Published at: Old School Value Investing Blog
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Walgreen jumped bout 11% yesterday on the news that it ended it’s dispute with Express Scripts.
If you remember, Walgreen was a bad news pick based on the price drop after the Express Scripts break-up and Alliance Boots acquisition. Although Walgreen did not show up on the BWB 7 Screen, it has a history of strong financials and desirable intrinsic properties.
Yesterday’s response by Mr. Market was nice to see, but long term Walgreen investors are not out of the woods yet. As reported in the Q3 results, “Compared to the prior year, the strategic decision to no longer be part of Express Scripts Pharmacy Network as of January 1, 2012 impacted our quarterly results by a net $0.06 per diluted share including cost controls, at a total of $0.15 per diluted share year-to-date.“. Not only prescription transactions were down(10% in June alone), but revenues on same store sales suffered also(down 4.9% vs. Q2 2012) because those customers were not in the store to shop while they waited for that prescription to be filled.
The question to be answered now is, how many of those lost customers will come back to Walgreen for their prescriptions? CVS Caremark, who benefited from the dispute as an alternate supplier for Express Scripts, expects to retain about 50% of its new customers gained from Walgreen. Customers will return and some will be lost, this is the nature of retail. More importantly, the opportunity for new customers has grown with the return of the Express Scripts subscriber network.
Revenues will return, but not quickly. I expect the remainder of the year’s sales will still be affected by the dispute. Management expected a total loss of $0.21 per share for the year because the loss of the contract. It will be worth watching the Q4 results and seeing how much management attributes to the loss. Based on the numbers they have put out thus far, I would expect to see $0.06 or less tied to the Express Scripts contract dispute.
As for Mr. Market, I expect him to be a little hung over today. Look for the profit takers to exit and the price to drop a little as details emerge on the settlement. Now that the dispute is over with Express Scripts, the growth potential has returned to the domestic market. I still consider Walgreen a long position that will reach its Fair Value price of $45.00 or more.
Disclosure: I am Long WAG
Jinpan International Ltd. (Nasdaq: JST) announced preliminary financial results for the second quarter ended June 30, 2012.
Here are the numbers compared to a year ago same quarter:
| Category | Q2 2012 | Q2 2011 | % Gain/ (Loss) |
| Net sales | 55.6 | 58.3 | (4.6) |
| Gross Profit | 14.5 | 22.2 | (34) |
| Gross as % of Sales | 26% | 38.1% | |
| Net Income | 2.5 | 7.28 | (65) |
| EPS | .15 | .45 | (66) |
Also, per the news release management has amended the 2012 outlook per the following:
The sales number reports from two segments, domestic (China) and international. Domestic sales grew to 50.8M from 46.1M the same quarter last year. International sales took a big hit, 4.8M compared to 12.2M from last year’s second quarter. This was attributed to “…a change in the design by our primary OEM customer of their wind power product(s), which resulted in a decrease in our international sales in the second quarter.”
“Currently, we are waiting for our customer to provide new specifications, so we can make corresponding design changes to our cast resin transformer products and integrate our transformers into their newly designed wind power product(s).” International OEM sales have been down for a three month period and Jinpan is still waiting for specifications from this customer. This may be a flag signaling strained customer relations.
Once these specifications are received, Jinpan will have to modify/redesign their product and have it re-qualified. I would expect this to take some time and possibly affect International sales for the remainder of this year. Management expects this also, “Even though we experienced slower sales to our primary OEM customer, we do expect a pick-up in orders from other OEM customers in the second half of 2012.” This has also exposed a weakness of dependence on one major OEM customer (a 60% decrease in this sales segment due to one customer). I would like to see management move to fix this weakness.
I sensed some hesitation by management about Domestic sales for the remainder of the year also, “We also experienced some weakness in domestic order flows in the second quarter due to a softer economic environment in China.” Domestic sales were actually up by 9.25% this quarter compared to last year, why the warning?
“We have backlog of approximately $113 million at the end of June 2012 and believe that approximately 80% to 90% of the backlog will be shipped in 2012”. I assume that 113M figure is a net sales number. 80% of that would be about 90.5M for the last half of the year in addition to incoming orders. Last year Jinpan had 130.75M revenue over the last half of the year.
The revised numbers for Net Sales predict 0-5% growth this year. Using the worst case scenario of 219M would require Jinpan to achieve Net Sales of 120.6M over the last two quarters. Again, Jinpan had about 130M over the last two quarters for 2011 so it is possible, even more so if the backlog is delivered as promised.
The Gross Margin reduction is not too much of a concern for me. Jinpan has averaged a 38% margin over the last ten years and been in the 33% range three of the same last ten. Also, the net income number if reduced by 20% would be 19M. This is still well above the ten year average of 12.6M and better than seven of the last ten.
“We believe the second half of 2012 will be stronger for our business than the first half.”
