As usual, a few of the best value investing links from the past two weeks:

Domino’s Pizza (DPZ)

Long. Domino’s is an established brand name that is opening up 250-300 stores per year, mostly overseas. The international segment is expected to grow 10% next year compared to 2.6% for the domestic business.

Since the international business has much higher gross margins, this growth should provide a boost to operating profits.

The business is very leveraged, so the additional free cash flow can be used to pay down debt, lowering interest expense, which therefore increases free cash flow even further – a virtuous cycle.

The author’s excel models show a potential upside of 30%.

Equal Energy (EQU)

Long. Equal Energy is a Canadian oil and gas exploration company that is turning around with the help of new management. The company current trades with a FCF yield of 25%, with a cash flow stream that is expected to grow significantly over the next 3-5 years.

The company used to be a Canadian income trust and recently converted to a normal corporation focused on longer-term value, a possible catalyst for value investors as income investors flee.

CVS Caremark (CVS)

Long. The CVS drugstore chain is one of the dominant players (along with Walgreens) in a business that is unlikely to go away anytime soon. The company trades at 12x 2011 EPS, yet has a strong industry tailwinds due to the growth in generic medicine and increase in the population age.

The author also highlights the possibility of ‘free call option’ coming due in 2014, with an uptick in the number of people with prescription drug coverage (due to the new health reform law), which would provide a significant boost to CVS.

Warren Buffett’s Annual Letter

Warren Buffett released his 2010 letter to Berkshire Hathaway shareholders.

Required reading for any serious value investor, Buffett provides an estimate of Berkshire’s normalized earnings power – $17b pre-tax or $12b after-tax.

He also sees a ‘normal’ economic climate as somewhat better than 2010 but weaker than 2005 or 2006.

To quote Buffett:

“We are not natively smarter than we were when our country was founded nor do we work harder. Butlook around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and1941, America’s best days lie ahead.”

Suggestions

If you have links or suggestions to detailed analysis from other value investors, please drop me a line using the Contact Form.

I’m always open to ideas from other investors, especially for a thoughtful and well-researched investment articles.

Disclosure

No positions.

As usual, a few of the best value investing links from the past two weeks:

Sears Holding Corp (SHLD)

Long. Sears is a company with a long brand history that has gone through its share of well known struggles over the past few years.

The stock, a holding company for the 2004 merger of Sears and Kmart, is headed by well-known financier Eddie Lampert of ESL Investments.

Other well-known long-term investors such as Bruce Berkowitz and the Tisch Family (of Loew’s fame) have a large stake as well. While the core business is struggling, the company is backed up billions of dollars of real-estate and other favorable assets, protecting the down-side.

While the stock has run-up since the original analysis, it is a great example of a sum-of-parts breakdown for a complicated company.

ITT Corp (ITT)

Work-out. Another conglomerate, ITT announced a split of the company into three operating businesses: Defense, Water, and Industrial Products.

Spin-offs have been proven to a profitable source of investment ideas, and the article does a great job of breaking down the individual business segments.

Rolling up the respective valuations into the core holding company doesn’t leave much margin of safety, but the new entities could be prime candidates for value investors.

I will be keeping a close eye industrial products segment, especially since the ‘new ITT’ is not as fancy as the other two divisions. This dynamic could lead to forced selling and a resulting attractive price.

Citigroup (C)

Long. After suffering through the financial crisis (including a government rescue and massive dilution for existing shareholders), Citigroup is now trying to move forward with a more conservative strategy and better risk management.

While outside of my circle of competence, there is no doubt that Citigroup has enormous global potential with operations in over 140 countries. Most of the toxic assets were spun-off into the Citi Holdings subsidiary, and the new bank is trying to stick to its core vanilla banking.

Using several optimistic assumptions (rise in ROA, positive valuation of Citi Holdings and tax assets) yields $0.80 EPS in 2014, or only 5.5x the current price.

While I normally like to look at historical earning power and not pay-up for growth, it is a compelling argument that is backed up other well-known value investors including John Paulson, Bill Ackman of Pershing Square, Bruce Berkowitz of Fairholme Capital, and David Tepper of Appaloosa Management, among others.

