27 Hours on the Road – Part I

By | May 11, 2014

Finally some time to write… the last 11 days were so packed with action that it all seems like one continuum. Since its too long for one post, this post will focus on Springfield MO and Dallas TX. As usual, here is the “Twitter version” (113 characters): Many hours on the road, unexpected encounter in Springfield, useful meeting in Dallas and many business insights.

For those of you who haven’t read the “Getting Ready” post, here is a the route we went through:

From north to south: 27 hours of driving

From north to south: 27 hours of driving

We knew upfront that our schedule will be tight, we had to drive from city to city, from company to company in places that were sometimes a 7-hour drive apart. Our first company visit was in Springfield Missouri.

Springfield: An Unexpected Encounter

I bet most of you have never heard of Springfield. Even most of my American friends responded with “where the hell is it and why are you going there?” There is one company that really piqued our curiosity, it is a small company and its located in… you guessed right… Springfield. So we took our car and drove there to meet with the CEO. Since the level of disclosure in small companies’ reports is usually far from satisfactory we felt we should talk to the management to get a better understanding of the business, and so we did. Unfortunately, I can’t elaborate on this investment idea at this time. I can just say that we liked what we saw, the meeting was very helpful and the CEO seems to be the right person for the job. I hope to be able to write about it here in the future.

The CEO highly recommended to visit a store called “Bass Pro Shops.” While we were driving to there, we suddenly saw a huge sign “Everest College” — This sign made Assaf stop the car and shout “COCO!” To explain this, I have to sidetrack for a second. At Eden, we sometimes invest in companies that are in troubled industries. Oftentimes, companies in such industries get oversold in the market due to “negative mood” of market participants and such cases tend to create gaps between the price and the value (“price is what you pay, value is what you get”) of individual companies in the sector. Long story short, the for-profit education sector in the US experienced just that and we made an investment at a company called Corinthian Colleges (stock ticker: COCO), that brings us back to the point when Assaf shouted “COCO.” We pulled over, parked the car and went to visit this Everest campus (the company has many campuses in different locations but we wanted to get a feeling for what its like). The receptionist was a bit shocked to see three investors show up at the door, without having scheduled any meeting but the people in Springfield Missouri are so nice so she arranged for us to meet with the head of academic programs and the head of career services. If you would read how badly companies in the for-profit education sector are perceived by the market you would think that their campuses are places where people are tricked to get government financing that would pay for useless education. However, what we saw was a completely different sight. The managers with whom we met — whom never met with investors before nor did they have any idea they would have their first encounter that day — were highly motivated and proud of what they do, the programs they set up and the career placement statistics that this school posts. We saw well-equipped classrooms where students practiced useful stuff such as computer programming, paralegal and paramedical studies. Although we visited only one school, it left us with a good impression of a dedicated team that strives to serve its community well and make positive impact on students’ life. Few days after that meeting, the company released its quarterly results and the stock plunged by almost 20% — we love it when Mr. Market offers us such companies at even a steeper discount to what we perceive to be its intrinsic value.

Oh, and we did go to the “Bass Pro Shops” — here are the pictures of that amazing retail operation:

An amazing retail space

An amazing retail space (I used Instamag app to create this)

 

Quick Visit to Dallas

Well, it wasn’t really Dallas, it was in the outskirts of the city where we met the CEO and CFO of a small integrated security devices company. The previous day, we debated whether or not we should cancel this meeting because we were afraid that it might be a waste of our time — we had many open questions and we felt like there is no way that this meeting will lead us to invest with the company. Before we interview management teams we always ask ourselves whether this meeting can lead us to making and investment (or selling our holdings) with the company and what is it that would make us do so. CEOs tend to be very charismatic people who know how to sell themselves and their companies, otherwise, they wouldn’t have been in that position to begin with. So, its important to come well prepared to those meetings with a very clear idea of what you are looking for because otherwise you will end up listening to what the CEO is looking for you to hear.

The management team tackled our questions pretty well and left no question unanswered. We were impressed with the way they run the company. One thing we really liked is that when we visited some of the company’s facilities the CEO turned off the lights in when we left a room, he seems to be very frugal. When we asked him about the relatively low level of CAPEX he told us that most equipment and furniture were purchased on the cheap from a few companies down the road that went bankrupt. We still did not invest with that company but its high on our list and since its a small cap I can’t disclose the name yet.

That meeting, of which we had very low expectations, was the complete contrast to a meeting we had with the management team of one of our substantial holdings — Conrad Industries. But that, will be the topic of the next post so stay tuned.

 

 

6 thoughts on “27 Hours on the Road – Part I

  1. Eylon

    great post. hope to hear in the future which company it was.

    Reply
  2. Miki

    Yaniv,
    Can you please provide some more details why do you believe COCO is undervalued and what in your opinion is its intrinsic value?

    Reply
  3. Yaniv Uliel Post author

    The way I personally see it is:

    1. Similar to Ido, on such a large revenue base (~$1.5B) they should, somehow, be able to generate even a tiny small digit positive margin. If that happens, then the company is cheap. Even a margin of 2% would make it a PE of less than three under the current market valuation.

    2. Value to a potential buyer: If someone wants to enter this field then COCO can be a great vehicle to do this. If one buys the whole company (even at a premium) he get campuses, approvals (not all approval and not all programs/campuses are under regulatory attack) and many things that it would have otherwise cost a lot of money and time to obtain. Of all the smart and super hard working PE guys out there, isn’t there even one that thinks he can turn this around and squeeze some margin our of this asset base?

    3. This PE for this year’s projected EPS is ~8 and this is not expensive. You can see that cashflow-wise the situation is not as bad as one may think.

    That said, this is still far from being a no-brainer. Things can get worse but at least for me, the risk-reward profile here is very compelling.

    Last thought: many people had entered into this trade by last year and now, that price went down, they ask themselves questions that should have been asked long time ago. I guess some people expected a complete turnaround and a quick profit by 2014Q1 and got disappointed but the facts did not change much except for the lower price that Mr. Market offers us.

    Please note that I’m often wrong and the above represents my thoughts and is in no way a recommendation for action.

    Reply
  4. Miki

    Yaniv,
    Thanks for the detailed answer.
    With regards to the value of the intangible assets. They are valuable indeed only if someone wants to use COCO’s assets as a vehicle to get into this field. However, looks like sector is being consolidated and the trend is players are leaving the sector and closing schools and not vice versa. What do you think?

    Reply
  5. Yaniv Uliel Post author

    It’s a judgement call, if you think that there is severe over capacity in the industry and that America will need fewer paralegals, paramedicals, plumbers etc. then you might want to stay out of this company. I don’t share that view but that is up to each one to decide.
    Also, it is not just intangibles that we are talking about — the company has over $220 of tangible assets on top of that. Anyway, it is up to each one of us to decide about the future productivity of these assets.

    Reply

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