Valuation

Strategy

What determines a company’s worth?

Our goal is to arrive at a reasonable estimate of a company's value, independent of its current stock price. Whether we are interested in a company's equity or debt, we arrive at these estimates primarily by using three techniques.

1. Net Asset Value

We acquired the common stock of a business development company possessing a mixture of private and publicly traded portfolio holdings (akin to a mini-Berkshire Hathaway) at a meaningful discount to the company's readily ascertainable and growing net asset value. Our valuation resulted from conservatively summing the company's collection of wholly-owned subsidiaries and its stakes in several publicly traded companies. This holding company possessed a portfolio of mature cash-generative businesses (lubricants, chemicals, and greases) and newer investments (exclusive licensee of an automated cleaning and recovery system for oil storage tanks) in emerging enterprises. Our purchase price represented a greater than 30% discount to our sum of these diverse and dynamic business interests held by a solidly financed, exceptionally well-managed company.

2. Private Market Value

We purchased the debt of a REIT owning a collection of high grade Manhattan office buildings with a yield to maturity of 15%. These bonds were purchased at a significant discount to par value. At our purchase price, we were effectively buying this portfolio of premium office space at roughly $200 per square foot while replacement value was closer to $700 per square foot. Moreover, we had comfort stemming from the fact that this company's lenders were extending credit at $200 per square foot assuming a loan to value ratio of 50% suggesting that the company's bankers were effectively placing a value of $400 per square foot on its assets.

3. Going-Concern Value

We purchased a software company with highly-recurring maintenance revenue that generated a free cash flow yield of roughly 12%. Maintenance contract renewals, in fact, represented roughly 50% of the company's total revenue. This company had no debt and possessed two specialty businesses that addressed faster growing markets. In effect, the investment combined the best of a secure value proposition given its persistent cash flows, with a solid growth kicker as a result of savvy capital allocation decisions. Moreover, the company paid no rent, resulting in higher available cash flow, because it had built its own headquarters years earlier.

“In our approach to opportunistic investing, we emphasize understandable businesses with safe capital structures (i.e., not overly leveraged), managed by honest and competent people, and purchased at quantifiable discounts to our calculation of intrinsic value." - Roumell Quarterly Report