JAH - Jarden

[Liberty]

I wanted to ask Gio for his thesis on JAH, and figured I might as well create a thread for the company. It's one that has been on my list of companies to check out for a while, but I haven't gotten a chance to get to it yet. This brought it back to my attention.

 

There's a writeup on the VIC about it:

 

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/108870

 

The company is related to PAH:

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/pah-platform-specialty-products/

 

http://brooklyninvestor.blogspot.ca/2013/11/platform-specialty-products.html

[fareastwarriors]

Quarterly Preview: Fundamentals Remain Healthy Despite 1Q Headwinds

 

 

Oppenheimer & Co. Inc.

OppenheimerCoInc_QuarterlyPreviewFundamentalsRemainHealthyDespite1QHeadwinds_Apr_16_2014.pdf

[giofranchi]

I think the March 2014 presentation in attachment speaks for itself.

A forward P/E of 14 is a good entry point for something that might still grow very rapidly. And, as always, I will seize any opportunity to average down and increase my investment in JAH.

Mr. Franklin is a great entrepreneur and is still very young. He is exactly the sort of manager I like to partner with.

Not much more to add. :)

 

Gio

Investor-Presentation-March-2014.pdf

[giofranchi]

I would also add that I like consumer products: they are generally a very predictable business, which provides Mr. Franklin with very predictable cash flow. :)

 

Gio

 

[colinwalt]

Also, a comprehensive overview from Horizon / Murray Stahl (from 2008)

 

http://www.pcsresearchservices.com/research/download/contrarian-and-deep-value-investing/the-contrarian-research-report/2008-june-jah-contrarian-comprehensive

[giofranchi]

Also, a comprehensive overview from Horizon / Murray Stahl (from 2008)

 

http://www.pcsresearchservices.com/research/download/contrarian-and-deep-value-investing/the-contrarian-research-report/2008-june-jah-contrarian-comprehensive

 

Thank you very much for posting this one! :)

 

Gio

[Liberty]

Thanks fareastwarriors, Gio, and colinwalt!

 

I've started looking a bit deeper last night. I was already a bit familiar with it as it was on my list and always liked what I saw, but I haven't yet been able to determine if what made it successful in the past decade is still intact and if Mr. Franklin is now focusing more on PAH (these 20% preferreds are probably a good incentive...) or if JAH is still a primary vehicle for him. He does own about 5 million shares of JAH out of 133m...

[giofranchi]

I've started looking a bit deeper last night. I was already a bit familiar with it as it was on my list and always liked what I saw, but I haven't yet been able to determine if what made it successful in the past decade is still intact and if Mr. Franklin is now focusing more on PAH (these 20% preferreds are probably a good incentive...) or if JAH is still a primary vehicle for him. He does own about 5 million shares of JAH out of 133m...

 

Given my most recent track record… just don’t ask me!! ;D

 

What I believe is JAH is still small enough, and Mr. Franklin is still young enough, to go on growing for the next two decades.

 

If, on the other hand, entrepreneurs who have built something extraordinary during the last 10 years, all of a sudden lose interest and start dumping it... well, then I really don’t know what to think nor say. ::)

 

Gio

 

[Liberty]

I've started looking a bit deeper last night. I was already a bit familiar with it as it was on my list and always liked what I saw, but I haven't yet been able to determine if what made it successful in the past decade is still intact and if Mr. Franklin is now focusing more on PAH (these 20% preferreds are probably a good incentive...) or if JAH is still a primary vehicle for him. He does own about 5 million shares of JAH out of 133m...

 

Given my most recent track record… just don’t ask me!! ;D

 

What I believe is JAH is still small enough, and Mr. Franklin is still young enough, to go on growing for the next two decades.

 

If, on the other hand, entrepreneurs who have built something extraordinary during the last 10 years, all of a sudden lose interest and start dumping it... well, then I really don’t know what to think nor say. ::)

 

Gio

 

Don't feel too bad, Gio. One way to look at the situation is that the only reason why you are so shocked by Mr. Brindle's voluntary departure is because that kind of thing is so rare. If it was frequent, it wouldn't stand out and be surprising.

 

But then, now that I've said that, we'll probably learn that Brian Dalton is retiring to a coconut plantation in the Bahamas or something like that  :D

[giofranchi]

Don't feel too bad, Gio. One way to look at the situation is that the only reason why you are so shocked by Mr. Brindle's voluntary departure is because that kind of thing is so rare. If it was frequent, it wouldn't stand out and be surprising.

