Danier Leather & Coat-Tailing

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Danier Leather & Coat-TailingBy HardCoreValue, he can also be followed on  twitter

Investing is about making money, there are no points for style. Following other successful investors for ideas is a great way of filtering possible investment ideas. Even Warren Buffett admitted to coat-tailing when he was younger. There are lots of ways of tracking other investors (13-F SEC filings), investor letters like David Einhorn’s which often explain their thesis or websites like gurufocus that maintain a database. However, investors must realize that following other investor’s purchases are just a starting point and do not excuse them for doing their own research. Also, these purchases can be mis-interpreted, since short investments do not have to be disclosed, the long position could actually be a hedge and thus the investor is bearish on the stock that you think they appear to be bullish on!

Respected value investor, Irwin Michael of ABC funds maintains a great website with research notes on their value investments (mostly Canadian).  Danier Leather caught my eye. The last paragraph of their research note reads like a value investor’s dream.
(September 23, 2011) At its current price of $10.50 per share, DL shares are currently trading at just 0.8x tangible book value.  With $6.13/share in cash and no debt, we believe the market is effectively attributing just $4.37 per share for Danier’s operations. Given that the company has just earned $1.57 per share and demonstrated significant year-over-year growth in earnings (23%), we believe the shares are extremely undervalued at current levels.  
Less than 4x earnings with a great balance sheet!? I was getting excited. Also, they own a 130,000 square foot facility in Toronto that could be leased back for extra cash. Finally, management has been opportunistic with substantial share repurchases.
But after a little digging I am taking a pass on Danier Leather for two reasons.
1. Profitability. It’s not a great business, although profitability is currently high, return on equity has averaged only 5% over the past 10 years. ABC’s undervalued argument from 2003 remains the same yet shareholders have nothing to show for it. (June 20, 2003) “At its current price of $10.00, Danier is trading at approximately its tangible book value and under 7 times 2002 earnings. Further enhancing its low valuation is a solid balance sheet with no debt.” It’s not hard to imagine earnings reverting to their historical mean. Also a drop in the Canadian dollar would compress margins on imported Chinese manufactured goods.
2. Dual Class Shares. Multiple voting shares reduces the accountability of management. Although the board only has an economic interest of 27%, the multiple voting shares allows the board to control 78% of the votes.
There is a lot to like about Danier especially given its recent earnings and its strong balance sheet. I am very surprised management hasn’t taken the company private. If the company can keep its earnings high, the stock looks to be a big winner but the historical profitability and the dual class shares are keeping me on the sidelines for now.
Hat tip to Irwin Michael and the ABC team.
Coat-tailing Part 2: Bennett Environmental
Disclaimer: The content contained in this website represents only the opinions of its author(s). We, or clients we advise, may hold long or short positions in securities mentioned in the website. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision.

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