Crocs, Inc (CROX) stock price has been steadily declining as the company restructures and tempers its growth targets. At current price levels of about $11.50 per share investors are buying a company with no debt, $4.24 per share of cash on its balance sheet and a business backed by The Blackstone Group, the private equity firm. Blackstone backing comes at a price as Crocs issued 200,000 Series A convertible preferred shares ($200 million) to Blackstone that pay 6% interest per year and will be convertible at $14.50 per share. At the same time the company has repurchased $90 million of its own stock for the first nine months of 2014 decreasing its outstanding shares by about 6 million or about 6.8%. The average price per share Crocs paid to repurchase its own shares during the first nine months of 2014 was $14.76 per share (a 28% premium from current price level). A dividend for the common shareholders would likely cause the share price to jump and could be in the planning. Overall, based on stock price, Crocs seems like an attractive investment at $11.50 per share.
CFA institute reading list (latest editions as of August 2014) sorted by price (price is usually indication of readability/level).
Books under $30
Bubbles and How to Survive Them by John Calverley
Flaws and Fallacies in Statistical Thinking by Stephen Campbell
Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation by Richard and Robert Michaud
Financial Shenanigans by Howard Schilit and Jeremy Perler
The New Financial Order: Risk in the 21st Century by Robert Shiller
Books between $30 and $100
Investments by Bodie, Kane and Marcus
Valuation: Measuring and Managing the Value of Companies by Koller, Goedhart and Wessels
The Essentials of Risk Management by Crouhi, Galai and Mark
Modern Portfolio Theory and Investment Analysis by Elton, Gruber, Brown and Goetzmann
Argumentation and Debate by Freeley and Steinberg
Finite Mathematics With Business Applications by Kemeny, Schleifer and Snell
Venture Capital and Private Equity: A Casebook by Lerner, Hardymon and Leamon
Books between $100 and $200
Financial Modeling by Simon Benninga
Triumph of the Optimists: 101 Years of Global Investment Returns by Marsh, Dimson and Staunton
Investment Science by David Luenberger
Financial Statement Analysis by Subramanyam and Wild
Books over $200
Bank Management by Koch and MacDonald
Investment Analysis and Portfolio Management by Reilly and Brown
Principles of Risk Management and Insurance by Rejda and McNamara
Financial Institutions Management: A Risk Management Approach by Anthony Saunders
In November of 2002 I started working for an affiliate of the Affiliated Managers Group (AMG) whose stock has returned over 400% since then compared to slightly more than 100% for the S&P 500. Much of the reason for their success is their price-to-earnings ratio. If you own a money management business, this business is usually valued at two or three times the annual revenue. If you sell that business to a public company, it is valued at the price to earnings. So assume your business has annual revenues of $1 million and a profit of $250,000 it is valued at $2-3 million if you sell it to a private buyer. However, if you sell this business to AMG, you may ask even more as AMG will be willing to pay anything below its price-to-earnings ratio times the business net income (30*$250,000 = $7.5 million). A price between $3 million and $7.5 million is a win-win for AMG and the business owner.
A company with a similar business strategy to that of AMG but in its early stages as a public company is Bright Horizons Family Centers. Similar to the investment management business, day care centers are small businesses and usually privately owned. One major difference is that the owners of investment management companies can estimate the values of their businesses better than the owners of child care centers. In 2013, Bright Horizons acquired U.S.-based Children’s Choice Learning Centers for $50.8 million and U.K.-based Kidsunlimited for $68.9 million. For the first three months of 2014, these two businesses had revenues of $30.4 million or annualized revenues of about $120 million (the price that Bright Horizons paid for them). Currently, Bright Horizons price-to-earnings ratio is about 30 and its net profit margin about 6%. It looks like with this acquisition, it added about $216 million of market value (0.06*30*120M) while paying about $120 million. These calculations exclude synergies and growth from the acquisitions.
Bright Horizons is well known for its daycare centers. I was really happy with the care they provided for my son in one of their several locations in Stamford, CT. I should also note that Bright Horizon was very consistent in raising their tuition prices every year. Shareholders of Bright Horizons will also be happy to know that as of March 31, 2014 the majority of its shares (51.7%) are owned by Bain Capital (a large private equity firm known for its co-founder, Mitt Romney) and its directors (4.5%). While Bain is slowly reducing its stake in the company by selling shares to the public, the company is buying its own shares through a recent $225 million share buyback program.
