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April 2010



Dolby Laboratories - A Static Investment?

April 25, 2010 – Comments (6) | RELATED TICKERS: DLB , DIVX.DL , MSFT

We noticed an article the other day at The Motley Fool site titled I Wouldn't Sell This Stock if I Were You. Among other companies, the article mentioned Dolby Laboratories, Inc. (NYSE: DLB).

The reason the article caught our attention was because it confused us.

In one part of the article the best time to sell was identified, as never, a philosophy we happen to think, as the article notes, works out extremely well for the very long-term investor.

No, the part that confused us was the part near the end when the article mentioned that there may still be lots of room for the stock to run.

While we happen to agree that the stock may indeed have lots of room to run, we also believe the stock is now mature enough, with enough shares outstanding, that some serious consideration should be given to an entry price, something the article fails to mention.

Having read the article several times, we were left wondering if now was as good a time as any to take a position?

Financial information related to Dolby Laboratories, Inc. contained in this report, is based on the company's most recent SEC Form 10-K filing for fiscal year ending September 25, 2009, as filed with the Securities and Exchange Commission on November 18, 2009.

What They Do
The company develops and delivers products and technologies that are used throughout the entertainment industry to produce a more immersive and enjoyable experience. Over the years, the company has introduced innovations that have significantly improved audio entertainment, such as noise reduction for the recording and cinema industries and surround sound for cinema and home entertainment.
Today the company's technologies are standard in a wide range of entertainment platforms and are used in virtually all standard definition Digital Versatile Disc (DVD) player and personal computer DVD playback software, increasingly in digital televisions, set top boxes, portable media devices, and a wide array of consumer electronic products such as gaming systems and audio/video receivers. Movie theatres and broadcasters around the world also use the company's products.

Management believes the company has the opportunity to expand the adoption of its formats for both content and devices because it is expected that the transition from analog to digital broadcasting, the upgrade to high definition (HD) content, and the advancement of online and mobile content delivery are all factors that could potentially increase the company's markets.

The company generates revenue by licensing its technologies to manufacturers of consumer electronics products and media software vendors and by selling its professional products and related services to entertainment content creators, producers and distributors, with licensees in approximately 25 countries distributing the company's products, technologies, and services in 85 countries.


The company competes with DivX, Inc. (Nasdaq: DIVX), DTS, Inc. (Nasdaq: DTSI), Microsoft Corporation (Nasdaq: MSFT), RealNetworks, Inc. (Nasdaq: RNWK), and SRS Labs, Inc. (Nasdaq: SRSL).

Short-Term Investment
If the old stock market adage the trend is your friend is really true, then short-term investors should pay attention and run from this stock like it contained the plague.

According to the trend line there have been very few times to take a short-term position in this stock over the past nine months, since the last oversold bottom the stock made with an MACD below zero, was back in September 2009.

The stock closed recently at $61.53, with first resistance at $61.71, a 1% increase from a recent close, and first support at $56.35, an 8% decline from a recent close.

Coupling the resistance and support spreads with the trend line not being anywhere close to an oversold bottom, we think a short-term trade at this time would be a very large mistake.

Long-Term (5 Year Hold) Investment
We reviewed the company's latest annual financial information and simply couldn't find many negatives aside from current pricing levels.

Ending FY09 with Current Ratio of 5.75, a Quick Ratio of 4.84, a Cash Ratio of 4.70, and a Return On Invested Capital of almost 40%, we can certainly understand the average investor becoming very excited about the company.

About the only real negative we found in the financials was that the company only turns its inventory over slightly more than twice a year, but considering that for FY09 the company generated Free Cash Flow of $2.38 per share, had $6.37 per share of cash on hand, and had Total Debt of $0.06 per share, we hardly think slow inventory turnover is a big deal.

Common Real Estate Holdings
The other negative we found, admittedly not a big deal to many, was the amount real estate the company leases from Ray Dolby, the company founder and board chairman, and/or the Ray Dolby Family Trust.

According to the company's latest Definitive Proxy Statement SEC Form DEF 14-A as filed with the Securities and Exchange Commission on February 9, 2010, the company paid rent to Mr. Dolby of $1.3 million for a single California property.

In addition, the company and entities controlled by Ray Dolby own three (3) properties in California and two (2) properties in England, with the Ray Dolby entities having majority control.

The Ray Dolby controlled entities rent their portion of the properties to the company per standard rental agreements.

For FY09, the total amount of rent paid to the Ray Dolby Trust, the Dolby Family Trust, and the Ray and Dagmar Dolby Trust for these five (5) properties was $5.4 million, in addition to the $1.3 million paid for the single California property.