TravelZoo (TZOO)

Long. As a deep value investor, TZOO is normally a stock I would avoid: it trades at 50x TTM earnings. But with all of the media attention around the phenomenal success of Groupon, TZOO seems to be positioned to compete in a very hot space.

The write-up breaks out the business into its core travel deals segment along with its new entry into the local deals business.

Assigning a $300m valuation to the core business and $335m valuation to the local deals business results in a fair valuation of $635m on 2011 numbers. With a market-cap of $700m, the business seems fairly valued.

However, a thought-provoking quote sums up the investment thesis:

“Of course, we want to skate to where the puck will be and not where the puck has been or to put it in another way, this is a case of buying a great company at a reasonable price based on conservative assumptions.”

If those assumptions play out, it might turn out to be a great investment.

Paradise (PARF.PK)

Long. In my recent journey through the Pink Sheets, PARF was a stock that caught my eye due to a large discount to both book value and NCAV. In addition, the company dominates its core niche – believe it or not, the candied fruit business!

However, despite the significant asset base, the business has struggled with low operating margins and ROE over the past several years. The article outlines several avenues for improvement, but it is still unclear whether management has taken those necessary steps.

For those interested in net-nets, it could be a stock to watch.

Suggestions

If you have links or suggestions to detailed analysis from other value investors, please drop me a line using the Contact Form.

I’m always open to ideas from other investors, especially for a thoughtful and well-researched investment articles.

Disclosure

No positions.

As usual, a few of the best value investing links from the past two weeks:

Noble Corp. (NE)

Thesis Overview. When the Deepwater Horizon disaster occurred back in April of last year, the stock prices of BP and RIG were obviously hit very hard.

Other offshore drillers in the industry were affected as well, whether or not they had exposure to the GoM. It was a classic case of an extreme event that provided a buying opportunity for value investors.

Rational Walk does a great job of describing the evolution of his investment thesis in NE.

Since the buying opportunity back in May/June, the business has went through several major changes including a large acquisition and near-term industry headwinds that caused a re-examination of the thesis (and eventual sale).

Apex Minerals (AXM:Australia)

Thesis Overview. One of the best blogs for reading about obscure stocks all over the globe, AdventuresInCapitalism does a good job of explaining his sale rationale for a small miner in Australia. The original investment thesis showcases some very detailed due diligence, and the thesis seems to have played out along the proposed lines.

However, the company announced a rights offering at only one penny, which would cause significant dilution for existing shareholders unless they participate.

Mining is a very tough business (both to operate and to invest).

Netflix (NFLX)

Thesis Overview. Netflix has been one of the most popular stocks in our weekend values series, due to the fascinating amount of research and back and forth among management, long investors, and hedge fund managers.

Throughout the back and forth, the stock has kept rising, causing a painful situation for many of the shorts.

Whitney Tilson, the famous hedge fund manager, posted his rationale for closing out his short position. Overall, I think the entire saga shows the danger of valuation-based shorts.

C-Com Satellite Systems (CMI.V)

Long Thesis. C-Com is a satellite broadband company trading on the Toronto Stock Exchange. The company went public in 2000 and has been profitable since 2005, earning very high returns on capital.

The company is trading around 25% higher than book value, with EV/EBITDA of 2.8x and EV/FCF of 4x, both extremely cheap. Even better, the stock has $0.17 in net cash on the balance sheet. Insiders own approx. 35% of shares outstanding.

However, as pointed out in the article, technology can change extremely quickly and obsolescence is a big risk. Investor relations are also less-than friendly.

Macquarie Infrastructure Company (MIC)

Long Thesis. Macquarie is a holding company with a diverse set of operating businesses with high barriers to entry. The holding company is highly leveraged, but enjoys a FCF yield of 13%.

Part of the company’s covenant agreement limits the amount of cash flow that can be returned to shareholders. As operating results continue to improve, Macquarie will be able to pay out significantly more in dividends, potentially starting in the 1H of 2011.

Using a sum of parts valuation, the current share price reflects the valuation of only one of the operating businesses (IMTT), potentially throwing in the other 3 significant business units for free.

It is a complicated but well laid out thesis.

Suggestions

If you have links or suggestions to detailed analysis from other value investors, please drop me a line using the Contact Form.

I’m always open to ideas from other investors, especially for a thoughtful and well-researched investment articles.

Disclosure

No positions.