Case Study: Li Lu’s Investment in Timberland

Incorporated in Li Lu’s guide, “Civilization, Modernization, Value Expenditure and China,” are two in depth situation experiments of his early investments, which he shared all through his 2006 lecture at Bruce Greenwald’s Value Investing Training course at Columbia University. I have read the notes posted by someone who attended the lecture, but identified them way too short and lacking in specifics. Li’s guide integrated the edited model of the comprehensive discussion of these two situation experiments. I individually assume these situation experiments are pretty handy.

Strategy generation

Li enjoys looking through Value Line and employed to read it web page by web page. He paid out distinctive awareness to the new lower checklist. In the drop of 1998, he came throughout an fascinating concept – Timberland Co., which is now component of VF Corp. (NYSE:VFC). The 1st detail he does when he arrives throughout a potential financial investment is glance at the company’s valuation. If it really is not affordable, then he passes on the inventory.

Is it affordable sufficient?

Timberland was investing at $28 to $thirty per share and the earnings per share for 1998 was approximated to be about $five per share. It was investing at five.6 to 6 situations earnings. The guide worth was about $23 per share, so on a price-guide basis, the share was investing at 1.22 to 1.31 situations guide worth.

What is actually in the guide?

Li then analyzed the composition of the guide worth. At the stop of the third quarter that calendar year, Timberland’s guide worth was about $300 million, of which about $275 million was running asset. It experienced $a hundred million in funds and $a hundred million in set property. If you dig a small deeper, you are going to find out that most of the $a hundred million set property was a business actual estate creating. And because the fourth quarter commonly is the most effective quarter for shops, he could confidently venture that funds movement would be strong. So by the stop of the fourth quarter, there would be more funds on the guide.

Is it a good business?

The following detail Li analyzed was no matter if Timberland earned a higher return on invested capital. Timberland’s running revenue margin was about thirteen%. At a revenue level of $800 million to $850 million, it earned about $a hundred million to 110 million in running revenue. Invested capital was about $200 million, which integrated about $a hundred million in set property. We can then determine that the ROIC for Timberland was about 50%. It was a fairly good business.

Why is it affordable?

Li then asked the issue: “If it really is such a good business, why is it investing so cheaply?” It could be because of the Asian economic disaster, which has impacted Timberland’s competitors such as Nike (NYSE:NKE). He could not uncover any sell-side studies and considered that was fascinating because it was a first rate-sized and reputable firm. Why weren’t there any sell-side analysts masking