Thursday, May 10, 2007

First Quarter results

All of my companies have reported earnings for the first quarter of 2007 (though some of them call it Q2 or Q3). With a single exception, I'm quite happy with the results. Here are the earnings per share adjusted for splits and spin-offs:

1st Quarter EPS      2007  2006  Change
                     ----  ----  ------
Oracle                .20   .14  42.86%
Canon                 .84   .69  21.74%
Select Comfort        .21   .21 -00.66%
Berkshire Hathaway  56.07 50.03  12.07% 
Alberto-Culver        .23   .16  43.75%
Sally Beauty          .06   .17 -64.71%
First Marblehead      .75   .62  20.97%

One quarter isn't really enough to give a clear picture of a company. But with the exception of Select Comfort and Sally Beauty, these companies are performing well on a multi-year basis. I've talked about Select Comfort's issues, so I won't go into them too much more. This Sunday, they ran a clever ad in Parade magazine that gets delivered with many paper in the US, which confirms my basically good opinion of the new campaign.

Sally Beauty is a more interesting story. Remember that I bought it before the split with Alberto-Culver. After the split, I owned one share of Sally, one share of New Alberto, and $25 for each share of Old Alberto. The $25 special dividend was paid for by borrowing huge amounts—in essence prepaying future earnings of Sally. I haven't seen the latest cash flow statement or balance sheet, but you can get a pretty good idea of the effect of the transaction from this portion of the income statement:

3 months ending March 30     2007    2006
                             ----    ---- 
Operating earnings         60,771  51,313
Interest expense           44,947     321
Interest income               300     300
Market interest rate swaps  1,700       -
Net interest expense       42,947      21
Earnings before taxes      17,824  51,292
Provision for income taxes  6,785  20,117

Net earnings               11,039  31,175

Operating earnings are up because of growth in the business and cost savings from no longer being part of Alberto-Culver. Interest expenses are up dramatically even after income from interest rate swaps because of the massive debt load. Sally shareholders owe roughly $12.45 a share to Sally bondholders after the special dividend. Fortunately, there is plenty of cash flow to cover the payments and plenty of growth to grow out from under the debt. You'd be forgiven for thinking the whole thing is a pointless exercise if I hadn't included the impact of taxes. Since interest payments are tax-deductible to Sally, net earnings are not as small as you might imagine. Over the life of the debt, this will amount to significant tax savings.

Although the market value of my companies have increased at a healthy rate, I'm not currently interested in selling any of them because I believe their potential has increased even more. That's the reward for buying good companies at a cheap price.

Update May 14

Sally released the balance sheet with their 10-Q and the debt is closer to $10 a share. Book value is about -$5 a share, which makes life a bit tough from a relative valuation perspective.

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