Archive for July 2012


  COR:PL     Exchange : EN Lisbon

Stock price: €1.33 
Market cap: €177 million 
Enterprise value : €292 million 
EV/EBIT : 5.6 X 
EV/ 10 year EBIT  : 10 X


It’s one of Nature’s amazing raw materials: light, water proof, fire resistant, pliant and yet durable.

Cork is actually stripped from the trunk of the Cork Oak. 
A natural wonder, as its harvesting doesn't injures or kills the tree. And Cork oak trees have an average life of about 200 years. In fact, the World Wildlife Fund points to cork production as a means "to preserve the precious and beautiful woodlands that have uniquely clustered in the western Mediterranean for millennia."

                                                       THE CORK OAK

Cork is used in a variety of products. Like:

• Wine stoppers (cork stoppers are used in over 80% of 20 billion bottles of wines produced each year)
•   Floor and wall tiles
•  Insulation
• Other building materials
• Insoles of shoes , musical instrument parts, shuttle cocks  etc
• Automotive industry (gaskets, meters, valves etc)
• Gaskets for electric and gas equipment.
• Acoustic and anti-vibratic insulation (construction, railways)

And Cork trees are found in abundance in Portugal – which occupies   the foremost position in cork production and exports.

On a worldwide scale, the cork forest reaches approximately 2.277.700 hectares.

And in Portugal, the cork forest occupies over 730 000 hectares. That makes approximately 32% of the total plant area.

No wonder Cork exports represent about 30% of the total Portuguese forestry product exports. (source : apcor cork yearbook 2011).

And the leader of cork industry in Portugal is the company called
Corticeira Amorim.

Amorim was founded in 1870 with one single utility to produce traditional cork stoppers specifically for Porto Wine. 

After few years the company started producing various cork products and exporting them to over various countries across the globe.

Today It exports cork products to over 100  countries in the world.

More than 80 % of its sales come from outside Portugal.

Below is the graph showing their consolidated sales by geographical areas
(source :2011 annual report)

Amorim is structured into 5 business units:

1 Raw material 

The Raw Materials Business Unit ,  as Amorim’s website points out  “brings together the management of purchasing, storage and preparation of the single variable common to all of CORTICEIRA AMORIM’s activities – Cork.”
It also focuses on Research and development. And  as we will see later this unit strengthens the competitive advantage of the whole company.

2 Cork Stoppers               World Market share: 25%

This unit is the biggest contributor to Amorim's total sales.
Amorim is the world’s largest supplier of cork stoppers producing over 3 billion units a year. It commands 25% share of the world market. It has established direct relationships with all major wine producing companies. It supplies corks to  famous Châteaux d'Yquem and Mouton-Rothschild, and most of Champagne's biggest names. As wine consumption increases all over the world -as it has over the last few years – it will have a favorable impact on this division’s bottom line. The cork stoppers BU recorded a sales growth of 9 % in 2011. And EBITDA growth of 10 %.

3 Floor and Wall coverings       World market share: 65%

According to Amorim , the floor and wall coverings produced  by this unit constitute a unique sales proposition in themselves as they are easily and rapidly installed , comfortable , durable, environmentally friendly and healthy as surface finishes do not retain dirt. Sales of this unit increased by 6% and EBITDA by 63% compared to the previous year.

4 Insulation Cork                       World market share  80%

According to their website the “The unique characteristics of the product grant it a high degree of thermal, acoustic and anti-vibratic insulation. For this reason it is used in the construction of oil  pipelines, airports, buildings, wine cellars and the refrigeration industry, as well as spaces dedicated to leisure activities.Sales of this unit fell around 6% and EBITDA fell around 10%  this year due to adverse economic climate.

5 Composite cork                   World Market share  55%

Its products are used in the areas of Gaskets and Materials for Automotive and Heavy Duty applications, Electrical Transformers
Natural Gas applications (Gas Meters and Water Heaters), Thermal protection shields, Expansion/Contraction joints, Home and office accessories and Footwear components .
Sales of this unit increased 6 % and EBITDA increased around 9%.

