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Please find flaws with this idea


dpetrescu
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I just found another lifetime punchcard company: SSD Simpson. Could everyone punch holes in this investment idea?

 

Why this is a special company:

- great balance sheet. No debt. Some liabilities in amounts due

- they are a near monopoly in the residential light commercial market

- The "Simpson" name is like Google. ask any contractor or structural engineer friend, what products they use for metal connectors. They will respond "Huh? Ohh you mean Simpson clips".

- Their near monopoly is self-reinforcing due to scale. A construction project will use hundreds or over a thousand clips and fasteners and a great amount of types. Engineers and contractors want a single source with the brand name to buy or specify in bulk. they won't buy post base clips from competitor because it is cheaper.

- large percentage of shares still owned by Simpson , the original founder from 1950s

- income and revenues fairly steady in direction

 

Cons

- they are expanding into non-consumer markets, not sure if they can keep their edge

- intangible assets grew in recent years from some acquisitions

- stock is not bargain cheap

- performance is tied to residential construction

 

I think Berkshire would love to own this company for ever.

 

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Good find about thier competitor USP connectors, USP is the #2 in the industry and only real competitor. prior to 2011 USP was part of ROCK. ROCK's gross margin 2005-2011 was very consistently in 20% range while Simpson's was consistently 40% range (currently 45%).  USP is making some headway, they're now exclusive at Lowe's while Simpson is Home Depot.

 

Simpson's ROIC is 18-20%, it was consistently 25-50% from 1995 to 2006 before the recession. ROIC has always been above 14% since 1995 with the exception of 2009 at the recession bottom when it was about 7%. Return on equity and assets is similar because of practically no leverage, it's about 7% now, has been steadily growing since recession. 1995 to 2006 ROA was consistently 10-20%. They are making steady recovery. They are running at 60% utilization so they have potential for operating leverage as long as housing starts are steady and increasing. Increased construction in Multifamily housing or seismic and hurricane zones will have the most impact on earnings.

 

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True their stock has decreased in last 10 years. But, during this time, their book value doubled and tangible book value is up by 62%, even with the housing near depression in the middle of that period.

 

I've read some quarterly and yearly report and listened to a couple conference calls and feel better about their expansion outside of the US and into truss products. When pressured to expand and make more acquisitions the CEO stated that their main focus is on differentiated products and not products/markets that are price sensitive. Compare this low competition market with the carpeting or roofing which is much more competitive.

 

They are a very focused niche company. I would love to own it at a good price. I also understand all of their products very well, have specified their connectors. I'm not sure about valuation, I need to do some more research and number crunching. I purchased a small amount because of the big fall in stock price while I learn more.

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I like the concept, but I don't like the price much, as others have mentioned. I am trying to figure out why SG&A is almost $50m higher today than it was in the prior peak, but sales are $100m lower. Someone mentioned some acquisitions, but they don't seem to have added much value.

 

As I see it: Peak revenue should be ~$850 or another $150m in sales. Historically, the company has gotten 20% incremental margins over time, but I will give them 28% due to what MIGHT be a structurally higher gross margin (I suspect it might just be mix though). So, my math gets me to $0.55 in incremental earnings, for peak earnings around $1.60. Because the company is cyclical, I would give it lower multiple of 15x (should probably go lower for PEAK, but giving them benefit for being preferred manufacturer in consolidated niche industry). We are maybe 2 years out from peak (residential cycles normally around 6-8 years), so they may generate $150m in cash on top of the $250m on the balance sheet ($7 per share). That gives me a price target of ~$31, and that is prior to discounting based on my return expectations.  In short, I'm not a buyer today, unless you can tell me why peak revenues should be substantially higher, or that I am way off on my incremental.

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Thanks Sternalot. This really helps. I'll look through their SEC filings and get some more information when I'm back from my vacation in Nappa.

 

I just like the company because of their market dominance. I would like to keep my investing simple and only invest in near monopolies or companies that have a sustainable competitive advantage. So far I own Verisign and Verison, both good examples. Its tough finding others. I don't think I will hold GM for decades.

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