 

But then, now that I've said that, we'll probably learn that Brian Dalton is retiring to a coconut plantation in the Bahamas or something like that  :D

 

;D ;D ;D

 

Gio

[racemize]

It was only half-way through the Stahl report that I figured out I'd been confusing Jarden and Jardine for quite a few months now.

 

Sometimes it hurts to be me!

[Liberty]

I missed it when I first looked, but there's also a second writeup on the VIC that recommends shorting JAH:

 

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/64598

 

Here's another negative piece on JAH:

 

http://seekingalpha.com/article/703071-this-companys-management-and-accounting-practises-obscure-business-evaluation

 

Gio and others, had you seen this? What do you think?

[Phaceliacapital]

Some comments on the SA article:

 

Let’s take a closer look at his reasoning:

 

1. Hiding True FCFs

Due to its acquisitive nature, Jarden’s income statement has a lot of one offs/noncash adjustments which it is obliged to do due to accounting regulation. The statement resembles a little bit the income statements we find at Valeant and other “serial acquirers”. We agree that some of these adjustments distort the “true free cash flow” but we do not agree that the company is purposely overstating FCF. Through performing thorough due diligence on both a business and financials basis, we should arrive at a more clear amount of cash generation.

We believe the author’s reasoning is that FCF should be corrected for acquisitions because Jarden is not able to realize a lot of organic growth on existing products and therefore is obliged to “acquire” growth externally, making the acquisitions a permanent necessity to grow the business.

 

We agree that acquisitions are a use of cash, but we do not agree that these should indefinitely impact free cash flow. In contrary to the author, we view these acquisitions as investments in growth capEx , and not expenses as maintenance capEx. The main difference between the two is that maintenance capEx will recur every year (and thus imply lower FCF) and growth capEx will occur only once (per company taken over). 

 

Of course, if Jarden can’t really grow its existing portfolio it can fool investors only by continuing to acquire other companies to mask declining organic growth. If this is the case, growth capEx needs to happen every year and should be incorporated in long term FCF forecasts.

Unfortunately, Jarden does not disclose same store sales figures so it’s hard to figure out the organic growth. However, a few qualitative tests show that acquired products portfolios are still selling, and are often selling at a #1 or #2 position in their segment.

 

The Amazon Test

 

• Foodsaver was taken over in 2002, and both its V2244 Vacuum Sealing System, Wide-Mouth Jar sealer and Quick Marinator are #1 Best Sellers in their categories. Other products are both popular and highly rated.

• Lehigh, taken over in 2003, #1 best seller with IKEA Pot Lid Organizer. Above average ratings for other products.

• Holmes, taken over in 2005, #1 best seller WITH Humidifier filter and the humidifiers themselves are also very well received.

• Rawlings, taken over in 2007, #1 best seller with Rawlings Bucket and official league baseballs.

 

Can we find #1 best sellers for every category? Probably not, but we also didn’t try. The above serves as an example that Jarden’s existing portfolios do not seem to decline as much as to warrant including growth capex into the true FCF calculation.

 

In addition, looking at Jarden’s different segments we find that the (accounting) Operating Income per USD 1 of assets has increased throughout the years.

 

OPERATING INCOME/ASSETS 2013 8YR AVG HIGH LOW

Branded Consumables 10% 8% 9% 4%

Consumer Solutions 15% 13% 11% 6%

Outdoor Solutions 10% 7% 10% 2%

Process Solutions 28% 15% 28% 10%

 

On a Goodwill basis, the results are similar, with operating income per dollar of goodwill increasing over the years, which kind of illustrates that Jarden can put the goodwill it bought “to work”.

The above indicates that Jarden is not operating “cigar butt” product portfolios, and we therefore believe that a true FCF is calculated without subtracting acquistions (growth capex).

 

2. Managing reporting of acquisitions

 

Firstly, in their 2013 Annual Report, the company clearly stated the contingent consideration related to the Yankee Candle acquisition. Secondly, while the author argues that a “tanking economy” caused Jarden to change its acquisition accounting, we think it has more to do with a change in regulation at the end of 2007.

 

These changes required the company to create a liability equal to the fair value of the contingent consideration on acquisition date, rather than expense it on the settlement date. We do not think there are accounting tricks here. It remains correct that cash outflow for future earn-outs will happen in the CFF statement (for the amount of fair value that was recognized), amounts larger than this fair value will flow through the CFO part.