The company also allows Mr. Dolby and members of his family, to use its office facilities for their personal purposes on a limited basis. In addition, members of Mr. Dolby’s family are allowed to use the company's conference and screening rooms for personal purposes up to ten times per year, the use of which the company estimated was less than $15,000 during FY09.

Also in FY09, the company paid Mr. Dolby $1,200 per month for the use by company employees, of a condominium Mr. Dolby owns in Alpine Meadows, California.

Based on our preliminary assessment of the company, we think a Reasonable Value Estimate for the stock is in the $59-$63 range and that a reasonable entry target is in the $26-$29 range, an entry point that is not supported by our Graham number of $21, our Tangible Book Value of $9, and our Net Current Asset Value of $6.

Final Thoughts
The company has a history of being inventive and creative, of seeing what isn't there, and then creating a need for what it has seen. Certainly the ability to hear the noise behind the music has been a positive for investors.

But our concern is for investors adding to positions or taking their first positions based on comments such as those we read several days ago.

We learned a long time ago that price determines return, and while the argument can certainly be made that investors waiting for a favorable entry price are likely to miss owning the stock altogether, we believe such instances over a lifetime of investing are rare.

Accordingly, we think investors should take all the time they need to understand where the noise behind the music actually goes, before considering how to filter it out.


To download the Wax Ink Dolby Laboratories Raw Value Worksheet, please click here.  [more]



L.B. Foster Company - Reparing America's Holes

April 18, 2010 – Comments (2) | RELATED TICKERS: FSTR , BRK-A , PRPX.DL

In our opinion, had Mr. Obama spent the past year repairing America's holes by getting Americans back to work instead of using all of his political capital to get the health care bill passed, we think the American economy would be much further along the road to recovery than it currently may be.

One of the areas where we have been extremely disappointed is the lack of commitment on the part of the Obama Administration towards America's infrastructure, which was originally how a large portion of the economic stimulus monies were going to be spent.

All of this came to our attention several days ago in an article we noticed that mentioned that America's railroads were handling more traffic.

Certainly such news may be great for Warren Buffett, given the recent purchase of Burlington Northern Santa Fe railroad by Berkshire Hathaway, Inc. (NYSE: BRK.A), but what about the rest of us, the folks that don't have $118,400 to plunk down for a single share of stock?

While we certainly salute Mr. Buffett on his recent railroad purchase, at Wax Ink we simply aren't interested in owning a railroad. We are however interested in owning a company that makes rail products, not to mention piling products, bridge products, and structural steel products, all of which we consider infrastructure products, all of which are manufactured by the L. B. Foster Company (Nasdaq: FSTR).

Financial information related to The L.B. Foster Company contained in this report, is based on the company's most recent SEC Form 10-K filing for fiscal year ending December 31, 2009, as filed with the Securities and Exchange Commission on March 12, 2010.

What They Do
The company's business is the manufacture, fabrication, and distribution of products and services for the rail, construction, energy, and utility markets in the United States. It operates in three segments: Rail Products, Construction Products, and Tubular Products.

For the rail markets, the company provides new and used rail, trackwork, and accessories to railroads, mines and industry. The company also designs and produces concrete railroad ties, insulated rail joints, power rail, track fasteners, coverboards and special accessories for mass transit and other rail systems worldwide.

For the construction industry, the company sells steel sheet piling, H-bearing piling, pipe piling and provides rental sheet piling for foundation requirements. In addition, the company supplies precast concrete buildings, fabricated structural steel, bridge decking, bridge railing, expansion joints and other products for highway construction and repair.

For the tubular markets, the company supplies pipe coatings for natural gas pipelines and utilities and produces threaded pipe products for industrial water well and irrigation markets as well as selling micropiles for construction foundation repair and slope stabilization.

Short-Term Investment
We noticed there was a substantial increase in trading volume on Friday, which we assume is because the Antitrust Division of the Justice Department is set to sign-off on the company's proposed merger with Portec Rail Products, Inc. (Nasdaq: PRPX).

Certainly for the short-term trader this may be good news. We however, think that taking a short-term position in the stock at this time, would be like lifting the toilet seat having already made water.

The stock closed recently at $32.13 with resistance at $35.09 and support at $29.89. With an upside potential from its recent close of 9% and a downside potential from its recent close of 7%, we simply can find no reason to initiate a short-term trade at this time.