Below is the table taken from their 2011 annual report showing consolidated sales by their business units:

And here is the 10 year record.

Sales growth has roughly tracked inflation. Gross margins have been consistent . It enjoys a good pricing power. But EBIDTA -capex margins have been wobbly. Capex  has been almost same as depreciation and takes away 30 % from EBITDA .  SG&A expenses are very high. Staff costs alone in 2010  were 94 million euros.  

Amorim's earnings are backed up by positive operating cash flows . But free cash flows have been extremely erratic. That's why EBIDTA - CAPEX  (which roughly equals EBIT) has been used as a measure for earnings.
Earning power  would be around euros 30 million .

Amorim's cash flows ( in million of Euros)

Return on Capital Employed

Amorim's return on capital employed is unimpressive .

(all figures in million of euros )

The first thing we notice from eyeballing the table above  is that they have to hold lots of inventories and that lowers their ROCE . As we will see later, that's one  price they pay for having and maintaining their competitive advantage . During the recent 2 years ROCE  gets a boost from high account payables.
Unlikely  to be called a normal ROCE.
 Factors  that contribute to low ROCE are low capital turnover  and tiny margins. A good quality company can afford to have low margins and  a very high capital turnover or high margins with  low capital turnover to get a satisfactory return on capital. Amorim has a low capital turnover and low margins.It's not an extraordinary business.But it's not a 'cigar butt' type of business either.

But then this kind of  somniferous record  won't attract competition.

 Return on tangible equity

Du-pont analysis breaks ROE into 3 components .
Assets turnover, profit margins and leverage.

Return on equity =  Profit / equity  or

Return on equity = ( sales/assets) * (profit/sales) * (assets /equity)

Below is a Du-pont analysis on Amorim:

Again it's a mediocre record.  It is unable to deploy its earnings to get high returns.

Running Du-pont on Amorim  reveals that return on equity gets a boost from leverage ratio which  has been consistently above 2 . It has to resort to debt. 

Balance sheet

Tangible book value amounts to 2.08 euros . The stock trades below its book.

Current ratio stands at 1.9 which is fine.

Debt / Equity (tangible) ratio stands at  ~ 0.65

Usage of commercial paper has  been declining which is a good thing.
In 2006 it was euros 85 million which has come down to 21.7 million in the latest balance sheet.

Debt stands at  euros 151 million which  5X normalized EBITDA- cap-ex.

Dividend History

Amorim recently paid dividend of euros .065 per share .

They paid a dividend of euros 0.10 in 2010 .
No dividend was paid in 2009 but that was good as debt was reduced.
It paid euros  0.06 per share   in 2008 , euros 0.06 in 2007, euros .055 in 2006  and .05 in 2005.

Corteicera  Amorim is an eponym  for  AMORIM Family which owns about 76% of the stock . Various members of the family serve on the board.

Amorim's competitive advantages

Amorim’s enjoys numerous competitive advantages.

Amorim has direct presence in the countries that produce the raw material – affiliates (all situated in the cork forest zones) in Portugal, Spain, Morocco and Tunisia, allowing diversification of sources and control of the flow of the raw material and has a direct presence in all the big wine-producing countries – France, USA, Australia, Italy, Spain, Portugal, South Africa, Chile, Argentina, Germany.

Its sales and after-sales service are integrated in such a way as to assure a high level of service to clients and the capacity to respond rapidly to their needs.

It boasts of a diversified portfolio of high quality products that cater to all wine segments all over the world. Amorim benefits from- as its annual report states- “unrivalled distribution network” .

Management knew to build a competitive advantage they would have to focus on building an extensive network of distributors.
 This wide  mesh of distributors enables the company to understand exactly what the market wants. 

According to the director of the company :

Competition is not able to offer such portfolio of products in so many countries and that clearly makes the difference”

One concern , however , is the usage of alternative  wine stoppers.
This is a long running debate : cork or screwcaps .
Around 2005 , the market share for cork wine bottle closures started falling from 95% to around 70% globally. Many  wine producers across the globe-especially in New Zealnd- started giving up cork, replacing it with screw caps.