 

3. Excessive Goodwill Impairments

 

The author provides an impressive table that shows that 25% of the company’s market cap (when it was worth USD 3.3 bn) has been written down in one-time charges. We agree that there have been goodwill impairments, most notably the USD 283 mn charge in 2008, but disagree with the author’s total amount of “value lost”.

 

First row: As stated above, Jarden is a “serial acquirer” and therefore has several acquisition/restructuring costs. Now, if a company has a clear outlined strategy of combining several product portfolios on its platform, we believe it is more correct to view these costs as investments, rather than “cash down the drain”. In 2012 the author is also double counting as he is using trailing twelve month numbers (full disclosure, the 2012 number came it at USD 27.1 mn).

 

Second row:  There appears to be a confusion between which expenses are cash, and which are noncash. The USD 119 mn, is a purchase accounting adjustment where GAAP requires Jarden to write-up the inventory received to a certain “fair value”. A simplified example is the following:

 

Jarden buys company X, and pays an average of USD 5 per unit of inventory. Due to GAAP a fair value has to be determined to “write up” the inventory. If company X could sell these products in the market for USD 20, the fair value in Jarden’s books will be much higher than USD 5 per unit. Let’s say the fair value is assumed to be USD 15.

 

When Jarden now sells these products the accounting GAAP margin (USD 20 – USD 15 = USD 5) will be much lower than should Company X have sold them (USD 20 – USD 5 = USD 15). It is evident that the adjustment made (USD 119 mn) is completely noncash and therefore not relevant to the business owner.

Cashwise, Jarden has bought inventory at 5 and sold it at 20. This is exactly why we have to adjust for inventory step ups and increase the GAAP margin. As an extra, the fair value write up is typically larger if the acquired company’s gross margin is larger.

 

The other costs mentioned are in fact cash expenses, but depending on your point of view one can treat these as investments during the typical course of business, with the same reasoning as the restructuring costs.

 

Third row: These are goodwill impairments, which should not really materialize if management knows what it is buying. USD 283 mn of writedowns appears to be a one/off event, in more recent years the annual goodwill impairment is around 2%. In addition, there is still some double counting in 2012, for which the real figure is 0.

 

Fourth row: These two numbers are costs made as Jarden paid back some of its debt early. We believe it is incorrect to say “these are costs” without properly accounting for the lower interest expenses these costs should delivers in the years going forward.

 

So, all in all, it looks like the “value destruction” at Jarden is much lower than one would expect by simply looking at the provided table (and far from the 25% figure).

 

4. Misleading Metrics

 

Most of the author’s statements here have already been touched upon in previous points, it comes down to whether you agree whether NON GAAP adjusted earnings are a better reflection of management earnings and whether management should be awarded based on these earnings.  That being said, we do not agree on simply adding back stock compensation expense as “noncash”.

 

With regards to the “extra” bonus in 2008 despite not reaching the required EPS. These bonuses, “additional discretionary bonus” , were included in the management’s employment agreements, and have been paid in some form or another over the course of the past years. These bonuses were typically related to “Exceptional performance”, which is rather subjective and which makes it hard to gauge whether these were really uncalled for. Nevertheless, it does not seem that they use this “bonus system” to offset salary losses when management does not reach the required EPS. In addition, any concern a business owner would have with this arrangement is no longer relevant, as the latest proxy statement (2014) states that:

 

“The terms of the new employment agreements entered into in July 2012 with Messrs. Franklin, Ashken and Lillie no longer provide for consideration of discretionary bonuses. No such discretionary bonuses were paid subsequent to the date of their respective new employment agreements in July 2012”

 

5. Other Risks

 

Our first rule is to never lose money. When we read about potential accounting “peculiarities” we do our best to objectively accept/reject the validity of these peculiarities. In the above we discussed accounting characteristics that some might deem as risky, and why they seem less risky for us. That being said, the article does provide several worrying points:

 

- Management was sued for providing too rosy prospects when taking over the Holmes Group, and while they always denied the charges, a settlement was reached for USD 8 mn. Up till now this has been a one-time occurrence.

- Management did in fact tender their own shares during the company’s latest buyback programme, which provides some mixed signals to us as business owners. From a business owner perspective, the company bought back shares at USD 36, which looks accretive as this is significantly lower than the current share price.

