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 it? Nicely, all through the previous 10 to fifteen decades, the firm experienced by no means lifted capital. It can be also household-managed, with the founding household managing forty% of shares but ninety eight% of the voting electrical power. It also experienced a lot of litigations. Why had been there so a lot of lawsuits? Li downloaded all the courtroom paperwork and read them. What he identified was most lawsuits had been about dissatisfied shareholders suing the administration staff for missing earnings steering. The lawsuits also annoyed the household, so they decided not to deal with Wall Road any longer.

Is administration truthful?

The following issue turns into no matter if the household is reliable. Li recommended to the students that they should really act like an investigational journalist. Most business owners depart a path for you to stick to. You should really spend some time and check out to get contacts to their good friends and household. You should really uncover out what their neighbors say about them and what they have done for the community they live in. Li did just that. He identified out that Timberland’s founder was a easy and first rate man, and a higher faculty graduate. He went to church regularly. He experienced a son who went to business faculty and was about the identical age as Li. The son was slated to triumph his father as CEO of the firm. Li then identified out that the son was a board member of a non-income firm termed Metropolis 12 months, which was started by Li’s good friend. So Li joined the board of Metropolis 12 months and grew to become a good good friend of the son. Through later interactions with the father and the son, Li concluded that they are truthful and reliable persons.

Is the manufacturer still a good manufacturer?

The following puzzle to clear up was why Timberland’s gross margin stored increasing. Li visited a lot of of the firm domestic retail outlets. What he identified out was that inside of Timberland’s main purchaser group, the manufacturer experienced come to be a trend. Everybody preferred a pair of Timberland footwear and Timberland denims. The outlets managers often complained about not getting sufficient inventory to sell.

Intercontinental revenue

Li was also anxious about the impact of global revenue, particularly in Asia. He discovered that global revenue accounted for 27% of Timberland’s full revenue and Asian revenue had been only 10% of global revenue. So even if Timberland’s revenue in Asia dropped to zero, it wouldn’t have experienced significantly impact.

Placing it all jointly

It took Li a handful of weeks to conduct all the exploration, all through which time he was wholeheartedly concentrated. He concluded that an financial investment in Timberland at that price just about experienced no hazard because it was investing at less than 6 situations earnings and earnings had been pretty probable to increase thirty% a calendar year. So he guess massive on Timberland and the inventory went up seven-hundred% in the following two decades.

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About the creator:


A international worth investor consistently searching for to obtain worldly wisdom. My financial investment philosophy has been encouraged by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.