The main culprit: Cork Taint due to TCA. Some corks had become infected by a mold by-product called 2,4,6 trichloroanisole (TCA). The taint distorted the taste of some wines and angered wine consumers. Cork producers did not address the problem and instead started putting more money into PR rather than into research.
Carlos de Jesus , the Director of Communications for Amorim said:

"We messed up. For too long we denied the problem and fought a PR battle, when we should have been addressing the issue of TCA."

 AMORIM acted decisively and developed  a technology called ROSA. Rosa- named after one of the Amorim family's daughters- is a proprietary cork-cleaning process developed after three years of research, that reduced releasable TCA levels in cork by as much as 82%. 

Carlos De Jesus admitted :

"Market share has fallen from 95% to 72%.We've paid the price for our past mistakes." . But companies like Amorim took action .
 Cork quality is much better, and much more reliable than it was just five or six years ago.

"Today, 70% of winemakers have chosen cork over screw-caps or plastic wine stoppers," says Carlos de Jesus.

Thanks to investment in R&D which was instrumental in recovering the market share. check this link.

Despite the dominant market share management is still working towards fortifying the company's market position.

Recently, Amorim acquired a 90.9% stake in Trefinos, a Spanish manufacturer of champagne cork stoppers.

The company is mentioned in the book Hidden Champions of the Twenty-First Century: The Success Strategies of Unknown World Market Leaders by Hermann Simon.

Basically hidden champions are medium-sized, unknown companies that have quietly, under the radar, become world market leaders in their respective industries.

Amorim perfectly fits the bill. 

 But it's trading at an  EV/10 year EBIT  of 10 X which is a better gauge of its earning power. And that's not that cheap considering its below average return on capital employed and return on equity and free cash flow margins.

I rest my case with the following quote of Warren Buffett :

"I have no use whatsoever for projections or forecasts.  They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be.  We never look at projections but we care very much about, and look very deeply, at track records.  If a company has a lousy track record but a very bright future, we will miss the opportunity"

Answer to the ROCE Riddle...

About a week ago I posted this question:

Can a negative ROCE/ROIC be a good thing ?
if yes , how ?

I received several e-mails. And I am glad 80% were right.

Abitofvalue summed it up in a simple and direct way :

Negative ROIC can be a great thing as long as the negative is coming from the denominator - i.e. from the invested capital. So if EBIT is positive and the company has a large negative working capital with no fixed assets, the answer will be a negative ROIC. But this is a good thing - in someways its much better than having a high positive ROIC even. 

He is right .

In other words, other investors are paying you to run your business.
You are using their capital to run your concern.

Thanks to everyone who participated.

Some quick thoughts on International Speedway

International Speedway (ISCA) founded in 1953, owns and operates motorsports entertainment facilities. It hosts number of stock car, sports car, open wheel and motor cycle events including the famous NASCAR sprint cup series, which is the most popular form of motorsports in the United States.

The NASCAR racing season runs for 10 months, visiting 21 states across the country, and frequently attracts more than 100,000 attendees at each Sprint Cup Series racing event.

ISCA is among the largest owners of these entertainment facilities based on revenues, number of motorsports events operated and number of facilities owned. It owns 13 of nation’s major motorsports facilities like iconic Daytona international speedway in Florida and Kansas speedway in Kansas.

Their facilities currently have approximately one million grandstand seats and 530 suites. 

Isca earns more than $600 million in revenues and generates substantial cash flows primarily from admissions, television and ancillary media rights fees, promotion and sponsorship fees, hospitality rentals (including luxury suites, chalets and the hospitality portion of club seating), advertising revenues, royalties from licenses of trademarks and track rentals. They own Americrown Service Corporation which provides catering, concessions and merchandise sales and service at their motorsports entertainment facilities. They also own and operate the Motor Racing Network, Inc. radio network, or MRN Radio, the nation’s largest independent motorsports radio network in terms of event programming.