- Regarding related party transactions, we believe this is mainly related to Richard Heckmann and his private jet while working as CEO with K2. Mr. Heckmann is no longer in this function (since 2007).

- Management pledging their shares. This one is difficult to assess. On the one hand, for managers with a lot of their net worth tied into the company, pledging allows them to monetize their assets while maintaining their exposure to the company. This is a good thing. On the other hand, if the stock price materially declines, margin calls can exert a downward cycle on the share price. This a bad thing.

 

[Phaceliacapital]

My current two cents, I haven't read the VIC article but it that the SA article repeats a lot of their facts.

[giofranchi]

I missed it when I first looked, but there's also a second writeup on the VIC that recommends shorting JAH:

 

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/64598

 

Here's another negative piece on JAH:

 

http://seekingalpha.com/article/703071-this-companys-management-and-accounting-practises-obscure-business-evaluation

 

Gio and others, had you seen this? What do you think?

 

Liberty,

sorry I hadn’t read your post until now…

The short thesis for JAH is almost exactly the short thesis for VRX: if you can answer short sellers’ arguments against VRX, you should also be able to answer their arguments against JAH.

In fact, I think there are many similarities between VRX and JAH. :)

 

Gio

 

[Liberty]

Liberty,

sorry I hadn’t read your post until now…

The short thesis for JAH is almost exactly the short thesis for VRX: if you can answer short sellers’ arguments against VRX, you should also be able to answer their arguments against JAH.

In fact, I think there are many similarities between VRX and JAH. :)

 

Gio

 

The difference that bother me are how management apparently sold shares right after they were saying on conference calls that the shares were undervalued. That's very strange behavior to me.

[Phaceliacapital]

VIC case:

 

- Return on Capital is low: Okay, but they use GAAP earnings.

- Highly leveraged: Not necessarily a bad thing if you have management that used low i-rates to their advantage.

- I made the goodwill & intangibles calculations, and their annual goodwill impairment. These numbers are currently not a cause of concern for me.

- These earnouts I don't get, it states investing but earnouts really need to go through financing in the CF statement. Anything above the reserved account goes through CFO.

- Capex/Depr, I have numbers in 2013 of 1.27 and 2012 of 1.01 with a LT average of 0.72. Equal results per division.

- Jarden has lower quality earnings than peers, yeah okay but they also operate a different business model? It's like comparing Valeant to JNJ, no?

- Yes, integration problems are very apparent when you do a lot of acquisitions. But how difficult is it to integrate other consumer products? You keep the factory, reduce the admin/hr etc services that you can share, and you put the brand under your portfolio when talking to retailers..

- Regarding Quickie, these are assumptions and can be correct or wrong. Shouldn't auditors see this misclassification?

- Do we have a breakout of Aero products? A first glance on Amazon would not indicate a disastrous product?

- Regards the tender offer, I am a little bit divided by this, but then again how many companies do adjust their EPS targets when they do stock buybacks (not saying that it shouldn't be done.. but that it's just not common practice, which concerns us as business owners)

 

- Finally, it appears management likes to create businesses outside of Jarden and then monetize those assets through selling them to Jarden. For example, in January 2009, Jarden bought ZuitSports for $2.2mn in cash, plus consideration for a $14.4mn in earnouts. Martin Franklin, Ian Ashken, and James Lillie, all happened to be stakeholders in ZuitsSports.

 

This is true, and concerns us.

 

How can I find more recent data on the corporate jet story?

 

 

 

 

-

-

 

[Phaceliacapital]

Liberty, I think they sold 500k, but are entitled to receive almost 5mn if EPS targets are reached.

[Liberty]

- I made the goodwill & intangibles calculations, and their annual goodwill impairment. These numbers are currently not a cause of concern for me.

 

Can you elaborate on this. Why did they have so many impairments?

 

Thanks for the feedback, I haven't had time to dig into this one much yet, been busy on a couple of other ideas lately :)

[Phaceliacapital]

In 2008 they had 18% of goodwill impairment, and following years it was 2% 1% 3% 0% and 0%.