Bright Horizons largest balance sheet item is its goodwill in the amount of $1.1 billion. Essentially, for every dollar an investor spends to buy a share of Bright Horizons, he pays about a third for an intangible goodwill. While a goodwill write-off is hard to estimate it does have a negative impact on a company’s performance after it is announced. Also, goodwill write-off is a balance sheet adjustment mostly at management’s discretion.
The benefits of high quality pre-k are unquantifiable for children, parents and society in general. Many countries in Europe and Asia have universal pre-k while the U.S. and U.K. mostly provide tax incentives and subsidies for placing your child in daycare. Recently, a London borough started offering 24-hour daycare service and NYC’s Mayor DeBlasio was elected partly because of his promise to establish universal pre-K. While publicly funded universal daycare should be a concern for investors in Bright Horizons, a proposal for a national universal pre-K will be very difficult to pass in the U.S. Currently, Bright Horizons is facing competition from private and public centers, daycare operations at places of worship and YMCAs and smaller daycares in private homes.
Compared to two other publicly traded childcare providers (G8 Education of Australia and BrighPath Early Learning of Canada), Bright Horizons seems overvalued but it is also the largest of the three companies with access to the largest economy (U.S.) and leading markets in Europe (U.K., Netherlands, and Ireland). Below are some comparative measure for the three companies (in $ millions):
|Number of centers*||880||51||252|
|Operating Cash Inflow||$160||$1.5||$43|
Source: * 2013 annual reports, ** Yahoo Finance U.S., Canada, and Australia
BrightPath acquired 3 child care centers in Canada for a total sum of $2.5 million while G8 bought 86 centers (10 of which in Singapore) for $121 million, and Bright Horizons led with acquiring 113 centers in 2013 for about $120 million. It looks like BrightPath could be an acquisition target and is the company with the lowest valuation. This is primarily due to its low profitability. Bright Horizon on the other hand has the highest debt, goodwill and price-to-earning ratio. It has carries significant risk on its balance sheet while its shares are not cheap. In addition, Bain Capital is likely to continue to sell its Bright Horizon shares putting additional pressure on the company’s stock price.
Bright Horizon faces significant risks. On the political front, it is not likely that universal pre-k will be nationwide anytime soon but there is more and more instances of universal pre-k on state and municipal levels. From an economic perspective, the U.S. economy is strong but how long will employees be willing to sponsor pre-k is another question. Employee benefits have seen decline (from health insurance to pension benefits) and employee sponsored daycare could be the next to fall. Finally, Bright Horizon has significant debt and goodwill on its balance sheet, which could be a drag in more challenging times.
On the positive side, Bright Horizons is growing through acquisitions, which will benefit the equity shareholders. Also, the importance of quality early childhood education is likely to continue to rise. However, the positives do not seem to justify the company’s current stock price ($40+ per share). BFAM could be a good buy only at a significant discount from current levels.
Today Crocs stock was up over 12% after reporting better than expected Q2 ’14 results. There are a number of reasons this performance should continue for the foreseeable future.
First, Crocs shares trade at price levels two times lower than they were three years ago, while the company has improved a number of important metrics such as sales, liquidity and profitability while also making meaningful management changes. Importantly, the company’s largest investor is Blackstone, the New York-based investment powerhouse. Blackstone has one director on Crocs board of directors.
Second, Crocs are sold on-line and in stores in more than 90 countries. In 2013, revenues in the Americas were 41.9% (down from 44.7% in 2011), Asia Pacific 28.7% (up from 22.7% in 2011), and even fashion-oriented Europe’s portion of revenues grew from 17.1% in 2011 to 18.1% in 2013.
Finally, Crocs is trying to grow its wholesale and e-commerce operations (which are usually lower cost than retail operations) while trying to streamline its products (SKU reduction of 30%-40%), expand its core casual footwear offerings, and sell non-core assets. All this together with a $300 million+ share repurchase plan and new growth areas (Crocs for sports anyone?) offers a sizable investment opportunity and a good exposure (literally) to the shoe industry. While inflation and consumer taste and confidence could bring challenges, Crocs should continue to perform well quarter-to-quarter as well as long-term.
