Case Study: Li Lu’s Investment in Timberland

Involved in Li Lu’s guide, “Civilization, Modernization, Benefit Expenditure and China,” are two comprehensive scenario scientific studies of his early investments, which he shared throughout his 2006 lecture at Bruce Greenwald’s Benefit Investing Course at Columbia College. I have read through the notes posted by someone who attended the lecture, but discovered them as well short and missing in particulars. Li’s guide involved the edited variation of the whole discussion of these two scenario scientific studies. I personally assume these scenario scientific studies are very valuable.

Concept generation

Li loves studying Benefit Line and utilized to read through it website page by website page. He paid distinctive focus to the new reduced record. In the slide of 1998, he arrived across an intriguing strategy – Timberland Co., which is now section of VF Corp. (NYSE:VFC). The 1st thing he does when he comes across a possible expenditure is appear at the company’s valuation. If it’s not low-cost, then he passes on the stock.

Is it low-cost ample?

Timberland was trading at $28 to $30 for every share and the earnings for every share for 1998 was approximated to be about $5 for every share. It was trading at 5.six to six times earnings. The guide worth was about $23 for every share, so on a price-guide basis, the share was trading at 1.22 to 1.31 times guide worth.

What is in the guide?

Li then analyzed the composition of the guide worth. At the stop of the 3rd quarter that 12 months, Timberland’s guide worth was about $300 million, of which about $275 million was functioning asset. It had $a hundred million in money and $a hundred million in preset property. If you dig a minimal deeper, you will learn that most of the $a hundred million preset property was a commercial true estate building. And since the fourth quarter normally is the ideal quarter for merchants, he could confidently challenge that money stream would be solid. So by the stop of the fourth quarter, there would be a lot more money on the guide.

Is it a superior business?

The subsequent thing Li analyzed was whether Timberland acquired a superior return on invested money. Timberland’s functioning revenue margin was about 13%. At a earnings degree of $800 million to $850 million, it acquired about $a hundred million to 110 million in functioning revenue. Invested money was about $200 million, which involved about $a hundred million in preset property. We can then compute that the ROIC for Timberland was about 50%. It was a fairly superior business.

Why is it low-cost?

Li then asked the problem: “If it’s this kind of a superior business, why is it trading so cheaply?” It could be since of the Asian money crisis, which has impacted Timberland’s rivals this kind of as Nike (NYSE:NKE). He couldn’t obtain any provide-side reviews and thought that was intriguing since it was a decent-sized and dependable enterprise. Why were not there any provide-side analysts masking it? Nicely, throughout the past ten to 15 yrs, the enterprise had by no means elevated money. It really is also household-managed, with the founding household controlling forty% of shares but 98% of the voting energy. It also had a great deal of litigations. Why were being there so quite a few lawsuits? Li downloaded all the courtroom paperwork and read through them. What he discovered was most lawsuits were being about dissatisfied shareholders suing the administration crew for missing earnings steering. The lawsuits also annoyed the household, so they decided not to offer with Wall Street anymore.

Is administration genuine?

The subsequent problem gets to be whether the household is reliable. Li prompt to the college students that they must act like an investigational journalist. Most entrepreneurs leave a path for you to adhere to. You must invest some time and try out to get contacts to their mates and household. You must obtain out what their neighbors say about them and what they have done for the local community they reside in. Li did just that. He discovered out that Timberland’s founder was a basic and decent guy, and a superior college graduate. He went to church consistently. He had a son who went to business college and was about the similar age as Li. The son was slated to do well his father as CEO of the enterprise. Li then discovered out that the son was a board member of a non-earnings corporation identified as Metropolis 12 months, which was established by Li’s friend. So Li joined the board of Metropolis 12 months and grew to become a superior friend of the son. By way of afterwards interactions with the father and the son, Li concluded that they are genuine and reliable persons.

Is the manufacturer nevertheless a superior manufacturer?

The subsequent puzzle to fix was why Timberland’s gross margin stored expanding. Li frequented quite a few of the enterprise domestic retail outlets. What he discovered out was that in just Timberland’s core purchaser group, the manufacturer had become a fad. Everyone preferred a pair of Timberland footwear and Timberland denims. The outlets supervisors usually complained about not acquiring ample stock to provide.

Worldwide product sales

Li was also anxious about the impact of worldwide product sales, in particular in Asia. He uncovered that worldwide product sales accounted for 27% of Timberland’s whole earnings and Asian product sales were being only ten% of worldwide earnings. So even if Timberland’s product sales in Asia dropped to zero, it wouldn’t have had much impact.

Putting it all together

It took Li a couple weeks to conduct all the investigation, throughout which time he was wholeheartedly targeted. He concluded that an expenditure in Timberland at that price nearly had no danger since it was trading at considerably less than six times earnings and earnings were being very likely to increase 30% a 12 months. So he guess large on Timberland and the stock went up seven-hundred% in the subsequent two yrs.

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About the author:

Grahamites

A world worth trader consistently searching for to get worldly knowledge. My expenditure philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

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