Long-Term (5 Year Hold) Investment
Considering the age of America's infrastructure, we think the company is in not only in an ideal business, but has investment quality financial metrics.

The company ended FY09 with a Current Ratio of 3.64, Quick Ratio of 2.33, a Cash Ratio of 1.56, and a Debt to EBITDA Ratio of 0.74, all of which far exceed our investment quality minimum threshold.

There is room for improvement in the company's financial statements however. For instance the company ended FY09 with Return on Invested Capital at 16.31%, which is a reasonable number given the business the company is in, although to us, we think an investment quality number for this metric should be above 20%.

We would also like to see an increase in the collection time for the company's Account Receivables. While we are pleased that Accounts Receivable are outstanding an average of 59 days and Accounts Payable are outstanding an average of 72 days, we think that Accounts Receivable at 16% of Sales is a bit on the high side, and should it remain at this level, will eventually start to eat into the company's available cash flow.

Last but not least, we were impressed with the company;s FY09 Free Cash Flow of $2.50. Given the current economic climate, we think that a Free Cash Flow to Operating Cash Flow Ratio of 0.51 shows that management's collective head is in the game.

Based on our preliminary assessment of the company, we think a Reasonable Value Estimate for the stock is in the $61-$66 range and that a reasonable entry target in the $29-$33 range, as supported by our Graham number calculation of $31, our Tangible Book Value calculation of $23, and our Net Current Asset Value calculation of $18.

Final Thoughts
Had the Obama Administration invested in American workers that sweat for a living instead of Wall Street workers that sweat American workers out of a living, we believe company's like L. B. Foster would already be hard at work repairing the holes in America's infrastructure.

This of course begs the question just how many holes actually need repairing in America?

By our count, the correct number is 535, that is unless it's that special four-year Tuesday, in which case the number soars to 536.


To download the Wax Ink L.B. Foster Company Raw Value Worksheet, please click here.



L.S. Starrett and Company - Looking for Depth

April 11, 2010 – Comments (0) | RELATED TICKERS: SCX

Apparently, while we were all sleeping, somebody, somewhere, decided that the recession was over. We hate to sleep through such major events but nobody told us what time this was going to happen and so, we failed to set our collective alarm clocks.

Evidence that the recession has ended can be found on the Time business blog, which is how we came to realize the end had happened while we slept. Never mind that the unemployment rate in February was 10.4% and that debt to GDP stood at 89.2.5616%. Heck the recession is over. And that's that.

We bring this up because it occurs to us that what is needed in these situations is a way to obtain a fair and accurate measurement, one that is traceable to the National Institute of Standards or the International Organization for Standardization. It seems to us that if such a measurement means were in place, everyone would know if a recession was over on the very day it was actually over.

We did check, and the closest we came to finding a company in that business was The L.S. Starrett Company (NYSE: SCX).

Financial information related to The L.S. Starrett Company contained in this report, is based on the company's most recent SEC Form 10-K filing for fiscal year ending June 27, 2009, as filed with the Securities and Exchange Commission on September 10, 2009.

What They Do
The company was founded in 1880 by L.S. Starrett and incorporated in 1929, and manufactures over 5,000 different products for industrial, professional and consumer markets.

The company has had subsidiaries in Brazil since 1956, Scotland since 1958 and China since 1997, offering products to the market through multiple channels of distribution worldwide.

The company’s products include precision tools, electronic gages, gage blocks, optical and vision measuring equipment, custom engineered granite solutions, tape measures, levels, chalk products, squares, band saw blades, hole saws, hacksaw blades, jig saw blades, reciprocating saw blades, M1® lubricant and precision ground flat stock.

Short-Term Investment
The stock currently has an upside of 11% based on recent close of $10.55 and resistance at $11.75, and a 1% downside based on the same recent close and support at $10.44. The stock price has fallen from an overbought condition the first part of March and is currently heading back to oversold.

It is currently in a down trend attempting to find support.

For short-term investors, the largest single problem with this stock is that there are no real analysts that follow it, which limits momentum plays for short-term investors. The company is expected to announce earnings of $0.09 for its FY10 third quarter the first week of May.

Assuming the company is on track to match earnings, the best short-term play in our opinion is to start a position as the stock becomes oversold, probably sometime late next week, and hang on until earnings are announced.

After that, there really isn't any short-term reason to continue holding the stock.

Long-Term (5 Year Hold) Investment
We reviewed the company's latest annual financials which are for FY09, and for the first time in a very long time, actually found a stock with a net current asset value that was positive.

