Valuation Thought Experiment

[JAllen]

There's a company out there, and before we post the name we were curious as to what people think the company is worth after listing a few facts about the company. If you're already aware of this company, please refrain from posting the name for a while.  Also, if you're not aware of the company, it would be great if you could think through this experiment before figuring out which company it is.

 

Thanks for voting.

 

• 45 years old
  
• 60 stores
  
• Sales in line with economic changes
  
• Negative operating income two of last three years
  
• Consistent negative net income after interest
  
• Adjusted EBITDA margin ranging from 8-12% over last five years
  
• Products available many other places, though it specializes in one category and does a good job at what it does
  

How much is this company worth?

[LC]

I voted 5-7x Ebitda and here is my rationale:

 

I pretty much ignored the accounting numbers you provided and focused on this:

 

-45 years old

-60 stores

-Sales in line with economic changes

-Products available many other places, though it specializes in one category and does a good job at what it does

 

45 years old and 60 stores? OK,maybe they operate in a certain niche, which jives with the fact that they specialize in one category. But if that is the case, you would think sales would not be in line with economic changes. But they are...which to me is a red flag. So without knowing exactly what that niche is, I would say it's a somewhat boring retailer. And being a somewhat boring retailer is not the best business in the world...hence 5-7 ebitda multiple.

 

Now I am preparing myself to be embarrassed :)

[Otsog]

At first I was thinking either small retailer with all 60 stores in a smallish geographic region or a boutique services firm. 

 

Lowest EBITDA is 8% but they've had negative operating income which means depreciation and amortization is a minimum 0.08 on a dollar of sales and capitalized assets last ~12.5 years (assuming no non-operating losses).  This doesn't work with small geographic retailer or boutique services as the depreciation and amortization should be way lower for either of those.  Maybe a specialized product manufacturer that produces goods to spec?  Can't outsource production due to quality/timing concerns with the specialization of the product required. 

 

Complete shot in the dark, maybe an orthotics or prosthetics manufacturer?

 

Regardless, if required capital investments is going to continually crush the operating income to negative or near 0 from an 8-12% EBITDA I would value the company at 0. 

 

Now I am also preparing to be embarrassed  :-[

[SharperDingaan]

'Cause we are evil, value investing, bastards we want < 3x;

& will be swapping distressed paper at face value + interest, for equity!

 

Hopefully we bought the paper for <85-90, & have enough big friends to force the dilution.

We get a meaningful position in a coy that is now profitable because of lower interest (& lower rates because of the BS fix)

We can get an option market going, & can sell some OTM calls

.... & get our total outlay down to around 50% of MV, or less  :D

 

Definitely not in the case study.

 

SD 

[JAllen]

This particular company trades at 25X+ EV/EBITDA (using $90M more than they generated during the past five years), with 17% of the EV as debt so if you think it's worth 10X EV/EBITDA there's some nice downside to the stock.  The valuation is totally incredible to me.  The EV/FCF is 45X+!

 

 

I noticed this valuation insanity a few weeks ago, and let the idea gestate for a while to hopefully realize what I was missing but nothing's come up.

 

 

The company is The Container Store; it just went public November 6.

 

 

Prospectus: http://www.sec.gov/Archives/edgar/data/1411688/000104746913010187/a2217221z424b3.htm#di19401_capitalization

 

 

Catalyst will be continued stock sales by insiders, especially the PE owners.  They were happy to sell a huge portion of their holdings for $18.  I predict they'll be thrilled to sell all at $40 in ~140 days when their lockup expires.  Also, this insane valuation should come to light over the next few months as more people notice it.  Short interest is almost nil offering quite a bit of downside once short sellers pick up on it as well.  The IPO proceeds went straight to pay off the convertible; I don't believe the company received any of the proceeds.

 

 

Note: it's not a horrible company as far as the operations go; but it's not great either and it sure is expensive!!

 

 

There will be close to 49M shares outstanding when including the options (which the prospectus didn't do).  EV is about $2370 using 48M shares out, $41 stock price and $400M for debt.

 

 

I'd love to hear others' thoughts about the company.  Please let us know why you think it should trade at these levels if you do. 

 

And we totally agree that a retailer that is this old doesn't have much expansion opportunity - this is probably about as big as it gets.

[LC]

The only way I see Mr. Market's valuation as being in the realm of accuracy is if there is growth ahead. Where is the runway? Are people going to stop buying from other home furnishing stores? Are Amazon, Target and Walmart suddenly going out of business? It's not like their offering is so niche that you can't find it elsewhere. I don't quite get it.

