[TSO]

@ pilyong_husband:

Just checked both companies on google.

Netsuite is out; has been incurring operating losses since 2008. Debt is also high, mostly current liabilities, and retained earnings have been shot dead. Worse, it has little liquidity whatsoever.

Salesforce has posted an operating loss for most recent fy. However it has been profitable in th prior so you may want to check if this is one-time or not. Assets are slightly more towards debt, but still decent enough to be a going-concern. Warning: 30% of assets are in fixed assets (both ppe & intangibles, incl goodwill), so you'll have to analyze capital investments well, and determine how well the mgt is paying for their acquisitions.

Salesforce looks something worth studying, but as far as directly investing goes, I cannot blindly recommend anything. I'm not jim cramer.

[pilyong_husband]

Thanks TSO

[BatmanBeyond]

Hi TSO!

This is my first post on this thread though I have been reading this for a few months already. I am new to stock investing. In fact, my COL's application was just approved yesterday and I am to fund my account today so most probably, I can start getting my feet wet tomorrow or the next day.

I am eying COL's recommendations as of now. I have chosen BDO, EW, EEI, FLI and SMPH. That seems to many but I will take this opportunity to request an analyses of them from you.

This is a very helpful thread especially to newbies like me. Though we know that you have other things to do, you still give time to our requests. More power to you TSO. Thank you very much!

[prnd32]

Sir, how about TDY?  I would like to know whether this would be a good long-term investment.  I have already purchased few shares. Is it worth accumulating?

[TSO]

I'll run both that and LOTO through my screener (just a quick spreadsheet) when I have time. I want to hold both but I'm unsure of their prices, hehe.

[bajoyjoy]

hi prnd32! I'm not sure if you've browsed through the entire thread yet, but the quoted post below was originally posted in page 2 of this thread by TSO himself.... maybe it could help with your preliminaries (on filtering stocks for possible long-term investment). just remember it was scanned last year pa.  any additional/update for this post would be great, considering the change in circumstances that have occurred over the past few weeks . but still is a very good read imho (and concise too!), update lang siguro on the figures, and most importantly for part III-IV... 

Since GoodSteward has rescinded his desire to pursue Tanduay's further analysis, I shall post the screening results here.


DISCLAIMER: This is only a screen-level analysis! The requester has stopped the analysis at this point and according to my policy I will release the findings for public view. Please remember that my study of the company is not as in-depth as Air T.

Tanduay Holdings, Inc.
I. DEMOGRAPHICS
Country: Philippines
Ticker Symbol: TDY
Industry: Distilled Spirits
Profile:

Tanduay Holdings, Inc. ("TDY") is a holding company at least seventy years old (but with a 155Y corporate history), engaged in the production of distilled spirits (rum, wine, gin, & brandy) and their distribution to over 170,000 retail and wholesale outlets in the Philippine archipelago through direct sales as well as FOUR exclusive distributors. These distributors operate 21 sales offices and 52 warehouses all over the country. To minimize overhead (maintenance and labor) and tap into a scale economy, TDY generally establishes contracts with 3rd parties for transportation services.

TDY enjoys a significant competitive advantage with its Rum, securing virtually all but 5% of all Rum sales in the industry (which accounts for 28% of the distilled spirits industry) Despite TDY's 99% focus on the domestic, low-income market, TDY's sales is second to Puerto Rico's Bacardi. (79% of TDY's sales is from its 5Y Fine Dark Rhum)

TDY's geographic dominance comes from VisMin. GSMI is the undisputed market leader of the entire distilled spirits industry (producing gin and brandy), controlling a rather large 46%. Emeperador Distillers, Inc. is the lesser company, controlling only an estimated 17%. TDY, in contrast, holds 33%.

II. RISK ASSESSMENT
Summary
TDY's risk is assessed to be moderate. While the company is stable, possessing multiple competitive advantages, and is actually well-positioned for growth, the fact remains these do not justify the company's shaky credit, mediocre efficiency, and variable profitability.

Justifications
A. Creditworthiness
Creditworthiness is rather shaky. I don't find it as disheartening as RLC's situation was, but nonetheless, there are several points of concern. Assets have consistently been debt-funded, and solvency tests produce subpar results.

Liquidity is actually rather decent, conforming to the usual rule-of-thumb standards, but earnings coverage simply doesn't fly. Tanduay churns out a loooot of money for debt. Neither EBITDA nor OCF amount to more than 2x required payments! These are current values. Average figures aren't exactly that reliable due to the debt payments on '06 and earlier and the effects of working capital changes and unusual/unpredictable items. In fact, even if you eliminate all factors causing the variation, the best you get is a median 2.1. That's not exactly a large margin especially when they were all below the average from '06 to '09.