Jinpan has some work to do if it wants to be a ‘zero growth company’ this year. There have been some weaknesses exposed regarding reliance on a single customer and possibly customer relations/communications. Jinpan plans to release its second quarter earnings results and conduct an earnings conference call in mid-August. I look forward to seeing how management addresses these issues and handles the remainder of the year, it could reveal a lot about the quality of management.
Transaction costs are the bane of investors everywhere. Whether the market is up or having its worst day ever someone makes money; that someone is the Stock Broker.
Consider the following fees charged by the following firms for trading stocks:
| Brokerage | Fees/Trade |
| Scottrade | $7.00 |
| E Trade | $7.99 – $9.99 |
| TD Ameritrade | $9.99 |
| Charles Schwab | $8.95 |
| Fidelity | $7.95 |
On the surface these fees may not seem like an excessive amount, but looking at it from the perspective of a new or small investor changes things a bit. For example, our new investor (let’s call him Mr. Value) has just saved enough to open his first brokerage account…a hard earned, hard to come by $1000. After long hours and study, Mr. Value has found the perfect first pick for his portfolio. Grabbing a “Dow 30” component for around $8.35 a share he makes his purchase. Not wanting to put all his eggs in one basket he opts to go with 75 shares, because he’s sure of his pick and round numbers are easier for math.
So, 75 x $8.35 = $626.25 + the 7.00 fee (which is 1.11% of the cost) will total $633.25 or $8.44 a share.
It’ll be another $7.00 to sell those 75 shares. $633.25 + $7.00 = $640.25 or 8.54 a share.
Just to break even Mr. Value’s investment has to grow 2.28%.
Mr. Value hopes his investments will grow at around 8% a year. The first year he hits that mark, minus the 2.28% fees and 3.24% average inflation leaves him a net of 2.48%. Even if we exclude the sell side since Mr. Value holds long term, he is at 3.64% if things go according to plan.
Wikipedia defines a stock broker as, “a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms.”
Professionals get paid when their services are utilized. So I suggest the following methods to keep transaction cost at a minimum:
“Our favorite holding period is forever.” – Warren Buffett
By its nature Value Investing should lend itself to lower transaction fees. Waiting for that fundamentally sound company at a fair price or less may take a while. When that fat pitch presents itself a purchase can be made in volume and held long term to minimize transaction cost and taxable gains.
It is my goal to go transaction free for one year from today. This commitment locks me into my current portfolio and helps remove the temptation to sell or purchase. I will continue to look for companies that meet my requirements for investment. If I find one worthy of purchase this will be another fail safe to bounce it off of: “Is this company, at this price worth not achieving my no-transaction goal?”
As posted on Old School Value – Thank you Jae Jun
I heard the other day that 85% of Americans own running shoes but only about 15% of them regularly run. We all know what we should be doing, but doing it is another thing.
The same is true when it comes to investing.
I tout myself as a value investor. Although there are many variations to the rules of value investing, the basic tenants are the same:
This easily quantifiable, emotionless step is usually taken care of with a stock screener.
I look at current ratio, earnings growth, earnings stability, dividend record and price to book. If a company can make it past my screen, a quick look at the last ten years statements will verify the condition of the financials.
Here is when it can start to get a little tricky.
Fair value is usually determined by estimating future earnings and multiplying them by a capitalization factor. This requires research of past performance, long-term prospects and company management; usually done by reviewing several years’ worth of 10K filings.
Two things become a problem here. First, it should go without saying that ‘estimating the future’ of anything is really nothing more than an educated guess. Second, the more time spent researching a company and its statements an emotional bond may develop.
Once an estimate of earnings and capitalization has been made, these numbers are usually plugged into a formula, i.e. Value = Earnings (8.5+ (2g)) and the result is fair value. But what if the number is not what was expected or desired? Suddenly you are emotional. Maybe you feel like you wasted all that time reviewing the company; maybe you really like the company now after learning more about it.
This is the dangerous path that may lead to manipulating the numbers to reach a desired value.
Long-term can become short-term with gains and losses.
Scenario 1: That Company bought at a bargain has now become an even bigger bargain. Doubt creeps in, conviction wavers. Three choices present themselves at this time; ride it out – sell and take what is left – or strengthen the position.
Scenario 2: That Company bought at a bargain has now become an overnight sensation. This scenario even has its pitfalls. Is it time to take profits now or let it ride until your long-term timeline? It all depends on how much confidence there is in the estimation of value and future prospects of the company.
Again, we all know what we should be doing, but doing it is another thing.
Knowing some of the error traps associated with value (defensive) investing allows for a plan of action to avoid them. Here are some suggestions that have helped me from time to time:
“A strong minded approach to investment, firmly based on the margin-of-safety principle, can yield handsome rewards. But a decision to try for these emoluments rather than for the assured fruits of defensive investment should not be made without much self-examination” – Benjamin Graham
Value investing is hard; not the concept, but the application.
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