# Danier Leather (DL.TO)



## Banalanal (Mar 28, 2011)

Danier Leather, value argument.

It's trading at its tangible book value. It has no debt. It has had positive FCF nine out of the last ten years. Its current price to its average 10 year FCF is 8.7x. It has a rough intrinsic value of 19$ based on its average FCF and and a 15x multiple. It trades at 10.5$ per share. Over the past 6 years its revenues have been steady, its margins improving. Management bought back over 22% of the outstanding shares when they were trading at very low levels from 2009-2010, significantly increasing shareholder value. It's a business easy to understand, leather. 

Potential risks include, over the past 10 years its revenue is trending downwards. It doesn't have a moat to speak of (though its vertical integration and Chinese outsourcing provides cost effectiveness). There is a dual share structure that some investors shy away from. 

I think the current price of the stock offers a very high margin of safety. Its price may be low due to it being a smaller Canadian company with little to no analyst coverage, and not a very liquid stock. For a private investor, it appears to offer an excellent opportunity.

If we price in no growth for a DCF analysis of 20 years, and assume it keeps 2 million in FCF, and does not buy back any shares, I get a 35% margin of safety. If it grows its FCF as it has been and buys back shares as it has been, the safety at these prices and potential return is much higher.

Thoughts?


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## PMREdmonton (Apr 6, 2009)

If they are going to be a value play in a no-growth industry they need to start paying a 5-7% dividend to be worth it. Otherwise there is really no point in being part of the business unless you want to trade the stock.


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## Square Root (Jan 30, 2010)

Their product is " cheap looking" and not really in style. If they can't get past that I see little upside.


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## Homerhomer (Oct 18, 2010)

PMREdmonton said:


> If they are going to be a value play in a no-growth industry they need to start paying a 5-7% dividend to be worth it..


They are already paying it.


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## Banalanal (Mar 28, 2011)

PMREdmonton said:


> If they are going to be a value play in a no-growth industry they need to start paying a 5-7% dividend to be worth it. Otherwise there is really no point in being part of the business unless you want to trade the stock.


I disagree with this. Dividends are one way to get a return from an investment, but not the only way. If a company is trading at such low multiples to its FCF and has no debt, and is buying back large portions of stock, you will get rewarded. Value is its own catalyst.


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## Banalanal (Mar 28, 2011)

Square Root said:


> Their product is " cheap looking" and not really in style. If they can't get past that I see little upside.


It's leather. Who cares if you think it is cheap looking as long as people are buying. Revenues are consistent over the last 6 years and margins are improving. You are looking upside in the face: very low multiple to fcf, consistently fewer shares outstanding, no debt, not followed by analysts, not loved by some because they buy back shares instead of paying dividends.


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## Square Root (Jan 30, 2010)

My point is I think there won't be much sales growth. If you like the stock, buy it. You asked for our opinions and I gave mine for what it's worth.


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## Banalanal (Mar 28, 2011)

Square Root said:


> My point is I think there won't be much sales growth. If you like the stock, buy it. You asked for our opinions and I gave mine for what it's worth.


I welcome all opinions, of course. My points are that, we can price in no growth and no sales margins increase and still see that it is trading at a discount. And I'm trying to decide if I like the stock before I buy it. Just speaking plainly here.


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## Andre112 (Apr 27, 2011)

Square Root said:


> Their product is " cheap looking" and not really in style. If they can't get past that I see little upside.


I agree. Their products aren't attractive.


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## Banalanal (Mar 28, 2011)

If you thought Sir Robert Laird Borden was an unattractive man, yet somebody tried to sell you a 100$ bill for 80$, would you turn it down?


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## PMREdmonton (Apr 6, 2009)

Banalanal said:


> I disagree with this. Dividends are one way to get a return from an investment, but not the only way. If a company is trading at such low multiples to its FCF and has no debt, and is buying back large portions of stock, you will get rewarded. Value is its own catalyst.


The company is sometimes earning positive and sometimes earning negative.

They are sometimes net income positive and sometimes net income negative.

Their margins have been very consistent.

This doesn't speak to a great value investment where I usually want a very consistent business trading at a discount. I just don't see that consistency here and their "brand" is worth nothing.

If I were to buy such a micro-cap I'd want more consistency and a substantial dividend in a non-growing business. Your criteria may be different but I don't see a huge amount of value here.

The situation would be different if they were trading at a 40% discount to book but they aren't.

Their Piotroski score is only 6 and in cigarette butt companies I usually want a score of 8 or 9. They have a good Altman score so they are at low risk of bankruptcy.

I'd want them to trade 20% lower before entering into a value position.


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## Banalanal (Mar 28, 2011)

PMREdmonton said:


> The company is sometimes earning positive and sometimes earning negative.
> 
> They are sometimes net income positive and sometimes net income negative.
> 
> ...


Why do you focus on earnings over cash? I mean that as a genuine question. Please explain your reasoning to me. As I understand it, cash is what matters. Cash pays your dividends, cash buys back your stock, cash acquires other businesses, cash is spent on investing activities. What does earnings do? In that regard, they are free cash flow positive nine of the last ten years and trade at a significant discount to their average fcf.