 

So they had one large write down, the 18% in 2008:

 

"In the fourth quarter of 2008, the Company's annual impairment test resulted in a non-cash charge of $283 million to reflect impairment of goodwill and intangible assets. Of this charge, $172 million related to the impairment of goodwill in the Company's Branded Consumables and Outdoor Solutions segments. In the Branded Consumables segment the impairment charge was recorded within the Firelog, Lehigh and United States Playing Cards reporting units. In the Outdoor Solutions segment the impairment charge was recorded within the Apparel and Footwear reporting unit. The impairment for these reporting units was due to a decrease in the fair value of forecasted cash flows, reflecting the continued deterioration of macroeconomic conditions, which accelerated and became apparent during the fourth quarter of 2008 (hereafter referred to as "continued deterioration of macroeconomic conditions")."

 

That can happen right? The more recent numbers are more in line with peers.

 

And regarding Lehigh: http://www.amazon.com/s/ref=nb_sb_ss_i_0_6?url=search-alias%3Daps&field-keywords=lehigh&sprefix=lehigh%2Caps%2C353&rh=i%3Aaps%2Ck%3Alehigh Doesn't seem that bad right?

 

And Firelog: http://www.amazon.com/s/ref=nb_sb_noss?url=search-alias%3Dgarden&field-keywords=jarden%20firelog

 

 

[Liberty]

Makes a lot of sense, thanks!

[Phaceliacapital]

And Gio,

 

I think it's a little bit fast to equate the short seller arguments.

 

At VRX there is no sign of management using company perks, pledging shares, selling shares during tenders etc etc. For Jarden this worries me.

 

I think people should invest in Jarden if they are confident with the management. 1) Is the corporate jet going to Aspen necessary for winter product related sales?, 2) Did they really think the Holmes acquisition would have better numbers? 3) Was Zuitsports a great addition to Jarden's product portfolio? 4) Why oh why did they tender shares in the dutch auction offer? That's something I really do not understand..

[giofranchi]

And Gio,

 

I think it's a little bit fast to equate the short seller arguments.

 

At VRX there is no sign of management using company perks, pledging shares, selling shares during tenders etc etc. For Jarden this worries me.

 

I think people should invest in Jarden if they are confident with the management. 1) Is the corporate jet going to Aspen necessary for winter product related sales?, 2) Did they really think the Holmes acquisition would have better numbers? 3) Was Zuitsports a great addition to Jarden's product portfolio? 4) Why oh why did they tender shares in the dutch auction offer? That's something I really do not understand..

 

I do not even know what the dutch auction offer actually is… ::)

 

I don’t understand what you are worried about: that JAH might be a fraud?

 

Listen, management here has a predictable business, which is not capital intensive: that is what I look for in a business. Because it puts free cash in management’s hands on a regular basis and safely enough.

 

If then management is good at deploying that free cash, management and shareholders will become rich.

 

On the other hand, a fraud in the end makes everyone poor.

 

Therefore, why should management be cheating? Only if the business is not a reliable free cash generator and/or if management’s capital allocating skills are poor.

 

That’s for each of us to judge.

 

Me, I like consumer products, and I like Mr. Franklin. :)

 

Gio

 

[Liberty]

Gio, I don't think either of us is worried about an Enron. More about a David Sokol (ie. very good manager who nonetheless had character flaws that made him do questionable things, and once he does that, how do you know where he'll stop? It's not like Sokol needed the money, but some people just can't help themselves...).

 

I don't think it hurts to check... As they say: Trust, but verify :)

 

https://en.wikipedia.org/wiki/Dutch_auction

 

They used this when they repurchased shares in 2012. It's a good mechanism and I love big tenders for shares when they are undervalued. I just don't understand why management sold that many shares right after saying they thought they were very undervalued.

[giofranchi]

Gio, I don't think either of us is worried about an Enron. More about a David Sokol (ie. very good manager who nonetheless had character flaws that made him do questionable things, and once he does that, how do you know where he'll stop? It's not like Sokol needed the money, but some people just can't help themselves...).

 

I don't think it hurts to check... As they say: Trust, but verify :)

 

https://en.wikipedia.org/wiki/Dutch_auction

 

They used this when they repurchased shares in 2012. It's a good mechanism and I love big tenders for shares. I just don't understand why management sold that many shares right after saying they thought they were very undervalued.

 

I agree… at least in theory… in practice I am very bad at verifying this kind of things… and don’t know many people who are good at it… of course, I will now read Wikipedia (thank you!)… I just don’t think it will make much better at it…

 

That’s why I invest in 10 companies: if I get burnt with just two or three of them, I might do very fine nonetheless! I think this is the best way of verifying I have come up with until now... ;)

 

Gio