My past articles on Crocs:
A Step With Crocs (CROX) Aug. ’11
Crocs historical metrics YTD, June 30:
2012 2013 2014
Revenues $603M $675M $689M
Gross Profit $341M $367M $359M
Cash $294M $317M $409M
I broke even on my largest single stock investment, Industrial Services of America (IDSA). Initially, I bought the stock in August of 2011 at $10 per share and subsequently added to my position when it was trading at $6, $5, and $3.50 per share. In August of 2013, the shares were trading as low as $1.50 and my total investment in ISA was down over 80%. I was considering selling the shares to salvage whatever little value there was left.
Near that time the company entered into a bad management agreement, the founder, Chairman and CEO got sick and subsequently passed away, and metal prices continued to decline. At that point my decision to keep my investment in the company was purely psychological. I knew that fundamentals did not matter but I believed in my initial decision to invest in the company and didn’t sell.
Currently, my investment in IDSA is up about 3% for holding it nearly 3 years (still better than bank interest). Someone I know said that she will be happy when she breaks even in life and is able to pay all her student loans and other debt before she dies. I hope to do more than that, but the question before me right now is do I sell and just break even or continue to hold the shares for a larger gain.
As an investor, I always try to look at fundamentals and not just the stock price. For the most recent quarter ending March 31, 2014, ISA reported revenues of $25.7 million and operating loss of $440,000. Importantly, the company had $2.3 million of operating cash inflows during the same period. For comparison, during the first quarter of 2011 (shortly before I made my initial investment), the company had revenues of $106.2 million, operating income of $4.1 million and $427,000 of operating cash outflow. It seems the company is being able to generate significant cash inflow despite deteriorating revenues and profits. Importantly, ISA had long-term debt of $44.2 million on March 31, 2011 while its long-term debt as of March 31, 2014 was $13.5 million.
In December of 2013, ISA entered into a management agreement with Algar, which basically allowed Algar to take over ISA. Also, ISA granted Algar an option to purchase 1,500,000 shares at $5.00 per share (ISA’s shares closed at $5.98 today).
A week ago ISA announced a $3 million equity investment by Recycling Capital Partners. The investment consists of a purchase of 857,143 shares of ISA’s common stock at $3.50 per share and a 5-year warrant to purchase an additional 857,143 shares at $5.00 per share. Five dollars per share seems to be a pivotal price for Industrial Service of America. This investment is already paying off well for Recycling Capital Partners, a company led by Daniel Rifkin (another generational scrap metal recycler).
Industrial Services of America had a near death experience but seems to be back on track. Its balance sheet is stronger and the management of the company is in capable hands. However, given my past investment experience with Industrial Services of America, my dilemma is whether to keep holding until the company’s revenues and profits come back or sell its stock while the euphoria from the latest developments is still in the air?
(Click here for The Selected Stories of O. Henry on Amazon.com)
On his bench in Madison Square Soapy moved uneasily. When wild geese honk high of nights, and when women without sealskin coats grow kind to their husbands, and when Soapy moves uneasily on his bench in the park, you may know that winter is near at hand.
A dead leaf fell in Soapy’s lap. That was Jack Frost’s card. Jack is kind to the regular denizens of Madison Square, and gives fair warning of his annual call. At the corners of four streets he hands his pasteboard to the North Wind, footman of the mansion of All Outdoors, so that the inhabitants thereof may make ready.
Soapy’s mind became cognisant of the fact that the time had come for him to resolve himself into a singular Committee of Ways and Means to provide against the coming rigour. And therefore he moved uneasily on his bench.
The hibernatorial ambitions of Soapy were not of the highest. In them there were no considerations of Mediterranean cruises, of soporific Southern skies drifting in the Vesuvian Bay. Three months on the Island was what his soul craved. Three months of assured board and bed and congenial company, safe from Boreas and bluecoats, seemed to Soapy the essence of things desirable.