Another warning sign here is the level of owner earnings and free cash flows earned by the company. Historically speaking, the company barely has anything left after paying off its debts, and it STILL has to pay for dividends -- which either forces the company to rack up more debt OR turn to other sources of cash flows (which is obviously unsustainable and, if frequent, definitely unpredictable).


B. Efficiency
We can at least say efficiency is generally increasing, considering that revenues being generated by TDY is going up, whereas total assets remains stable, lingering around P12B without much variation.

Inventory management has been maintained over the medium term, even though the company had a problem on '06 when they closed the year with a rather large volume of unsold goods. Anyway, that they turned it around in two years speaks plenty for operational efficiency.

Take note however that I consider the company's level of efficiency, at least from the turnovers, to be inadequate for the type of business it is in, as you will see in the next section.

C. Profitability
This is where I am divided. Operating margins are at stable 11% of total revenues, but as you move down, nonoperating items increase the variation all the way down to the bottom line. The lowest net margin TDY ever had was about 4% on '08. The highest? 11% on '05. Current margins are still lower than the median, so we can at least expect some improvement when we get the FY10 17A. (Of course, the median shows just how powerful nonoperating items, interest, and taxes are, eliminating 30% of operating income, which is harsh considering 80% of revenues dissolved after being swallowed by product costs.)

The very nature of TDY's business requires the company to have turnovers above 1.0. Unfortunately, this requirement isn't met, and ROA is bogged down, pulled up to an ROE of 10% by leverage alone.

Dividend payout rates are completely unreliable, of course, but if it helps, the company has distributed no less than 325.75m since '05. At today's price of P3.4/share, that's a 3% dividend yield every year. Not bad, I think.

D. Inherent Stability
In spite of troubling credit, good (but probably mediocre) efficiency, and low bottom-line profitability, Tanduay is actually a stable company. It's a bit sick, but it's definitely going to live.

TDY possesses multiple competitive advantages that help it dominate the playing field along with Ginebra San Miguel and Emperador:

~~ Treasure vault of experience ~~
The holding company's initial incorporation date stamps its age at a minimum of 70 years (the company claims in its annual report it is 5 years older than the Ateneo de Manila University campus).

TDY is thus a wellspring of knowledge when it comes to its products and how it is so tailored to domestic wants. That it still puts money on R&D implies a very large barrier to entry for anyone pursuing a venture into the distilled spirits industry, specifically rum.

~~ Massive scale economy ~~
Tanduay distributes their products through four exclusive entities, in easy reach of the public considering their alcohol is sold in over 170,000 retail and wholesale outlets. This doesn't count direct sales. The four distributors own 21 offices and 52 warehouses nationwide.

The company taps into the scale economy even more by setting up contracts for transportation services with third parties, minimizing shipping and delivery expenses.

~~ Geographic and Industry Monopoly ~~
The distilled spirits industry is controlled by only THREE major entities: Tanduay (33%), Emperador (17%), and Ginebra San Miguel (46%). HOWEVER, Tanduay controls 95% of the rum market, kicking out any hopes for either two competitors to make a killing from this niche segment.

~~ Self-sustenance ~~
TDY owns two alcohol production plants as well as a significant portion of a sugar producer. On top of that, it has a network of suppliers just in case supply is unable to meet demand.

~~ Goodness-of-fit with demand preferences ~~
Tanduay basically targets the low-income bracket, which represents 80% of the total population (and 66% of domestic liquor consumption). Filipinos are eminent for their alcoholism, to the point we were seen as the number one drinkers in Asia 15 years ago, families using 1% of their income to spend on alcohol.

A research paper even goes far as to say:

This seemingly outdated image has not even fazed in the slightest in current times. In fact, it's been reinforced. The average family in the lower 30% income group (i.e. TDY's targets) spent 1.2% of their income on alcohol on '06, and 1.1% on '09.

Of course, I think you and I will agree this is nothing more but confirmation of common knowledge: we Filipinos are alcoholics as a people. XD

If this does not even convince you, then I should bring up some *actual* sales data. I was actually able to derive unit sales of TDY in terms of liters of alcohol sold from '04 to '09. Demand has grown from 75M liters of alcohol to 123M liters in only five years, representing a 10% geometric growth rate. This translates to an average P87 of sales per liter: affordable, if you ask me. 

E. Future Prospects
As far as I'm concerned, unit sales will either be maintained at its current level or keep increasing domestically. The Philippine population is increasing at a rate of at least 2% per year (7Y CAGR from '00 ~ '07: 2.04%; 105Y CAGR from 1903 ~ 2007: 2.36%): roughly 312,000 families per year given today's average number of people per household. I hold the NSO as my source.

To support this, the two alcohol production companies TDY owns have a combined capacity of 102.6M L/year. The company is actually investing on a capacity expansion that will increase the cap to 138.6M L/year.

If we let ourselves speculate, we could see that TDY may have a future in expanding to Malaysia. It already has its foot in the door, as 1% of its sales output is being sent there through a distributor.

