Think, Invest! by

Monday, June 18, 2007

Fore! ALDA drives value

Imagine a company with an $85-million-dollar market cap, with $18 million in unrestricted cash, $44 million in total working capital, $51 million in total stockholder equity and which generates about $11 million in earnings a year. It trades just above 1 times sales, 8 times earnings, and yields just under 4%. In addition, this company has increased sales from under $38 million in 2003 to over $72 million in 2006.

Sound too good to be true? It’s not.

The company is ALDA, manufacturer of golf club shafts.

The reason I believe that ALDA is trading at such a low valuation is because of its performance in the 1990s. The company went public in 1993 and closed its first day of trading at $28.38 (adjusted). Today, the stock trades around $15. According to the company’s SEC filings: “During the 1990’s, the graphite golf shaft industry became increasingly competitive, placing extraordinary pressure on the selling prices of the Company’s golf shafts and adversely affecting its gross profit margins and level of profitability. The Company’s average selling price decreased by 64% from December 31, 1990 through December 31, 2002. The pressure was mainly attributed to the increased competition for OEM production shafts, and a shift of our customers away from branded shafts to customized OEM production shafts.”

However, in 2002 ALDA began to change course. And the stock has recovered from around $1.50 a share. Again, according to the company’s SEC filings: “The Company’s response to the pricing pressure it faced during the 1990’s, and continues to face in the OEM production shaft segment, has been to vertically integrate, reduce its cost structure and to focus on continued penetration of the branded and co-branded shaft segments.”

In addition, ALDA opened factories abroad: “the Company also reduced its cost structure by shifting more of its shaft production to lower cost labor markets, such as Mexico, China and in 2007, Vietnam.”

It also became trendy again: “Beginning in 2003, the Company was able to achieve higher average selling prices as it enjoyed increasing success in the branded segment of the business…The introduction of co-branded shafts and the continued success in the branded segment had the effect of increasing the Company’s average selling prices over the last few years. The Company’s average selling price increased by approximately 70% for the year ended December 31, 2006 as compared to the comparable period in 2002.”

In 2006 and 2007, the company has driven ahead: “The Company has re-emerged over the past couple of years as an innovator in the branded segment of the business, in which shafts tend to sell at higher prices and gross margins than the customized OEM production shafts sold to club manufacturers...In 2006, PGA Tour, LPGA Tour and Nationwide Tour professionals using Aldila NV TM or VS Proto TM shafts in their clubs have won a total of 32 Tour events. The Aldila VS Proto TM and NV TM Hybrid shafts combined have been the number one hybrid shafts at every event this year on the PGA Tour, according to the Darrell Survey Company. In addition, Aldila Hybrid shafts won the Annual Golf Magazine Club Test for 2006. Forty club testers evaluated hybrid clubs for Golf Magazine and clubs featuring Aldila Hybrid shafts received the highest rating in every category for hybrid clubs. Overall the Aldila shafts helped give the testers the best feel, playability, forgiveness and distance with their hybrids compared to the competition. As the 2007 PGA Tour has began, Aldila was once again the leading shaft manufacturer represented at the Mercedes Championship, winning both the wood and hybrid shaft count.”

Given the valuation, it seems as if all this cost reduction and sales improvement is available to investors for next to nothing!

If the trendiness continues, there’s only one thing to say: Fore!

Friday, June 01, 2007

Outlook and portfolio

Outlook (more to come in subsequent posts)

1) Continued high economic growth from abroad.
2) Strong sectors of the U.S. economy (manufacturing, corporate profits, etc.), but a generally slowing economy, driven by a slow housing market and moderate consumption.
3) Increasing inflation, especially in commodities as supply issues emerge (higher oil - maybe even over $80; higher food prices; higher metals prices).
4) Increasing long-term interest rates, lead by U.S. rates.
5) Possible continued upside to stocks, but limited by increasing risks as the economy slows and interest rates move higher.
6) A dollar that is generally steady, supported by higher rates, but weighed down by weak fundamentals.


$11.80 UNAM (good value, great management, they should benefit from higher rates)
$13.47 NAHC (good value, they should benefit from higher rates)
$18.47 USS (tight Jones Act market, tight refining market)
$19.55 DAL (good valuation because of non-investment-bank-sponsored IPO)
$26.33 NWA (good valuation because of non-investment-bank-sponsored IPO)
$27.68 PFE (cash cow)
$56.94 AMGN (cash generator and free research department thrown in)
$27.50 HELE (great value and management)
$41.61 NEM (benefits from higher gold)
$77.67 DVN (supply issues with oil)
$15.41 ALDA (value, small position)
$5.80 JRC (value, small position)

$30.50 Short GM (already bankrupt if you look into their balance sheet
$108.02 SPG (way overvalued)
$54.51 C (suffers under higher rates)
$230.71 GS (suffers under higher rates)

I have some other stocks here and there, but that's the essence of the portfolio.

Some of my stocks (DAL, NWA, HELE, ALDA) would not do well in a recession. But I'm not trying to win under one and only one economic scenario. I'm trying to construct a portfolio that wins in ANY scenario, and trying to pick better values and better companies, with a slight bias to my macro outlook.

More thoughts on GM's demise

GM currently has $20 billion in cash. But it CURRENTLY owes its dealers about $10 billion in rebates, it has taken $10 billion in cash from rental car companies for fleet sales but it hasn't delivered the product yet (meaning it will incur costs but get no cash for this effort), and it owes its suppliers $30 billion. Add onto that nearly $5 billion in short-term debt, $33 billion in long-term debt, and health care liabilities of around $49 billion (I agree, pensions are fully funded at this point-in-time).

So even if I were to buy the argument that GM is well on its way to profitability (which I don't think it is), where does it come up with the money to pay what it CURRENTLY owes????

Please answer me this!!!!!!!!

This is the essence of my argument. I'm not arguing whether June sales will be good or bad. Who knows? I'm arguing that even if June sales are good, this company is TOAST.

GM knows what I'm saying. That's why they are issuing debt against the equity value of their GMAC shares, that's why the are actively selling their Allison transmission plant (even though it generates EBIT of nearly $600 million a year, that is why they are pulling cash out of their pensions.

So, tell me, where does the money come from to pay what they ALREADY owe????