Monday, October 29, 2007

Tandy Leather Factory – A Potential Bargain?

Today, shares of Tandy Leather Factory Inc. (AMEX: TLF) took a 30% dive (to close at $4.25) as the company pre-announced the results from a less-than-appetizing third quarter. Since I have a bit of familiarity with the company, I thought I’d provide a few insights.
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Company Overview
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Tandy Leather Factory (TLF), based in Fort Worth, TX, is an international marketer, wholesale distributor, and retailer of a broad line of leather and related products, including leather, leatherworking tools, buckles and adornments for belts, leather dyes and finishes, shoe repair supplies, saddle and tack hardware, and do-it-yourself kits. The company operates in three segments: Wholesale, Retail, and Roberts, Cushman (Other). The Leather Factory (Wholesale) segment sells primarily to wholesale customers through outlet stores located in the United States and Canada. The Tandy Leather segment sells primarily to retail customers through retail stores located in the United States. The Roberts, Cushman segment manufactures decorative hat trims sold directly to hat manufacturers and distributors.
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To make a long story short, the story behind Tandy basically is that it is in the process of shifting from a more wholesale-oriented operation to a more retail-oriented operation. Tandy had previously been a much larger company until the previous management decided to close all the retail stores and try and make this an internet-based business. That didn’t work and the current management was able to take over in 2002 and start opening retail stores again, of which there are now about 70. I believe Tandy had previously had about 300+ locations and had generated enough cash flow to help Charles Tandy launch such businesses as RadioShack and Pier 1. The current plan is to open about 100-120 retail stores this time around.
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Recent Developments
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Sales have slowed and inventory is up. Although sales are still a bit above last year, the infrastructure for growth has continued and so margins have slightly compressed. Although the company and management are experiencing a few growing pains this year, they have shown great prudence in the past and certainly have the ability to right the ship.
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One of the big questions management gets asked is, “how big can you get?” Being the straight shooters they seem to be, they basically say that they don’t know but hint that it is quite a bit bigger than they are now. Wouldn’t it be nice if you could buy this business (which also has good returns on capital) without paying for that growth?
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Another one of the overhanging questions about the company revolves around capital allocation. What will they do with the cash the business generates? Until the purchase, last quarter, of the real estate that will be their new base of operations, the company had built up over $6 million of cash on the balance sheet. Although that has been lessened with the purchase of the property (which was probably a good purchase since 1) they’d been looking for a while and 2) management has historically been good at not wasting money), a time will come again when they may have much more cash than they will even conservatively need. I would love to see TLF take an approach similar to K-Swiss and Timberland and just let cash build until their shares are significantly undervalued and then buy back a bunch of stock (that strategy has worked very well for those companies), but Tandy has yet to decide on any definitive approach in that regard. At any rate, reinvestment and capital allocation are the key questions when/if the business gets back on track.
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What could shares of TLF be worth?
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To get an estimate of what TLF is worth, I used a Discounted Cash Flow plus Excess Capital model that produced the following figures (book value and assets based on end of second quarter balance sheet):
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Book Value: $28,291,889
Goodwill and Other Intang.: $416,530
Capital Assets (PP&E): $1,997,605
Working Capital for Ops.: $1,151,280
Capital Used in Ops.: $3,565,415
Inventory Adjustment (25% cut): $5,044,897
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Excess Capital: $19,681,577
Per Share: $1.77
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Year__Sales__ _ __Net Income_Owners' Earnings
2008__$57,564,000__$3,583,897__$2,933,897
2009__$59,115,840__$4,170,448__$3,502,925
2010__$60,760,790__$4,299,987__$3,613,890
2011__$62,213,830__$4,414,414__$3,711,909
2012__$63,739,521__$4,534,563__$3,814,830
2013__$65,341,497__$4,660,718__$3,922,896
2014__$66,687,157__$4,766,689__$4,013,672
2015__$68,086,644__$4,876,898__$4,108,079
2016__$69,542,109__$4,991,516__$4,206,262
2017__$70,677,373__$5,080,918__$4,282,845
2018__$71,846,694__$5,496,286__$4,685,009
2019__$73,051,095__$5,752,774__$4,927,897
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Using an 8-10% discount rate and a 12.5-14.3 terminal multiple, I get an intrinsic value somewhere between $5.72 and $6.70. Note, my sales growth is less than 3% every year (for a business that still has decent growth prospects and little to no competition) and I think my margins are fairly conservative for the way the business is developing. If management is able to have some success getting things in order (either on the cost or growth side), normalized earnings are probably somewhere closer to the $4-5 million range which could very easily make this business worth $8-10 per share, or more if they buy back their own stock when it is cheap.
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I know I didn’t get into too much detail on things, but it certainly may be a good place for you to start your own research. The company will hold a conference call Thursday afternoon.
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*This is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.