Let’s accelerate to its balance sheet:

We have a quick ratio of 1.4x which is fine. It can easily cover its short term liabilities.

We have tangible book value of more than $922 million or $20 per share .  At $26 the stock is trading at price to tangible book value of 1.3x 

But book value mostly comprises of their properties that are not easily replaceable at their original cost. And their value will only appreciate with time. So book value understates its true asset values.

ISCA clocked more than $180 million in revenues in 1999 and has grown steadily at 15- 18 % during the past 10 years with more than $850 million in revenue in 2008.  Revenue declined a bit after that but had $630 million in revenues in current year .Recession being the culprit.As its 10-k mentions decrease in  sale of admission tickets as the reason of decline in revenues.

Long term debt amounts to $343 million and even if we add tax liability of $319 million we have total liabilities of $662 million which ISCA can cast off in 6-7 years with its normal free cash flow of $100 million.

Now there are 3 key questions I would ask as a potential investor and these are:
1, How is the business? Is it ordinary or outstanding?

2, Does it have a wide economic ‘moat’ that keeps competitors at bay? And is this  moat sustainable ?

3, Is it trading at an attractive price?

We take these one by one.

Sure watching motor races make your adrenaline rush. What about the business?

History of positive operating as well as free cash flow for 10 years is a major plus.

The speedways of ISCA-which require initial capital to build - don’t demand on-going heavy capital expenditures. And the company has used its copious operating cash flow for growth – adding seating capacity and building more speedways.

Their 2008 10 –k states:
We repaved Darlington Raceway (“Darlington”) and constructed a tunnel in Turn 3 that provides improved access for fans and allows emergency vehicles to easily enter and exit the infield area of the track. These collective projects mark the largest one-time investment in the 50-year history of the storied South Carolina facility.

Similarly , 2009 10-k states that in 2006 they..
repaved Talladega Superspeedway’s (“Talladega”) 2.6 mile oval. Talladega’s racing surface had not been repaved since 1979, and we believe the newly paved racing surface has enhanced the thrilling on-track competition.

The capital expenditure item in the cash flow statement cannot be accepted therefore at its face value. The 10-k’s give a rough estimate of their maintenance cap-ex which is roughly 50 % of total cap-ex on an average. So we will have to adjust  free cash flow margin  by eliminating growth cap ex after reading the notes in 10-k’s 

This is an outstanding business that spits our free cash around 16% of sales on an average of 10 years.That’s the beauty of the tracks which like oil pipelines don’t need much capital infusions. They just sit there allowing cars to race freely and cash to flow free freely into the business. The company also generates huge income from media rights.

It also earns good cash return on invested capital. The 10 year average comes around 10 %.

ISCA is a duopoly in its industry with the other being Speedway Motorsports (TRK). 

ISCA has 13 facilities and TRK has 8.

ISCA derives 90% of its revenues from NASCAR-sanctioned events. And TRK derives 84% .

They both have same operating margins at 35 %. TRK is trading at price to sales of 1.3x and ISCA is trading at price to sales of 1.9x.

But ISCA has on an average gushed out more operating cash flow at $200 million almost double than that of TRK (at $130 million)

ISCA is trading at EV/10 year average EBIT of 5.36 compared to that of TRK‘s EV/10 year average EBIT of 7.5
But ISCA clearly has a very good advantage over TRK.

Here's why...

If we read TRK’s risk factors in its 10 –k it says:

Motorsports promotion is a competitive industry. We compete in regional and national markets, and with ISC and other NASCAR related speedways, to promote events, especially NASCAR-sanctioned Sprint Cup and Nationwide Series events, and to a lesser extent, with other speedway owners to promote other NASCAR, IndyCar, NHRA and WOO sanctioned events. We believe our principal competitors are other motorsports promoters of Sprint Cup and Nationwide Series or equivalent events. Certain of our competitors have resources that exceed ours. NASCAR is owned by the France family, who also controls ISC. ISC presently hosts a significant number of Sprint Cup and Nationwide Series races. 