III. VALUATION ANALYSIS
Initial Impressions
Essentially, we have on our sights a company mired in stability and, well, pretty good growth prospects. At the right price, Tanduay is certain to be a great buy, questionable credit, mediocre efficiency, and low profitability be damned!

The question is, is its price of P3.4 the right one?

One look at Tanduay's P/E ratio and you know it's going to be expensive! Current market cap versus last year's net earnings come very close to 20. Use adjusted earnings instead (representing an average that the company is sure to meet AND exceed) will bring this baby to 12.3x P/E --- rather expensive, and close to the threshold point.

Closer Look
The 2009 ending price of P2.7/sh are tells us the market is expecting this company to improve its revenues by 10% a year (if inflation rate takes over as terminal growth rate) or 15% a year (if the terminal growth is 2%). That it is currently at P3.4 means the market is looking for the large, 15% growth rate.

Is this realistic? It's probably optimistic. Despite the 10% growth in unit sales, TDY's revenues rose at 8.6% a year from '04 to '09, and, being the paranoid person that I am, think it is an *optimistic* habit to assume the company will match or even surpass this.

I assessed the value of Tanduay's sustainable earnings power. Precluding the impact of excess cash and long-term debt, we come up with a value of roughly P1.97 per share and a P/E ratio of 11.5. Including those two factors (to account for debt and financial assets), however, the value drops to P0.64, making the stock even more expensive.

I think the fact it is priced at 1.08 of 2009's sales revenues is another evidence to this.

IV. PERSONAL CHOICE OF ACTION
My personal choice of action would be to monitor the stock until it drops to 2.2 or lower. That value represents the highest level of P/E Graham is willing to accept. I refuse to pay a significant premium for growth that may not realize or may not be enough to satiate the arbitrary market consensus.

In fact, when I *do* buy the stock, it's probably going to be a small position of about 5%. I would then watch the news and keep an eye out for the 17A, and see if the income falls or not. Market letdowns are sure to pull the price down to a level closer to EPV.

[TSO]

Bajoyjoy, what exactly have I missed with Tanduay?

I visited the thread, and all I'm seeing are dilution threats. That only hits my valuation, but not my actual analysis of its economic moat. Is this all?

[bajoyjoy]

^yes TSO you're correct, mostly just on the valuation or part 3 of the report and consequently part 4 too (personal choice of action). i also mentioned updating the figures used -- if fresher data are now available. I took note that under part IV you suggested to "monitor until the price drops to 2.2 or lower" which i believe is no longer the case, considering the impending consolidation of all lucio tan interests under TDY as one conglomerate. this is one of the big changes in circumstances i thought would have a huge impact on TDY's current valuation and pricing. another one is the 3B worth of shares to be sold to comply with the minimum 10% float requirement which you've already mentioned, would cause the dilution of shares. hence, the need to update the above feb 24, 2011 report. it was just a suggestion though

[TSO]

considering the impending consolidation of all lucio tan interests under TDY as one conglomerate.

Do you realize this changes everything?

What are the biggest Lucio Tan interests already public on the market?

Anyone who's analyzing TDY at this point NEEDS to consider the individual risk-growth outlook for each company, and compare-contrast each of their prices/fair value against that of TDY's as it might be better to just go for one of the subsidiaries...

This is starting to look like Hillenbrand again. *facefault*

[alacrity]

Hi TSO,

I'd just like to ask, how can I evaluate SPE's (Special Purpose Entities) ? Thanks in advance for any help.

[TSO]

^ You're analyzing the SPE itself? Or is it an SPE of a public company you're analyzing? I need to know the context.

[alacrity]

I was just randomly scanning financial reports, and I saw that there was an SPE on the annual report.

On context, it's an SPE of a public company, I'm just wondering what should an SPE do, ideally?

Because iirc, Enron had SPE's, not that I'm saying the company is doing something shady but it just kinda set of some alarms since I don't know what an SPE does. Thanks in advance.

[TSO]

In that case, you're depending on the generosity of the public company. The SPE is basically a vehicle that owns some assets that belonged to the company, and is used for purposes like securitizing them and isolating them from what is legally owned by said company, virtually protecting them from the company's legal obligations. It should be something like that--the reason is often disclosed in the annual report.

However, what you should do to evaluate it is to read the disclosure in the footnotes and PROCESS the paragraphs of boring and legal-like text for the sole purpose of determining the possibility the company has, is, or can manipulate its earnings and/or balance sheet in the future.

[alacrity]

I see, thank you TSO.

[BatmanBeyond]

Hi TSO! How are you? I really appreciate all your efforts in this thread. It helps us a lot, especially the novice investors including me. I always read all your posts on your thread. I just wonder, it seems more than a month already that this has been silent and so I break it!

Would care to share what keeps you busy? TIA. Expecting to see more of your stock screens/analysis in the coming months.