[Otsog]

There are massive Goodwill and Trade Name impairments in recent years (~240 mill since YE 09).  Normalized EBITDA is far different from EBITDA which I think is the cause of the wacky EBITDA valuations.  I didn't look into the cause of the impairments, but that is probably something to check out.

[krazeenyc]

I won't comment on their valuation. But the container store is AWESOME. It is the perfect store for any major city where space is at a premium. The reason it has such a valuation is b/c it has so few stores -- I think growth potential is enormous. Whether they make it happen -- that's another story. I am not long the stock. The Container Store can become a "story" stock -- I would say be careful when it comes to shorting "story" stocks.

[Phaceliacapital]

FYI:

 

https://docs.google.com/file/d/0B4xbUnte_0Q2WGo1Tk1BOWhhQXM/edit

 

(not mine)

[krazeenyc]

FYI:

 

https://docs.google.com/file/d/0B4xbUnte_0Q2WGo1Tk1BOWhhQXM/edit

 

(not mine)

 

Yes it's a VIC idea.  I never know what the growth prospects are , but I believe the container store offers a differentiated product (my wife and friends' wives love it there).  They buy like $200 - $400 of boxes at a time there -- and once you start accumulating a certain kind of box (they're stackable/etc) you typically stay with all the same kind if you like it. I wonder what their prospects are of expanding into cities like London, Tokyo, etc.

[JAllen]

There are massive Goodwill and Trade Name impairments in recent years (~240 mill since YE 09).  Normalized EBITDA is far different from EBITDA which I think is the cause of the wacky EBITDA valuations.  I didn't look into the cause of the impairments, but that is probably something to check out.

 

 

We used their adjusted EBITDA numbers for our comments above.  Also, FCF was leniently calculated with EBITDA - Capex (or depreciation).  Using OCF - capex/depreciation we would arrive at ~$15M for FCF resulting in an EV/FCF multiple over 150X.

[JAllen]

I won't comment on their valuation. But the container store is AWESOME. It is the perfect store for any major city where space is at a premium. The reason it has such a valuation is b/c it has so few stores -- I think growth potential is enormous. Whether they make it happen -- that's another story. I am not long the stock. The Container Store can become a "story" stock -- I would say be careful when it comes to shorting "story" stocks.

 

 

Why didn't they grow the store base the last 6+ years when they had access to the PE owners capital?  Surely they wanted to grow the company right?

[krazeenyc]

I won't comment on their valuation. But the container store is AWESOME. It is the perfect store for any major city where space is at a premium. The reason it has such a valuation is b/c it has so few stores -- I think growth potential is enormous. Whether they make it happen -- that's another story. I am not long the stock. The Container Store can become a "story" stock -- I would say be careful when it comes to shorting "story" stocks.

 

 

Why didn't they grow the store base the last 6+ years when they had access to the PE owners capital?  Surely they wanted to grow the company right?

 

They had 39 stores in 2007 when they sold to Leonard Green. They now have 61 stores. They've grown their store base by more than 50% in the past 6 years.

[Otsog]

There are massive Goodwill and Trade Name impairments in recent years (~240 mill since YE 09).  Normalized EBITDA is far different from EBITDA which I think is the cause of the wacky EBITDA valuations.  I didn't look into the cause of the impairments, but that is probably something to check out.

 

 

We used their adjusted EBITDA numbers for our comments above.  Also, FCF was leniently calculated with EBITDA - Capex (or depreciation).  Using OCF - capex/depreciation we would arrive at ~$15M for FCF resulting in an EV/FCF multiple over 150X.

 

D'oh! Sorry I missed that  :-[

[JAllen]

I won't comment on their valuation. But the container store is AWESOME. It is the perfect store for any major city where space is at a premium. The reason it has such a valuation is b/c it has so few stores -- I think growth potential is enormous. Whether they make it happen -- that's another story. I am not long the stock. The Container Store can become a "story" stock -- I would say be careful when it comes to shorting "story" stocks.

 

 

Why didn't they grow the store base the last 6+ years when they had access to the PE owners capital?  Surely they wanted to grow the company right?

 

They had 39 stores in 2007 when they sold to Leonard Green. They now have 61 stores. They've grown their store base by more than 50% in the past 6 years.

 

 

Right, I wonder why they didn't grow even more since then and why they only have 39 stores after 29 years.  Home Depot was founded around the same time and has 1500 stores.