Last class period we discussed the need to raise some cash to pay for scholarships this semester. The class voted, and it was decided to sell all of our holdings in China($28,000) and VLO($23,000). This will raise enough cash for us to pay for our MBA student scholarship and our KU basketball scholarship.
There were several earnings calls last week to report on. Diageo had a good half, with their operating margin up 80 basis points. They also increased their dividends by 5%, and bought back $600 million of there shares. Their dividends and share buyback both signal good cash flow for Diageo.
Garmin also had an earnings call, and they beat all the estimates for the last period. The automotive segment margins were down, and they may go down a little more in the future. Many see this as a good buying opportunity, and in fact the stock price dropped during the call.
SOHU saw their online gaming revenue up 89% on the quarter. This may be attributed to the second add-on package for the online gaming, which was recently released. Another cause , would be small revenue to start with. Their advertising prices have gone up significantly, due to the Summer Olympics in Beijing. A sell on SOHU is being considered because of the Olympic hype.
Tim Burger, Senior Analyst, and Derek Smashey, Assistant Portfolio Management for Scout Funds were our speakers for the week. They gave us a brief description of their job at Scout Funds and provided some great advice for those interested in following that career path. They fielded several questions from the class about their personal experiences as portfolio managers.
Our case for the week was to compare two companies that produce machinery for coal mining, Bucyrus and Joy Global. Coal has seen a big price increase over the past year, and we needed to analyze how the demand for coal will affect each of these companies. Currently they have a duopoly in their industry, and the barriers to entry are high. Derek and Tim made some comments about our cases and gave us their insight on the coal industry.
We gained some excellent career advice as well as valuation tips from our speakers this week, and we're thankful to have them join us for class. Next week the groups will be giving presentations over current holdings in the portfolio. On March 5 we're looking forward to having Kent McCarthy in class with us.
Monday, February 25, 2008
Friday, February 15, 2008
APM February 13, 2008
Stock Sells
The class began with a discussion on stocks that we need to sell to raise money for scholarships. The APM class offers two scholarships: a basketball scholarship and an MBA scholarship. Our basketball scholarship funds Russell Robinson. We came up with 7 possibilities, and students voted to sell as follows: RIO (11), BRK.B (9), EGOV (9), CHINA (15), LKQX (7), BUD (2), and VLO (12). After tallying the votes, the APM class decided to sell all shares of VLO and CHINA.
We decided to sell our 7000 shares ($28,000) of CDC Corporation, because they really only have one profitable segment, the software segment, while the other areas of business have been an overall drag on profitability. Also, their stock price has taken a steady nose dive since September of 2007, so we are selling on weakness.
The original investment thesis for Valero had to do with their competitive advantage in refining sour crude and California gasoline (which is different from the rest of the US). This gave them higher margins than other refiners. Put that together with a big shortage of refining capacity in 2002 when we first bought, the mentor Robert Tracy thought this would be a good buy. Now that refiners have added a lot of capacity and capability to refine sour crude, Valero’s competitive advantage is being eroded. Thus, we liquidated our entire position of 400 shares for a cash consideration of $28,000. Since 2002 we have had a compound annual return of 42%!
The overall cash that we generated from the sale of these securities is approximately $51,000, which should be enough to cover both scholarships.
Company News
KC Southern (KSU) said they didn’t meet revenue expectations because of a weak economy; however their operating ratio was up 37%. It is also worth noting too, that the APM class is looking to find someone from KC Southern to come to class and speak, so if anyone has any information, please contact Prof. Shenoy (apm@ku.edu).
Inergy Holdings LP (NRGP) met expectations. Mainstream gross profit increased driven by the propane sector. The reason we hold this company is its strong dividend yield of almost 5%.
There was some concerns expressed in regards to NIC Corp (EGOV), the APM class is worried because the just replaced CEO, Jeff Frasier. He was both CEO and Chairman of the board of directors before he stepped down for misappropriating corporate expenses. The alarming news is that he is remains Chairman of the Board.
Visit from Brad Shoup
Brad Shoup started his visit with a quick update on Brooke Corp (BXXX) and Golden Meditech (8180.HK). He also went on to give us a very informative lesson on corporate governance and an intricate look at Quicksilver Resources, Inc (KWK). Mr. Shoup is Chief Investment Officer for Armstrong Equity Partners, LP. He graduated from the University of Kansas with an engineering degree, and is very knowledgeable of the petroleum and natural gas industry.
· BXXX - he just met with their new CEO. He believes it is a very disjointed story. The stock has been down about 50%, and the CEO is, essentially trying to get money from their subsidiaries to kind of turn the company away from lower tier insurance to the banking business. He went on to say that some deconsolidation has occurred, and that we really won’t get a good gauge on their performance until their 10-K comes out in March of 2008.
· Golden Meditech (8180.HK) just came out with their third quarter earnings results. In the Medical device segment, sales from the ABRS were flat. The company also just sold their TangHerb segment to a company that markets organic products in Europe.
· Corporate governance. Some of the key items that worth noting are that he likes to see more than one large investor on the board, so they will energize the board meetings. He also illustrated the importance of knowing what state a company is incorporated in, in order to understand the legal implications of a proxy fight and the rules by which a corporation must abide. He also said that easy for large capitalization company’s board to get separated from the shareholders.
· KWK. He discussed the Darden family who he has spoken to many times. There are two brothers, one is the CEO and the other is chairman of the board. He thinks from talking to the Darden family they are concentrated on their company’s performance. They have a lot of experience and energy tied up into this business. This is important, because they should continue to expand and act in the best interest of the shareholders.
In this industry, it is important to note, no company can affect their margins (they are set by market forces). Therefore, the lowest cost producers are better, and this is where KWK happens to be an industry leader.
He mentioned the Fort Worth Basin’s proved reserves have seen substantial growth. There is tremendous upside in the area, because right now they are working on 55 acre spacing and they are doing pilots for 27 acre spacing, which could drastically increase their production. He finished by explaining his valuation model.
Thursday, February 7, 2008
January 30, 2008
The portfolio managers started class of with a beautiful presentation with some tips for success in APM. Here are a few of their suggestions:
- Check the APM website
- Prepare by reading Yahoo, WSJ, Financial Times, and Thomson One analysis reports
- Reading Bio on speaker for the week
We discussed the Golden Meditech Case that each group prepped for today’s class. Professor Shenoy had the following comments for our work overall:
- State recommendation clearly, and follow with bullet points
- Provide a summary table
- Make sure forward P/E ratio matches the projections you have on your pro forma statement
- Too much company description, and not enough valuation analysis
- Make better use of graphs, and format them to stand out from the standard excel graphs
- Make sure to value segments separately in the pro forma, unless a particular segment makes up less than 5% of the company
A question was raised about what criteria we should follow when considering new stocks for the portfolio. The primary criteria is for the stock to provide a learning experience for the class. The student recommending the student needs to remain a mentor on that stock for future APM classes. We prefer to limit the number of companies in the portfolio. Obviously we want to earn an adequate return on the investment, and finally the portfolio needs to have international diversification.
Joe Onofrio from Jayhawk Capital Mgmt. was our guest speaker for the evening. He came to discuss Golden Meditech with us a little more in-depth. He answered any questions we had when valuing Golden Meditech, and their various segments. We talked about the impact of their latest transaction and where they are headed in the future.
Kent McCarthy called and spoke to the class a little more about Golden Meditech and the expectations for the class over the upcoming semester. As Golden Meditech is the largest holding in our portfolio he wants to put the most emphasis on following GM over the course of the semester. He will be attending class on March 5th.
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