Collection: Li Lu - #19 'Timberland Co. Part 1, Stock Screening Guide'



[Transcript]

LI LU 00:00

So, let's just go through a couple examples.


Unfortunately, what I’m dong today, you know, I no longer talk about what we own. So I pick up a couple of examples of what I owned in the past, you know, I started this business in late '97 and you know, along the way been through a couple really traumatic events, you know one is sort of the Asian financial crisis and then the technology bubble, a couple of different things. But during those period of times, you tend to have more interesting opportunities.


Let’s start with the – let’s go back to '98, so it was a fall in '98 and I tell you the search that I go through are very simple because I’m interested in all sorts of different business, I usually just get a menus, you know, I got hooked into Value Line while I was a student here.


You know, every issue as it comes out, I just, you know, love to read the whole thing from beginning to the end, because that’s really the best kind of education if you want to have encyclopedia knowledge base and database – (BROKEN AUDIO) – which you have to.


So just go through that, page after page after page is just enormously helpful and the first thing I always check is sort of the new low list; you know, the new kind of lowest book, lowest P/E – lowest this, lowest that – that really attract me more than the new high list.


Source: https://roiss.substack.com/p/li-lus-investing-masterclass-at-columbia?s=r

Now, this actually I don't have any more of my copies as I got rid of that. So I asked them for a reprint and the number is not right. I mean, I was looking more of somewhere around I think it’s September or something August that when the stock was roughly around 28, so this is 46, it’s not right. So it’s roughly called at 28 to 30.


Now you look at this one, you know, what is the first thing that jumps to you? Somebody give me a quick read. Yes?


AUDIENCE MEMBER 02:13

I found that the stock price fluctuation; high and low change every year.


LI LU 02:18

Yeah, anything else? Yes?


AUDIENCE MEMBER 02:25

The stock looks like it's just falling off a cliff.


LI LU 02:26

Right, anything else?


Now, if you’re in investors, you don't really care where it was traded before actually. All I care – I’ll tell you what I look for – is first, you look at the valuations. And if the valuation doesn't fit, I don't even want to really kind of go beyond. And so what do we know about valuation? Yes?


AUDIENCE MEMBER 02:48

(Inaudible).


LI LU 02:49

Yeah, that is a good point and what is the constitution of the book value? Everything you know, every time you see below book value, you want to see what is in the book? What is in the book? How much is the book?


AUDIENCE MEMBER 03:03

(Inaudible).


LI LU 03:04

What?


AUDIENCE MEMBER 03:05

(Inaudible).


LI LU 03:07

Now, that’s simple.


You can just, you know, call it at 28 and then you got a what? 11 and a half million shares roughly 300 something ($28 x 11.5m shares = ~$300m). Low 300 million. Just do approximate – you don't really have to do all the – quick ones and you will see where it is.


Now, the working capital is almost a 300 million in a sense and of course it was the end of the Q3. And in retail, what do you know about kind of the end of Q3 in retail? Now, this is really where, you know, your kind of a quick encyclopedia knowledge really helps you. All retail build up a huge amount of inventory – (BROKEN AUDIO) – last quarter (Q4).


So you look back at the previous years to see what is a normal like, cause if they’re really gonna have to collect a lot of cash at the end of the year.


So you say okay, so it’s a 300 million, it's almost the entire book value roughly 275 million is in the working capital. Everything else cancel each other. And so you’ll probably collect about a hundred million cash at the end of the quarter, if you look at the other two years.


So roughly you got a 200 million liquid asset and plus a 100 million of fixed asset. And if you do, you know, a little bit more study, you’re going to see the entirety buildings – real estate, basically. So 300 and you're trading roughly 300 million and so 200 million is a liquid asset and then about 100 million is in real estate, so you’ve got a pretty decent protection on the downside.


So what do we know about the earnings? The cashflows?


And the ones you want to really pay the most attention is basically kind of the pre-tax and pre-interest earning, the unleveraged, and you want to compare that with unleveraged capital that is needed in the business to get you sense of what kind of business you’re having, how much they’re making.


Give me a quick sense. How much is that?


Well, if you’re skilled, it shouldn't really take you more than 1 second to find that out. You got 13 percent roughly of operating margin of 850 million, so you get roughly 100-110 million.


And what is your deployed capital? How much capital is deployed in the business? Roughly?


You would have roughly about – lets say, 200 million in a liquid asset and then about 100 million in buildings. And then the 200 million of liquid assets probably a 100 million is cash so you roughly have a 200 million deployed capital and roughly returns about 110 million dollars. So your return on your deployed capital roughly around 50% at that point.


So that's not a bad business, so you shouldn't really – I mean you start with the – you give a five second look and you say hey, the business I don't care you know, all the other things – the business was trading roughly, you know, right around the book value – book value is pretty clean is basically consist of a tangible – (BROKEN AUDIO) – liquid asset; working capital plus, you know, 100 million in real estate. And the deployed capital is basically 2/3 of that and for that 200 million, you return roughly 100 million or so.


And so they shouldn't be bad business to begin with.


(Source: https://youtu.be/y3c2PKupiu8)

 

[YAPSS Takeaway]

  1. First, look into valuations if it wasn't attractive; skip it and go to the next.

  2. Second, what is in the book and how much is the book?

  3. Third, what is the operating earnings and cash flows?

  4. Forth, what is the return on deployed capital (unleveraged)?