For years the hospitable Blackwell’s had been his winter quarters. Just as his more fortunate fellow New Yorkers had bought their tickets to Palm Beach and the Riviera each winter, so Soapy had made his humble arrangements for his annual hegira to the Island. And now the time was come. On the previous night three Sabbath newspapers, distributed beneath his coat, about his ankles and over his lap, had failed to repulse the cold as he slept on his bench near the spurting fountain in the ancient square. So the Island loomed big and timely in Soapy’s mind. He scorned the provisions made in the name of charity for the city’s dependents. In Soapy’s opinion the Law was more benign than Philanthropy. There was an endless round of institutions, municipal and eleemosynary, on which he might set out and receive lodging and food accordant with the simple life. But to one of Soapy’s proud spirit the gifts of charity are encumbered. If not in coin you must pay in humiliation of spirit for every benefit received at the hands of philanthropy. As Caesar had his Brutus, every bed of charity must have its toll of a bath, every loaf of bread its compensation of a private and personal inquisition. Wherefore it is better to be a guest of the law, which though conducted by rules, does not meddle unduly with a gentleman’s private affairs.
Soapy, having decided to go to the Island, at once set about accomplishing his desire. There were many easy ways of doing this. The pleasantest was to dine luxuriously at some expensive restaurant; and then, after declaring insolvency, be handed over quietly and without uproar to a policeman. An accommodating magistrate would do the rest.
Soapy left his bench and strolled out of the square and across the level sea of asphalt, where Broadway and Fifth Avenue flow together. Up Broadway he turned, and halted at a glittering cafe, where are gathered together nightly the choicest products of the grape, the silkworm and the protoplasm.
Soapy had confidence in himself from the lowest button of his vest upward. He was shaven, and his coat was decent and his neat black, ready-tied four-in-hand had been presented to him by a lady missionary on Thanksgiving Day. If he could reach a table in the restaurant unsuspected success would be his. The portion of him that would show above the table would raise no doubt in the waiter’s mind. A roasted mallard duck, thought Soapy, would be about the thing–with a bottle of Chablis, and then Camembert, a demi-tasse and a cigar. One dollar for the cigar would be enough. The total would not be so high as to call forth any supreme manifestation of revenge from the cafe management; and yet the meat would leave him filled and happy for the journey to his winter refuge.
But as Soapy set foot inside the restaurant door the head waiter’s eye fell upon his frayed trousers and decadent shoes. Strong and ready hands turned him about and conveyed him in silence and haste to the sidewalk and averted the ignoble fate of the menaced mallard.
Soapy turned off Broadway. It seemed that his route to the coveted island was not to be an epicurean one. Some other way of entering limbo must be thought of.
At a corner of Sixth Avenue electric lights and cunningly displayed wares behind plate-glass made a shop window conspicuous. Soapy took a cobblestone and dashed it through the glass. People came running around the corner, a policeman in the lead. Soapy stood still, with his hands in his pockets, and smiled at the sight of brass buttons.
“Where’s the man that done that?” inquired the officer excitedly.
“Don’t you figure out that I might have had something to do with it?” said Soapy, not without sarcasm, but friendly, as one greets good fortune.
The policeman’s mind refused to accept Soapy even as a clue. Men who smash windows do not remain to parley with the law’s minions. They take to their heels. The policeman saw a man half way down the block running to catch a car. With drawn club he joined in the pursuit. Soapy, with disgust in his heart, loafed along, twice unsuccessful.
On the opposite side of the street was a restaurant of no great pretensions. It catered to large appetites and modest purses. Its crockery and atmosphere were thick; its soup and napery thin. Into this place Soapy took his accusive shoes and telltale trousers without challenge. At a table he sat and consumed beefsteak, flapjacks, doughnuts and pie. And then to the waiter be betrayed the fact that the minutest coin and himself were strangers.
“Now, get busy and call a cop,” said Soapy. “And don’t keep a gentleman waiting.”
“No cop for youse,” said the waiter, with a voice like butter cakes and an eye like the cherry in a Manhattan cocktail. “Hey, Con!”