According to its latest proxy, France Family Group members, together, beneficially own approximately 40% of ISCA’S capital stock and over 70% of the combined voting power of both classes of common stock. Members of the France Family Group own and control NASCAR. James C. France, Chairman of the Board, and Leas France Kennedy, Vice Chairman and Chief Executive Officer, are both members of the France Family Group in addition to holding positions with NASCAR.

It’s very clear .We don’t need to further delve on its implications.
And this also keeps new entrants at bay. This infrastructure cannot be built in a day. It requires tons of cash and moreover a new company building this will not have to consider what it will put down to build this but also what  return /earnings will  it will  be able to take out of this venture. (In investing terms,  it could have the same or more book value but not more intrinsic value which comes from earning power)And for this it needs to host sprint races esp. from NASCAR . And it’s NASCAR that determines every year which track gets what race. And we know who it will favor. (In the computer industry it’s similar if not exactly same as Microsoft dominating the PC operating system. A good company can technically build a superior operating system but it will have tremendous trouble in persuading developers to develop its applications and PC makers to install them into their systems). 

So the business has tremendous barrier to entry. 

Isca's current enterprise value is around $1.3 billion. But it can’t be replaced at this tag. 

Its balance sheet shows property and equipment of around $1.3 billion. But I think this might be understated.

Although it leases 400 acres of Daytona international speedway it also owns real estate in US which is hard to replace at today’s cost and will command a premium carrying value in future.

For example:

•500 acres near Daytona on which we conduct agricultural operations except during events when they are used for parking and other ancillary purposes.

•TALLADEGA SUPERSPEEDWAY located in 1435 acres.
• KANSAS SPEEDWAY located in 1000 acres

And they have plans to monetize their real estate assets.

They have built Hollywood Casino at Kansas Speedway which features a 95,000 square foot casino with 2,000 slot machines.

A recent article on International speedway in Forbes magazine noted that:

Mark Boyar, president of Boyar Asset Management, which has been accumulating Speedway shares. He adds that corporate sponsorships of special events, such as the Sprint Cup series, as well corporate advertising should also pick up as the economic recovery gains more heft.

The article further observed that:
there is the company’s vast portfolio of real estate assets which, says Jonathan Boyar, enhances Speedway’s worth, adding up to a total valuation of $50 a share.

While it is certainly not impossible to appraise its land bank, it's best to value ISCA through its earning power rather than asset values. The earning power in future will depend how well the company monetizes its assets. An example of this being Kansas casino as company says it will add $0.20 per share before debt service to its net income by 2013. The management is doing a good job by reducing its share count through stock repurchase program.

And the revenues certainly should improve once the economy improves as people start spending more on premium entertainment.

What about long term popularity of NASCAR ?
This worries many investors.
Can its long term popularity decline ?
Of course. And this is worth thinking over.

Let's jump over the boundary of finance and enter into the world of Psychology.

Why do we enjoy watching wrestling again and again ?

You can watch it repeatedly and not get bored .

The thing transcends language. Even a caveman can enjoy it.

In other words it's PRIMAL !

This primal factor is present in watching NASCAR too.

In fact, it combines this primal factor with glamor.

And that makes people watch cars go in circles for hours.

As one  NASCAR fan puts it aptly on the net :

You miss the adrenline you get by hearing the engine sing at 200 MPH, the smell of racing fuel, burnt clutches and burning rubber. You will just have to go a race and take it all in to get a feel for it. TV does not do it justice.

And personally  I think this primal element won't let NASCAR decay over the long term.

Anyway, back to finance.

With 10 year average free cash flow(by only deducting maint. cap-ex) of $ 2.43 per share  the stock is trading at the price to free cash flow of around 10 implying a yield of 10 % at this point. Not that roaring a buy as NASCAR sports car at this point. Certainly attractive at 15% free cash flow yield for long term value investors. With good insider stake of 40%, above average return on capital and a wide moat business it should definitely make an investor’s -'stocks of quality companies to pounce on when they become cheap' list.