Black Monday and Black Swans

Berkshire Hathaway Shareholder Letters - 1973-1976

Whitney Tilson was kind enough to post Mr. Buffett's 1973-1976 shareholder letters here (the link expires in a week!): http://www.yousendit.com/transfer.php?action=download&ufid=8B8FCF4920CF6A98
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The 1977-Present shareholder letters are posted on the Berkshire site here: http://www.berkshirehathaway.com/letters/letters.html

Monday, October 22, 2007

Berkshire Hathaway and GEICO: an M&A Case Study

A Storied Name on Sale?

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There is also an interesting Value Investors Club write-up on Sears (will need to have or sign up for a free guest account) HERE.

WealthTrack

Robert Hagstrom appeared on WealthTrack this past week:
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Video (10/19/2007): http://www.wealthtrack.com/video_player.html

17th Annual Graham & Dodd Breakfast

GREAT presentation by David Einhorn:
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Wednesday, October 17, 2007

Interview with Peter Bevelin, author of Seeking Wisdom - from Darwin to Munger

Being such a big fan of Peter Bevelin's book, Seeking Wisdom - from Darwin to Munger, and the Charlie Munger approach to learning, I felt quite lucky when Mr. Bevelin agreed to answer a few questions. If you haven't yet read his book or Poor Charlie's Almanack, you can get them both HERE. Enjoy!
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Interview with Peter Bevelin, author of Seeking Wisdom - from Darwin to Munger
By Joe Koster-

2007 Interview with Peter Bevelin

Q: In the introduction of your book, you mention that you owe a great debt to Warren Buffett and Charlie Munger and that if you had listened to them earlier in your life, you would have avoided many expensive mistakes. Could you elaborate a bit on how you first came across Warren and Charlie, how your process of learning from them began, and maybe even mention a couple of the mistakes that you may have avoided had you come across them earlier?

I first came across the name of Warren Buffett in 1986, when I was on a plane between New York and Miami and picked up Fortune Magazine in the seat in front of me. Back home in Sweden I immediately ordered Berkshire’s annual reports. But I was a slow learner. I didn’t really pick up his and Charlie Munger’s wisdom until I went to my first Berkshire annual meeting in 1994. What did I learn? – How to think about businesses and investing, how to behave in life, the importance of ethics and honesty, how to approach problems but foremost how to reduce the chance of meeting problems. As Munger says: “All I want to know is where I’m going to die so I’ll never go there.” When I hear them at the annual meeting, I am thinking about Einstein’s reply to a student. The student had challenged Einstein’s statement that the laws of physics should be simple by asking: “What if they aren’t simple?” Einstein replied, “Then I would not be interested in them.” 

They have a unique ability to distinguish masses of trivia from what is really important – to filter out situations, and find what’s at their core. They tell the simple, blunt truth rather than say things that sound good.

In the past, I complicated things too much, I put too much trust in people that really shouldn’t be trusted, I wasn’t skeptical enough , I bought into things merely because they were cheap etc. In short, I wasn’t thinking and I was lacking the Munger ability to un-learn my own best-loved ideas. The stock certificates of some of my earlier investments in private businesses are now used as lining in my old overcoat; at least they had a nice color. And is there really any other way to approach investments than their way? Turn it around and ask what are the effects of investing in things we don’t understand, lack advantages and have a dishonest and incompetent management and that can be bought at a high price.

I found that I could increase my chance of making better judgments if I could learn what works and not, if I adapt what I do to my personal situation, and if I could establish some values and preferences. If I then could set up some avoid-rules and filters/tests to judge what make sense or is important or not, life could be improved (even if I still do some mistakes; but hopefully I am less of a fool now). Also remember that all decisions aren’t important. Some people spend more time making a judgment on what TV to buy or where to go on vacation than a life-changing decision like marriage.

