.3
Phone: 814-723-3600

Blair is a direct marketer of fashion apparel for men and women. The company was founded in 1910, and is based in Warren, PA. Most of the company's business is via catalog, although the company is starting to generate a greater amount of business from its internet site (5% in 2001).

Sales growth has been minimal the past few years, although the company is seeing some success in reducing it's expenses. If the company continues to generate a greater amount of business from the net, costs should fall further; it;s not inexpensive to print and mail 40 million catalogs. If they are succesful here, operating margin expansion should occur.

Increase in consumer spending
Improving economy
More internet business
New products/audiences

Current Assets: 281(million)
Current Liabilities: 83
LT Debt: .6
Other LT Liabilities: 1.5
NCAV: 198
MKT Cap: 177
NCAV/MKT cap: 1.12 (ratio of NCAV to Mkt cap)

Blair's accounts receivable have been decreasing, and inventory is sharply reduced from the same period last year. The story here, though is cash, nearly $7 per share, and no debt to speak of.

Inventory: 72
Receivables: 139
Other: 15
Cash Per Share:$6.88

Fixed Assets: 56 (million)

Blair has a solid balance sheet, pays a 2.7% dividend, and is making inroads in cost reduction, and greater use of the internet. The company has returned 32.5 percent the past year, and has averaged more than 8.7% for the past five years. Keep your eye on this one. You may have never heard of Blair before, but despite it's small size, some institutions are owners, including Fidelity (9.7% stake as of 9/02).

Saturday, February 08, 2003

Circuit City Stores
Ticker: CC
Exchange: NYSE
Price: $4.87(2/7 close)
Market Cap: 1055 (millions)
PE Ratio: 7.72
Shares Outstanding: 210.527 (million)
2002 sales: $12.7 billion
Net Income: $218.8 million
Book Value per share: $10.72
Phone: 804-527-4000

Circuit City is the second largest electronics specialty discount retailer in the U.S., with more than 600 stores. The retail electronics business is extremely competitive, especially in this price-cutting, seemingly deflationary economy we are mired in. The field is crowded with competitors such as Best Buy. Other companies such as Wal-Mart, and Amazon which don't specialize in this area, also have a piece of the pie.

Neither has been good. This week, the company announced layoffs of 2000, a new compensation structure to cut costs, and that 4th quarter earnings would be below expectations. A year ago, the stock was around $20, and now trades at less than $5.
Current P/E is less than 7, but that does not tell the whole story (it seldom does). Although the company is still profitable, it;s profit margins are eroding.

Increase in consumer spending
Resolution of Iraq situation
Improving economy
Competitors going under
Pricing Power

Circuit City is currently the largest company (by market cap) trading below its NCAV.

Current Assets: 3631(million)
Current Liabilities: 1903
LT Debt: 12
Other LT Liabilities: 159
NCAV: 1558
MKT Cap: 1055
NCAV/MKT cap: 1.48 (ratio of NCAV to Mkt cap)

If this company has anything going for it as far as NCAV goes, its the fact that it has a lot of cash. While inventory is the largest component of current assets, that is par for the course for a retailer.

Inventory: 2375
Receivables: 231
Cash Per Share:$2.09

Fixed Assets: 693 (million)

This is a company to watch. It has a tough road ahead of it, but balance sheet is strong. The company has little debt, and more than $2 per share in cash. It is a very difficult environment for this type of company, but keep your eye on the economy.

Saturday, February 01, 2003

Ben Graham is considered to be the father of value investing, and although his principals seemed antiquated during the bubble, they still have application in today's market. Graham's focus on having a margin of safety in investments is as meaningful today, as when he first put pen to paper.

One of Graham's strategies focused on identifying companies trading below their "Net Current Asset Value", which is defined as:
Current Assets minus (Current Liabilities+Preferred Equity+Long Term Debt + Other Long Term Liabilities)

The product of this equation is then compared to a company's market capitalization. In cases where market cap is less than net current assets, you may (the operative word is may) have found a bargain. Why? Because net current asset value does not even consider the value of long-term (or non-current assets) such as property plant and equipment, land, long term investments. Therefore, buying a company trading below its NCAV is like getting the rest of the assets for free.

Graham preferred companies trading at less than 2/3 of their NCAV, which allowed a greater margin of safety. Word of warning though, companies may be trading at these levels for good reason. They may be in trouble, and Graham was very clear on this point in his writings. Howevever, the analysis of such companies is still well worth the effort.

In building this web page, the intent is to educate readers about this investment technique, the ins and outs, what to look for in NCAV companies, and why. As the concept is further explained in the coming weeks, short research reports on companies meeting the criteria will be also be posted.

Unfortunately there have not been many studies (outside of Graham's research, that is) on the success or lack thereof of buying companies trading at less than their NCAV. One, by Professor Joseph Vu of Depaul University from (1988) found that buying these companies, then selling two years later beat the market by 24 percent.

Tweedy Browne, an investment management firm (these guys are the real deal, excellent value managers), publishes a booklet titled "What Has Worked In Investing", which also references the NCAV strategy, saying that it's research "indicated that companies satisfying the net asset value criterion have not only enjoyed superior common stock performance over time, but also have often been priced at significant discounts to "real world" estimates of the specific value that stockholders would probably receive in an actual sale or liquidation of the entire corporation."

The bottom line is that you will not find many well known companies meeting the criteria. The large majority will be small companies, with market caps below $100 million. Analysts typically don't follow these companies, institutions don't own them, so they don't generate much press. Some are fallen technology companies, chock with cash, but unfortunately, that cash is being burned very quickly, and the companies are not profitable. You can also find companies that are making money, have great balance sheets, and a potentially positive future. This is where the analysis comes in.

The composition and quality of a company's current assets is an important factor as to whether you are truly getting a bargain. All else being equal, the greater the amount of cash and marketable securities as a percentage of current assets, the better. In terms of true value, it goes down hill quickly for the other current asset accounts. Accounts receivable, for instance, must be collected in order for value to be realized, and there are no guarantees this will happen. Inventories may be worth pennies on the dollar if they needed to be quickly converted into cash, plus there are storage and maintenance costs. Cash, on the other hand, has a fixed value. What you see is what you get.

Thats exactly what this strategy demands. Even if you uncover a true gem, it may take a long time for the market to realize a company's true value. You may find a company with tremendously undervalued assets (remember, if you buy a company below it;s NCAV, you essentially get the long term assets for free), but you should also look for a potential catalyst. Look for companies who have positive earnings (many NCAV companies do not), who have the potential to increase earnings in the future. Loads of cash, along with in-demand products will buy these companies time to make their strategies work. While, those that are bleeding red ink, and have little cash may be headed to bankruptcy.

Since most NCAV companies are small, and have relatively low trading volume, the bid/ask spreads can be huge. Always use limit orders when buying or selling. A market order placed for a thinly traded issue can really hurt when buying or selling.

Read the 10K, know what business the company is in, know its financials, and don't be afraid to call the company for more information. Don't buy if you can't explain the business in one sentence. This strategy is risky, so do your homework.