LC

At the firm I used to work for, (NYC architecture/permit firm) we took deposits for permitting fees for large projects up front. We did a large Nomura project where permit fees were 75%+ of the total job. But large deals usually have special pricing. For us, deposits were usually ~15-25% of the total cost of the project. Also in general cash earned by us was not remitted until milestones were completed, although once the deposit cash was in our acct we could theoretically do anything with it (pay salaries, owner withdrawals, etc.). In terms of sniffing it out, I would look for large imbalances in the cash account over time. This is probably indicative of deposits. Also maybe how revenues are earned vs. the cash account, to see if they hit a certain milestone and then can recognize revenue, assuming they play fair. By Play fair I mean, we had huge receivable problems. Small firms like this are usually on the short end of the stick vs. large guys, and other small firms usually just don't have the cash flow. But we kept things on the books to avoid write-downs for years. Cash flow is definitely king in figuring out these things, I think.

RIP

Spinoff that division and let it go bankrupt?

For me, if I make adjustments for various accountings, then I would find growth in BV useful. But otherwise it can be influenced by all kinds of non-cash charges. For example under-depreciating assets, or under-reserving for insurance policies or loan defaults. These non-cash charges may not correct themselves for years, in the meantime you get inflated growth in BV. My philosophy is that assets value = capitalized earnings stream. So book value and earnings power are really one in the same, and growth in BV equals growth in earnings power (or reduction in capitalization rate)

Oh man...he seemed like a really, really nice man from what I read of him. RIP.

Just to add to the option discussion because on the surface it seems intriguing. This is going to be a really elementary post because I'm just walking myself through the thinking (sorry to dumb down the discussion here, folks!) The rationale is that, like OM says, there is a temporary spike in debt. This makes the equity more volatile. As the debt is reduced, the equity should be worth more both because of reduced interest and volatility. However the downside is that if Salix or another material business unit performs poorly they will have difficulty reducing the debt. So if we look at the January 2017 Leaps the pricing at various strikes are as such: Strike - Price - Breakeven $150 - $69 - $219 $180 - $52 - $222 $200 - $42 - $242 $220 - $33 - $253 $250 - $25 - $275 So just take the $200 strike option since it is closest to the current share price. To breakeven in 2 years you need the stock to rise 21% or about 10%/year. 2014 cash EPS was $8.34. Prior to the Salix announcement they were trading at $175 or 21x cash EPS. Let's say that multiple holds. At our $242 breakeven they need to generate $11.50 of cash EPS. They guide to $2.30 in cash EPS for Q12015, or $9.20 annualized (will most likely be higher, but let's take it conservatively). They also guide that Salix will increase cash EPS by 20% in 2016, which comes to $11.04 cash EPS in 2016. At our 21x multiple that is ~$230/share. Obviously tons and tons of assumptions in this but just to frame the issue. Perhaps if you want to use call options, you want to buy options with a breakeven under $230/share?

I trimmed this position by about 30% today...it has just grown too big a % of my invested portfolio (as I hold cash too). At some point I knew I would have to make a decision whether I wanted a large, leveraged company in an industry with historically poor economics as a core holding. Looking forward to feeling the pangs of opportunity cost!

Congrats Sanjeev. Best of luck with your new enterprise!

I'm really getting pulled into this one. Next I'll be believing in alien abductions. But boy, these guys are really weaving a tale if it's purely fiction. Are they that bored in Nebraska (probably). But it reads like a summer novel. Lance Munger is even involved! Judges being paid off! CPA licenses revoked! Someone needs to turn this story into a film.

Honestly...I was (and still am) curious purely for the entertainment value. It's good drama! Everyone else in society has Kim Kardashian and Kanye West, or sports drama (come on pitchers & catchers already!), and I want some investing drama. And I love a good conspiracy theory on top of it!

but at least the accounting is exciting, right? They're really canning that underfunded pension liability! I'll show myself out.

