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A company can be valued in 3 dimensions – quality, value and growth.
It’s highly unlikely that you will be able to find a company deserving 5 stars for all three categories. They are rare but do exist in uncertain markets when people start to sell equities and run to bonds and other safe havens.
Another dimension that people sometimes include is momentum, but I will leave that out in this post.
A great discussion of the QVG model is provided in the book, Active Value Investing, for those interested in learning more.
- Quality: Yes
- Value: Yes
- Growth: Yes
GME [[GME]] has been king of the gaming retailers for quite some time. The company has been able to deliver solid FCF through the years. From 2008 to 2010, GME was able to increase FCF from $325m to $480m which is a 47% increase. Very impressive despite difficult times and declines in same store sales of 1.6%. The stock price has dropped quite considerably since the peak and the guidance of lower same stores is also what seems to be keeping the stock price at where it is.
Management has also been equally impressive. Over the past 5 years, the rolling median figures are as follows.
You can see that most of the numbers are higher for the 5 year medians which goes to show that GME has continually improved in all aspects.
Revisiting the company shows that GME is in value territory. With all the hype and expectation mostly gone since 2007, the current price looks good indeed.
My assumptions were fairly conservative for all three valuation methods. Growth was set to 13% and a discount rate of 12% produced the numbers below. If I lowball the projected FCF figures for the next year, I still get a DCF of $40 which is a 45% margin of safety.
A quick P/E
If the market is supposedly forward looking, it clearly looks to be wrong on GME. The company has proven that it can grow both the top and bottom line, and the used game market is consistently generating billions in revenue for the company.
FCF growth has slowed slightly, with the percentage change from 2007 – 2009 period being the lowest at 12.4%, but FCF has easily grown above 10% each year.
Key Tronic Corp (KTCC)
- Quality: No
- Value: Yes
- Growth: No
KTCC [[KTCC]] is an example of a company that has only one of the three traits but has produced extraordinary returns for investors.
A micro cap with inconsistent operations. FCF is usually negative each year. Management’s ability to generate cash off its investment is usually negative and the company is in a tough, low margin industry.
KTCC was clearly on a fire sale early last year. The current price of $5.50 may still be attractive as the company looks to be coming off a successful year of profits.
Considering the numbers and history of the company, growth is extremely difficult to predict. It would be best to leave out growth expectations and base opinions on the asset base and operations.
KTCC Stock Valuation Overview
- Quality: Yes
- Value: Yes
- Growth: No
BAMM [[BAMM]] is a well run company with very solid results. Their margins are rock solid and the reason why I like BAMM is because of the way the business was run over the past 2-3 years in difficult situations.
Both top and bottom line profits are consistent, although there hasn’t been growth.
The 5yr and 10yr numbers are basically the same so there hasn’t been many hiccups with how stores were run.
The cause of concern that could turn quality from a yes to a no is how well its $3m investment in a 2 store frozen yogurt franchise will work, and being a family run business, it’s important to know how shareholder friendly the Anderson family is.
Didn’t change anything in my assumptions. Since the numbers for the company has been flat for the past 5 years, it was real easy to value.
If BAMM just does what it is doing now the intrinsic value is at $15. Even the NCAV alone is $13.51 and since the book value, and reproduction value is close, BAMM should be valued as a no growth company.
Competitors consist of Barnes and Noble, Borders, Amazon as well as other discount retailers like WalMart. Margins are low with brick and mortar stores with books being discretionary items.
There is also the whole fuss about how ebook readers are revolutionizing the industry, but from personal experience, I find ebook readers to be less efficient.
I’m the type of person who underlines, highlights and scribbles notes everywhere. To do that with any reader, I would have to go through about 3-4 menus before I can do even one.
Apple has also beaten Amazon in the ebook pricing war. If you go to Amazon, you will see that ebooks now cost just as much as a regular book. Not many $10 titles anymore.
I hold BAMM at the time of writing
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