Neatly upon his left ear on the callous pavement two waiters pitched Soapy. He arose, joint by joint, as a carpenter’s rule opens, and beat the dust from his clothes. Arrest seemed but a rosy dream. The Island seemed very far away. A policeman who stood before a drug store two doors away laughed and walked down the street.
Five blocks Soapy travelled before his courage permitted him to woo capture again. This time the opportunity presented what he fatuously termed to himself a “cinch.” A young woman of a modest and pleasing guise was standing before a show window gazing with sprightly interest at its display of shaving mugs and inkstands, and two yards from the window a large policeman of severe demeanour leaned against a water plug.
It was Soapy’s design to assume the role of the despicable and execrated “masher.” The refined and elegant appearance of his victim and the contiguity of the conscientious cop encouraged him to believe that he would soon feel the pleasant official clutch upon his arm that would insure his winter quarters on the right little, tight little isle.
Soapy straightened the lady missionary’s readymade tie, dragged his shrinking cuffs into the open, set his hat at a killing cant and sidled toward the young woman. He made eyes at her, was taken with sudden coughs and “hems,” smiled, smirked and went brazenly through the impudent and contemptible litany of the “masher.” With half an eye Soapy saw that the policeman was watching him fixedly. The young woman moved away a few steps, and again bestowed her absorbed attention upon the shaving mugs. Soapy followed, boldly stepping to her side, raised his hat and said:
“Ah there, Bedelia! Don’t you want to come and play in my yard?”
The policeman was still looking. The persecuted young woman had but to beckon a finger and Soapy would be practically en route for his insular haven. Already he imagined he could feel the cozy warmth of the station-house. The young woman faced him and, stretching out a hand, caught Soapy’s coat sleeve.
Sure, Mike,” she said joyfully, “if you’ll blow me to a pail of suds. I’d have spoke to you sooner, but the cop was watching.”
With the young woman playing the clinging ivy to his oak Soapy walked past the policeman overcome with gloom. He seemed doomed to liberty.
At the next corner he shook off his companion and ran. He halted in the district where by night are found the lightest streets, hearts, vows and librettos.
Women in furs and men in greatcoats moved gaily in the wintry air. A sudden fear seized Soapy that some dreadful enchantment had rendered him immune to arrest. The thought brought a little of panic upon it, and when he came upon another policeman lounging grandly in front of a transplendent theatre he caught at the immediate straw of “disorderly conduct.”
On the sidewalk Soapy began to yell drunken gibberish at the top of his harsh voice. He danced, howled, raved and otherwise disturbed the welkin.
The policeman twirled his club, turned his back to Soapy and remarked to a citizen.
“‘Tis one of them Yale lads celebratin’ the goose egg they give to the Hartford College. Noisy; but no harm. We’ve instructions to lave them be.”
Disconsolate, Soapy ceased his unavailing racket. Would never a policeman lay hands on him? In his fancy the Island seemed an unattainable Arcadia. He buttoned his thin coat against the chilling wind.
In a cigar store he saw a well-dressed man lighting a cigar at a swinging light. His silk umbrella he had set by the door on entering. Soapy stepped inside, secured the umbrella and sauntered off with it slowly. The man at the cigar light followed hastily.
“My umbrella,” he said, sternly.
“Oh, is it?” sneered Soapy, adding insult to petit larceny. “Well, why don’t you call a policeman? I took it. Your umbrella! Why don’t you call a cop? There stands one on the corner.”
The umbrella owner slowed his steps. Soapy did likewise, with a presentiment that luck would again run against him. The policeman looked at the two curiously.
“Of course,” said the umbrella man–”that is–well, you know how these mistakes occur–I–if it’s your umbrella I hope you’ll excuse me–I picked it up this morning in a restaurant–If you recognise it as yours, why–I hope you’ll–”
“Of course it’s mine,” said Soapy, viciously.
The ex-umbrella man retreated. The policeman hurried to assist a tall blonde in an opera cloak across the street in front of a street car that was approaching two blocks away.
Soapy walked eastward through a street damaged by improvements. He hurled the umbrella wrathfully into an excavation. He muttered against the men who wear helmets and carry clubs. Because he wanted to fall into their clutches, they seemed to regard him as a king who could do no wrong.