Here are my notes from Moffett's presentation: The entire presentation read like a Buffett letter. USB's strategy was to be a low cost bank. They are one of the lowest cost operators. Their strategy was to compete on price and they refused to compete on credit risk. They estimated their cost of capital at ~10% and their first priority was to earn that. Above that they would grow 50% organic and 50% by acquiring inefficient regional banks. The dividend yield provided a floor to their stock price and buybacks + expansion grew EPS. The market rewarded them by expanding their multiple. They used this to issue stock for acquisitions. In 05 or so, Moffett et al looked at the credit spreads on housing related products and just saw the spreads falling off a cliff from ~220bp to 20bp. They went to their shareholders and essentially said, "we're not writing these loans, instead we're going to return 80-85% of earnings to shareholders." Many shareholders/the board were in disbelief given other banks were planning on continuing to expand their loan book. They jacked up the dividend and buybacks and that's what sold the shareholders. I asked about Buffett and Moffett said he was OK with their strategy, unlike other shareholders. As an aside, Moffett said when Berkshire bought their stake, Buffett sent management a letter saying, "if you keep doing what you're doing, we'll be shareholders for life. We won't bother you or get in your way." Typical Buffett I suppose. Moffett stressed their low-cost approach to all aspects of their business. Again, very Buffett. Their incentive structure was such that managers had goals to hit re: loan growth, earnings, etc. but if they went a nickel over their expense budget, no bonuses would be awarded. They would put a young guy earning $100k into positions where senior managers were earning 3x that. HJ, Moffett essentially said that credit card lending was very profitable but exposed you to a lot of credit risk. Again, something they were/are? very leery of. Merchant processing is very different, high returns on capital but low risk. I wasn't able to ask about MA vs. V vs. AXP. The sense I got was that Buffett's philosophy was palpable throughout USB's operations and capital allocation approach. They took/take a very disciplined and cost-focused approach to the business.

Problem with Seneca is it might be too boring. My experience with these competitions is everyone likes a catalyst...

Color me jealous. I'll be doing much of the same here in NY (Plattekill) this weekend. It's not the west coast but I'm just getting back into skiing. Had great snow last week, some of the best conditions ever. Hopefully this weekend will be more of the same. Have fun!

Whoops that was my fault. Ben is right, there should be no favorable tax treatment. Harney is where Buffett places his confidential trades. But insurance companies do gain favorable tax treatment of dividends, and Buffett does do a variety of things to reduce his capital gains (the Graham Holdings swap for instance)

Randomep, if you google "harney investment trust" there are some articles written about it. Nate, Mephistopheles, if either of you are able to dig up details on the lawsuit Nate is referencing I would love to see it. I haven't been able to discover anything on Google and I don't have access to Pacer.

Haha, if you like cigar bars, my recommendations in NYC are Soho cigar bar (low key) or the Carnegie club.

I believe Americans can now import $100 of Cuban cigars into the US. The story I immediately thought of is a famous city (I forget the name) where people can buy 500g worth of caviar. The Russian mob employed people every day to purchase their share and cross into Russia for the mob to distribute.

One could look at Apple as a design company whose medium is consumer technology. In light of this quote, Apple should do well going forward. Their innovation is not "inventing" the device, but designing it.

Taking a seminar class in my last semester of my MBA, I believe Mr. Moffett is a contact of my professor. Thanks for the Q's I'll try to bring them up.

I will be going to a presentation with David Moffett tomorrow (US Bancorp CEO 1993-2007 and Freddie Mac CEO 2008-2009) if anyone has any questions feel free to post them.

How structured is his investment process? He has given talks about how only invests in potential doubles/triples/ etc. I am referring to his columbia presentation about 26%/year target. But it seems he has deviated from this. Does he look at this as a philosophical guideline or a practical guideline? How well does he get to know management? What do his conversations with management look like?

I exited my position yesterday...basically pure luck saved me 5pct. I read Glenn's post on DVA and just said I don't want to deal with companies doing potentially unethical stuff. It's hard enough to get a handle on normal business factors...throw in the unethical/illegal stuff and it's just too much brain damage.

Good observation. In the short run this could cause users to transition to alternatives (namely taxact). But in the long run this shows the level at which tax software can monetize its customer base.

They should charter a flight to the moon and paint a giant apple logo which everyone sees during a full moon.