Q: Charlie Munger has mentioned that a great way to learn Adam Smith’s ideas is to first learn about Adam Smith. Do you believe that this idea of learning about the “teacher” before the “lesson” is truer in some disciplines than in others and do you have any examples when this method of learning was especially useful to you?

Experiments have shown that we learn better if information is tied to a vivid story. So, I would say, it depends. In some cases the “Smith-model” is superior and in other cases I may learn better in some other fashion. For example, I learnt a lot from reading The Autobiography of Charles Darwin. But I also learnt a lot of Einstein’s ideas by reading Mr. Tompkins in Paperback by George Gamow. See also what I wrote about Reason-respecting (20 in the book). On the other hand, when reading, we must constantly watch out for the sensemaking trap (19 in my book) since we are so easily influenced when we are told stories or given information in a “story-format.”

Q: As you state in the introduction, “This book is for those who love the constant search for knowledge. I have focused on explaining timeless ideas. The number of pages I have devoted to each idea does not reflect on its importance. My goal is to lay the foundation.” Once readers acquire the foundation they receive by reading Seeking Wisdom, where should they go next? Specifically, what is the first thing that you would recommend they should pick up to start learning more about the big ideas in the discipline of Math? Psychology? Physics? Biology? Chemistry? Economics? Engineering? Philosophy?

Look around you – observe reality. What can explain this? Learn some core concepts that account for reality. Start from the basics for each discipline and emphasize the understanding of general principles and use simple real-life examples to illustrate principles. Read, read and think about what you have read. Look for understanding. What is going on here? What is the core idea? What is the evidence that it is right? Also remember what Richard Feynman once asked someone who remarked that he had read a book. “But, did you learn anything?” Understand an idea’s meaning and applications. Focus on useful and obviously important and correct general ideas, concepts and principles. What does it mean? What happens? What is the effect?


Q: As many value investors have been taught, it is more important to focus on the process of doing something instead of solely focusing on the outcome of that process. Do you have any tips that may help people along the process of “seeking wisdom?” Should someone focus their attention on learning many ideas from one or two disciplines at a time, or by learning many disciplines one or two big ideas at a time?

There are principles, which apply to all different kind of phenomena. For example, JB Williams’s definition of value is applicable for all financial assets. Personally, I started with biology and psychology since knowing some human constraints and “brain traps” I could avoid some things by for example using some “avoid-rules.” Why can’t we all be nice, honest and rational? (And why can’t we all have wings and thus eliminate department store escalators?). I favor ideas that explain a whole range of phenomena. For example, biology (evolution and natural selection) explains why people: fear losses but take big risks when threatened, fear strangers, trust similar people, cooperate, imitate, fear social disapproval, make fast judgments, and overreact to vivid information.

Also, some disciplines are more reliable than others. For example, disciplines describing experimentally tested ideas, concepts and principles.

Some other examples on disciplines and ideas that explain a lot: Mathematics (scaling) explain how living things are shaped and constrained by basic mathematical principles. For example, why: no giants exist, a mouse can survive a big fall but not a human, some animals have short and thick legs, larger plants have leaves, small animals can’t live in cold countries, ants can lift such a big load, and grasshoppers can jump so high relative to their body sizes. Mathematics (combinatorics) and Physics (systems theory) explain why: we can’t predict the economy, it is hard to make money on new ventures, most projects take more time and money than we anticipate, nuclear accidents happen, we will have more electrical black-outs, coincidences occur, and some mutual funds beat the index.

Q: Are there any books in which you believe the models presented within those books are so important that you make it a habit to re-read them every year or every couple of years?

All of Charles Munger’s speeches. Most of them can be found in Peter Kaufman’s Poor Charlie’s Almanack. I also re-read Hardin’s Filters Against Folly.

Q: Charlie Munger once said that he can’t afford ($) to have too many friends like Peter Bevelin because when you recommend a book to him, it is so good that Charlie feels compelled to buy a copy for all of his friends and family. So, have you made any recommendations to Charlie or read any of those “need-to-send-everyone” kinds of books recently?

No comments.

Q: Can you give a Top 10 list of books that really changed the way you view the world?