Intrigued, we looked a little further and found the company had free cash flow that was close to what we think is investment quality, and a current ration and quick ratio that we did consider investment quality.

The fault we find, as we seem to find so often is with management allowing the company to finance the company's supplies with what amount to interest free loans.

We say that because the company's receivables are outstanding an average of 49 days, while it's payables are outstanding an average of 28 days. To us, there is simply no reason for this. Either management needs to do a better job collecting its receivables, or it needs to take a bit longer paying its suppliers.

Final Thoughts
We believe a risk adjusted entry point for the stock is in the $9-$12 range, an entry point that the company's tangible book value of $21 and Graham number of $19, support, since we believe a reasonable value estimate for the stock based on a five year hold is in the $28-$32 range.

Considering what the company does for a living, we wondered why the OMB and the NBER just didn't hire the company to measure different things, like when the end of the recession had occurred?

It was then we that we realized the company doesn't do depth measurement, leaving only the government to really know how far they’ve shoved it in.


To download the Wax Ink L.S. Starrett Company Raw Value Worksheet, please click here.  [more]



Family Dollar Stores - The Need for Clean Pants

April 02, 2010 – Comments (0) | RELATED TICKERS: FDO.DL , NDN.DL2 , DLTR

We read an article last week on the CNN Money site last week that reinforced why we think the markets are creating another stock bubble.

Then yesterday we noticed an article at the New York Times site that talked about the excessive risks that have been taken, and are still being taken, by Wall Street. "The fact is that Wall Street has always been - and remains - very much a Boys Club.", the article said.

Which brings us to Family Dollar Stores, Inc. (NYSE: FDO). The stock price has increased 25% since the beginning of the year, and was up 11% in March alone.

At first we were confused about the reason for the run up in the stock price. Certainly economic conditions are playing a role, but then we found that Credit Suisse, Goldman Sachs, and Merrill Lynch, all have the stock listed as either Buy or Market Outperform, making us wonder just who is going to benefit when the stock price finally rolls over.

Financial information related to Family Dollar Stores, Inc., contained in this report, is based on the company's most recent SEC Form 10-K filing for fiscal year ending August 29, 2009, as filed with the Securities and Exchange Commission on October 27, 2009.

What They Do
Family Dollar Stores operates a chain of more than 6,600 general merchandise retail discount stores in 44 states, providing primarily low to middle income consumers with a selection of competitively-priced merchandise in convenient neighborhood stores.

The company's merchandise includes consumables, home products, apparel and accessories, and seasonal and electronics, sold at prices that generally range from less than $1 to $10.

The first Family Dollar store was opened in Charlotte, North Carolina, in 1959, and in subsequent years, additional stores were opened with separate corporations established to operate these stores.

The company was incorporated in Delaware in 1969, with all of the then existing corporate entities, becoming wholly-owned subsidiaries of Family Dollar Stores, Inc.

Short-Term Investment
Let's see if we can put this in perspective for the average short-term investor that does not have 897 supercomputers executing trades. The stock closed recently at $37.00 which is almost 2% above its 13 day moving average, and almost 9% above its 50 day moving average.

The stock also have resistance at $37.20, its 52 week high and a 1% increase from a recent close, and finds first support at its 50 day moving average of $33.51, a 9% decline from a recent close.

Should the stock price break through first support, the next support it will find is the 200 day moving average of $30.24, an 18% decline from a recent close.

Long-Term (5 Year Hold) Investment
We are going to say this as simply as we can. Sell this stock. The company spends more on dividends and stock repurchases than on debt reduction, almost 2.5:1 more. The company has a current ratio of 1.5, an acid test ratio of 0.43, and a cash ratio of 0.42, none of which are investment quality in our opinion.

We would have been amazed had it been any other way, but the company's receivables are outstanding on average, less than one day, while it's payables are outstanding an average of 41 days. While we are all in favor of free money, we wonder how this screw might turn in the coming months, should the economy continue to deteriorate?

The company does have very good free cash flow at $2.75 per share, and a very healthy return on invested capital at 33%, both very positive signs. Which makes us wonder just why management isn't spending some of the company's cash to reduce debt, instead of paying dividends and buying back company stock.

Final Thoughts
We think a risk adjusted entry target for the stock is $22-$25, a price range that our very preliminary research seems to support.

Coupling that with the ratings from the Boys Club elite and the tremendous increase in the stock price since the first of the year, we have to wonder if folks investing in this stock at current levels, won't once again be left with skid marks on their underwear.


To download the Wax Ink Family Dollar Stores Raw Value Worksheet, please click here.  [more]

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