At length Soapy reached one of the avenues to the east where the glitter and turmoil was but faint. He set his face down this toward Madison Square, for the homing instinct survives even when the home is a park bench.
But on an unusually quiet corner Soapy came to a standstill. Here was an old church, quaint and rambling and gabled. Through one violet-stained window a soft light glowed, where, no doubt, the organist loitered over the keys, making sure of his mastery of the coming Sabbath anthem. For there drifted out to Soapy’s ears sweet music that caught and held him transfixed against the convolutions of the iron fence.
The moon was above, lustrous and serene; vehicles and pedestrians were few; sparrows twittered sleepily in the eaves–for a little while the scene might have been a country churchyard. And the anthem that the organist played cemented Soapy to the iron fence, for he had known it well in the days when his life contained such things as mothers and roses and ambitions and friends and immaculate thoughts and collars.
The conjunction of Soapy’s receptive state of mind and the influences about the old church wrought a sudden and wonderful change in his soul. He viewed with swift horror the pit into which he had tumbled, the degraded days, unworthy desires, dead hopes, wrecked faculties and base motives that made up his existence.
And also in a moment his heart responded thrillingly to this novel mood. An instantaneous and strong impulse moved him to battle with his desperate fate. He would pull himself out of the mire; he would make a man of himself again; he would conquer the evil that had taken possession of him. There was time; he was comparatively young yet; he would resurrect his old eager ambitions and pursue them without faltering. Those solemn but sweet organ notes had set up a revolution in him. To-morrow he would go into the roaring downtown district and find work. A fur importer had once offered him a place as driver. He would find him to-morrow and ask for the position. He would be somebody in the world. He would–
Soapy felt a hand laid on his arm. He looked quickly around into the broad face of a policeman.
“What are you doin’ here?” asked the officer.
“Nothin’,” said Soapy.
“Then come along,” said the policeman.
“Three months on the Island,” said the Magistrate in the Police Court the next morning.
When someone sells a company stock at a loss he or she can claim capital loss deduction. Investors have an incentive to sell losing companies and move on. Many homeowners houses and apartments are currently “underwater” and if they sell them at a loss they are not able to deduct the loss from their income. Many such homeowners do not want to sell their homes at a loss and move on even though they cannot find a job where they currently live. I think if homeowners are allowed to deduct up to, for example, $50,000 of the loss on a sale of their main residence this will allow the housing market to revive and the economy to improve. Many corporations have been given special tax treatments only to give larger dividends to shareholders and outsource jobs for even larger gains. I think that homeowners with properties currently “underwater” deserve a tax break too. This will also truly help those in need and the economy and job market in general.
I have been reading financial reports of various companies and in most of them there are disclosures about the company’s exposure to PIIGS (Portugal, Italy, Ireland, Greece, and Spain). With the majority of these companies doing business in these countries I wonder how a customer originating from one of the PIIGS reading the annual report would react? I was nicely surprised when GE used in its annual report the following carefully worded language calling them “focus” countries:
Several European countries, including Spain, Portugal, Ireland, Italy, Greece and Hungary (“focus countries”), have been subject to credit deterioration due to weaknesses in their economic and fiscal situations. The carrying value of GECS funded exposures in these focus countries and in the rest of Europe comprised the following at December 31, 2011.
This is a nice place selling great burgers, hot dogs, fries, lemonade, and, yes, beer. Also, it offers dog food (I have not tried it) and outside seating. It’s self-serve but I think the food and the atmosphere is worth it – there are three LCD TV screens, one of them showing Nickelodeon and the other two ESPN. It is off of Exit 19 between Southport and Westport on Route 1. The original Shakeshack started in NYC but it has additional locations now in Florida, D.C., Upstate NY, and the Middle East. I recommend it if you are ever passing by it.
As an investor, I am not sure how much investment analysts are influenced by their firms, clients and powerful hedge funds and investment banks? I always wondered, with the rising complexity among the publicly traded firms, whether the analysis an analyst publishes really provides an independent opinion. Do connections on a personal or firm level play any role? Research analysts are required to disclose their and their firm’s holding in and business relations with the companies they recommend but I think independence has a lot more to it than holdings and client relationships.