Some books that I really learnt a lot from (in no order of preference):

Dawes Robyn M., Everyday Irrationality: How Pseudo-Scientists,Lunatics, and the Rest of Us Systematically Fail to Think Rationally (it really introduced me to the value of always asking: Why should I believe this? – Show me the evidence + Compared to what?)

Montaigne Michel de, The Complete Essays

Nassim Nicholas Taleb, The Black Swan 

Q: Can you talk a little about the process of writing your book? I think you did a magnificent job of pulling things together into a logical and understandable order and I imagine it was quite the experience organizing all the models that you have acquired over the years from your mind down on to paper.

Gene Fowler once said: “Writing is easy. All you do is stare at a blank sheet of paper until drops of blood form on your forehead.” Most people can do what I did. I am not especially smart or talented. It just takes curiosity and real interest. After being inspired by Charles Munger’s lectures on worldly wisdom (from Outstanding Investor Digest), and after reading Darwin, I took some time off business and started reading books in biology, neuroscience, psychology, and physics. As Warren Buffett once said: “I think you can learn a lot from other people. In fact, I think if you learn basically from other people, you don’t have to get too many ideas on your own. You can just apply the best of what you see.” Then I wrote down what I learned – I put together some key thoughts as a crude working model (what I found was that I couldn’t really synthesize things sitting in front of the computer. Like Arthur Schopenhauer said: “Thoughts die the moment they are embodied by words.” I could only see various connections between things and the big picture when I was out walking thinking about something else). Since sorrow feels worse than happiness feels good, I concentrated on learning causes of what I wanted to avoid – things with huge consequences.

I also spent some time visiting the Neurosciences Institute in La Jolla where I got some real understanding of how our anatomy, physiology and biochemistry constraints our behavior. I also interacted with a lot of science people via the Internet. Remember, I did this not to write a book, but to improve my own thinking and as a kind of memorandum to my children. I had no time constraints. And I loved it! Exploring and learning new things give me great satisfaction. When I started to read and write some of my friends said: what’s that good for? Why do you waste time studying that? How can that help you make money? Usually I don’t like to answer these questions, not because I don’t believe that the basic insight into how things work will not pay off at some time, but because I believe that acquiring insight is in itself a worthwhile effort. As Benjamin Franklin said: “ If a man empties his purse into his head, no one can take it away from him. An investment in knowledge always pays the best interest.”

Q: Finally, is there anything people may be surprised to know about you? Any unique interests?

People immediately assume that merely because I have written a book containing a lot of science, I must be a professor or an academic. I am not. Regarding any unique interests – nothing that would interest your readers.

I wish you and your readers a happy day – Everyday!

Tuesday, October 16, 2007

Street Smarts: Value Plays

Greg Mankiw - How to Write Well

This is directed toward writing about Economics, but the tips relate to writing about any subject, especially when you likely have more knowledge about that subject than the reader.

ERP Writing Guidelines

Books:

Monday, October 15, 2007

Wednesday, October 10, 2007

The Pleasure of Finding Things Out

Link

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For more on Richard Feynman, visit Feynman Online.

Monday, October 8, 2007

Bill Miller: What's luck got to do with it?

This interview is from July of this year and since I don't believe I posted it before now, here it is.
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Bill Miller on poker and investing
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Question: Right. Who's Puggy Pearson, and why should anybody care?
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Benjamin Franklin - "The Way to Wealth"

One of my favorite literary pieces. I also recommend buying this short work in book form. If you read The Way to Wealth and The Richest Man in Babylon, you'll know the best secrets to gaining wealth. The rest is up to you.
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"Methinks I hear some of you say, must a man afford himself no leisure? I will tell thee, my friend, what Poor Richard says, employ thy time well if thou meanest to gain leisure; and, since thou art not sure of a minute, throw not away an hour. Leisure is time for doing something useful; this leisure the diligent man will obtain, but the lazy man never; so that, as Poor Richard says, a life of leisure and a life of laziness are two things. Do you imagine that sloth will afford you more comfort than labor? No, for as Poor Richard says, trouble springs from idleness, and grievous toil from needless ease. Many without labor would live by their wits only, but they break for want of stock. Whereas industry gives comfort, and plenty, and respect: fly pleasures, and they'll follow you. The diligent spinner has a large shift, and now I have a sheep and a cow, everybody bids me good morrow, all which is well said by Poor Richard.