Because apparently all I invest in is retailers, the newest stock in the Uproar Fund is Danier Leather (TSX:DL).
Danier Leather is Canada’s leading retailer of leather outerwear, accessories, handbags, etc. The company has 90 locations, split between malls and dedicated buildings it refers to as “power centers.” Approximately 2/3rds of revenue comes from shopping mall locations, while 1/3rd comes from power centers.
Unlike many companies in the clothing industry, the company owns all its own manufacturing facilities in China. This allows it to continue to supply high quality stuff, and control the quality of the merchandise in house. This is a big deal with you’re selling something high end like leather products.
It also means that the company has to invest in the factory every now and again. It did so in 2013, which led to some less than stellar earnings numbers. The company sees an opportunity in selling leather handbags for under $200, which is all part of its grander strategy — to increase sales of its accessory business from 25% of its revenue to 40-50% of total revenue. Accessories might not have quite the sticker price that coats do, the lower price tag seems to be working. Sales were up 5% in 2013, compared to a decrease of 6% in 2012 and 4% in 2011.
The balance sheet
Like just about every stock I buy, Danier Leather has a practically sexually arousing balance sheet. The company is sitting on $15 million in cash, compared to a market cap of just over $35 million. Total assets are over $68 million, with just a hair less than $12 million of total liabilities. The company doesn’t have any debt.
This gives it a book value of $14.35 per share. As I write this, shares are at $9.15. That puts shares at a 37% discount to book value. If you don’t get excited about that, you’re probably not a value investor. Go buy some Vanguard fund or something.
The income statement
I’m too lazy to look this up completely, but Benjamin Graham (you may have heard of him) argued for using something called “normalized earnings” when valuing beaten up companies. I think Graham suggested that you use the average of 10 years worth of earnings to figure out what the company earns in a typical year. I’m kinda lazy, so I go with five. Here’s Danier Leather’s last five years’ net earnings.
- 2009 – ($0.37)
- 2010 – $1.28
- 2011 – $1.55
- 2012 – $0.83
- 2013 – $0.33
Average earnings over the last five years — $0.72
Right now, shares trade at about 12.5 times normalized earnings. You’re also getting a company that trades at less than 65 cents on the dollar. If the stock just recovers to book value, you’re looking at 50% upside.
I’d look at buying Danier Leather just for those two reasons alone. At some point in the next few years (I’m thinking soon, if the accessories business takes off), the market figures out that shares are cheap, and some catalyst sends them forward.
But wait, Nelson the Shamwow guy says, THERE’S MORE.
Danier is aggressively buying back shares. Let’s look at average share counts over the last five years.
- 2009 – 5.1 million
- 2010 – 4.6 million
- 2011 – 4.7 million
- 2012 – 4.6 million
- 2013 – 3.8 million
The company has eliminated about 25% of all shares outstanding over the last 5 years, and currently has pledged to buy back 145,000 shares in 2014. The reason why so many shares got repurchased in 2012 was because management did something called a “dutch auction,” where they asked shareholders to sell their shares back to the company at somewhere right around the 30-day average. Quite a few investors participated, as you can see.
Let’s assume that the company continues to buy back 145,000 shares a year over the next five years. You’d be looking at a share count of approximately 3.1 million, give or take a few. Both book value and earnings per share would increase by 20%, without doing a thing. Meaning, you’re buying a company that in five years has a potential book value of nearly $18 per share, and earnings potential of about 95 cents.
Or, to put it another way, you’re getting the equivalent of a 4% dividend, just in the form of buying back shares. Normally I’m pretty meh about share buybacks (since companies tend to do them when the market is high), but I’m quite okay with this one. Buying back shares at 63% of book value is a pretty good use of capital.
As a reminder, The Uproar Fund is a $100,000 portfolio, which will end up being invested in 10-15 worthy companies. So far, Reitmans is approximately 12.6% of the fund, and MRRM is approximately 5.5% of the fund. Click on either of those two links to read the write-up on each company.
I purchased 600 shares of Danier Leather, for an average cost of $9.11 each. That gives the company a weighting of approximately 5.5% of the fund.
The current three positions make up just less than 24% of the total assets of the fund. The rest is held in cash.
Many pundits are calling for a market correction. I’m generally one of them, I think shares of a lot of different companies are a little frothy. But overall, I don’t care about the market. There isn’t a whole lot of value out there, but I’m finding some. As long as I can find it, I’ll continue to invest in it.