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