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## PMREdmonton (Apr 6, 2009)

Banalanal said:


> Why do you focus on earnings over cash? I mean that as a genuine question. Please explain your reasoning to me. As I understand it, cash is what matters. Cash pays your dividends, cash buys back your stock, cash acquires other businesses, cash is spent on investing activities. What does earnings do? In that regard, they are free cash flow positive nine of the last ten years and trade at a significant discount to their average fcf.


Perhaps on a yearly basis but it still looks like they have quite a few negative cash flow quarters.

As for earnings, a good value business should have consistently positive earnings. I would agree at looking more at cash flow in a utility or a REIT (AFFO). However, in a value setting the company should be consistently profitable on an earnings business for me to trust them as a value investment. Positive free cash flow is not enough in this setting but different people may have different opinions about this but I usually want both valuations to be good consistently.

Another way of looking at it is EV/EBITDA where you usually want a number less than 7 for a value stock. Now I looked on 3 different website with fairly divergent answer on EV ranging anywhere from $4M to $27M and EBITDA looks like $14.7M giving them a score < 2.

I would say that yes it does look like they are a good value now once that is factored in. I was a bit leery of what looked like a few unprofitable quarters and CF negative quarters and even a recent year with a fairly large negative earnings total.

But given their low debt, low enterprise value (< 0.5 of market cap), low P/B, microscopic EV/EBITDA they actually look really good.

They have been doing some stock buybacks and have gone from 6.3M shares outstanding to about 4.6M shares outstanding over the last 3.5 years representing about 27% of market cap.

At this point to really get the stock going as a value play they should initiate a dividend with all that positive FCF they have been throwing off. They had 2.13M last year but just pocketed it instead of paying about a 45 cent dividend. They were 9.4M positive in 2010 but used it to retire about 1.34M shares at an average cost of about $7 which is a 33% discount to their present price so it looks like they timed their buyback for a period in which the stock was undervalued by a wide margin which suggests good management.

Based on present PE and earnings yield they are screaming out they can afford a 5% dividend easily. The only thing I wonder is if they are trying to drive down share count to eventually take it private?


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## Banalanal (Mar 28, 2011)

Ok, we may have to just go our separate ways when it comes to earnings versus cash 

In regards to negative quarters, it doesn't really interest me. I'm okay with the variance as long as they generate strong cash when we adds those quarters together. Their fcf for their last quarter was about 4 million, obviously much higher than their average, but I don't get too excited (or depressed) over short term performances.

There has been speculation by others about the company going private given how much stock they bought back but I have no idea.


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## PMREdmonton (Apr 6, 2009)

Banalanal said:


> Ok, we may have to just go our separate ways when it comes to earnings versus cash
> 
> In regards to negative quarters, it doesn't really interest me. I'm okay with the variance as long as they generate strong cash when we adds those quarters together. Their fcf for their last quarter was about 4 million, obviously much higher than their average, but I don't get too excited (or depressed) over short term performances.
> 
> There has been speculation by others about the company going private given how much stock they bought back but I have no idea.


If they want to take it private it makes perfect sense to try and understate earnings compared to FCF and it makes perfect sense to offer no dividends so many value investors will ignore it as most want a dividend.

Right now they have $32M in cash and short-term investments versus a market cap of $50M. They are pretty close to being able to buy themselves out if that is what they want.

I just don't know what that means to remaining shareholders - do they just pay them out the market value of the last remaining shares once they get down to $20M.

On a FCF yield basis they look good at 12% average over the last 4 years. 

If they don't plan on privatizing they really should start paying a 5% dividend.

They have enough cash on hand to pay a 5% dividend for 12 years even if they don't make another cent.


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## OntFA (May 19, 2009)

Irwin Michael and Francis Chou both like Danier.



> If they don't plan on privatizing they really should start paying a 5% dividend


Well their significant share buy backs are effectively the dividend so they've made good use of excess cash by buying back undervalued shares.

But regarding the potential privatization, there is a risk of taking the company out at a low price. This is always a risk with illiquid or chronically undervalued stocks. But hopefully this institutional participation would help to prevent that.


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## Argonaut (Dec 7, 2010)

Share buybacks are an extremely poor use of money, investors should demand a dividend instead.


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## Banalanal (Mar 28, 2011)

Argonaut said:


> Share buybacks are an extremely poor use of money, investors should demand a dividend instead.


You are going to have to justify that statement please.


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## HaroldCrump (Jun 10, 2009)

I am with Argo on this.
Share buy backs have only a temporary effect on the price, if any at all.


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## Banalanal (Mar 28, 2011)

If you and I each own half of a company and I die, you own the entire company. This is how share buy backs worth. The equity is reduced, the profit distributed to fewer owners. How is this temporary?


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## HaroldCrump (Jun 10, 2009)

Banalanal said:


> If you and I each own half of a company and I die, you own the entire company. This is how share buy backs worth. The equity is reduced, the profit distributed to fewer owners. How is this temporary?


If this were a private partnership, sure, that is how it would work.
But that is not how it works in the open market.
Buy backs does not guarantee anything.
Very often, you will barely notice the effect of buy backs.
It gets lost in all the market noise.
There are often many more important and more powerful factors affecting the share price than buy back of a few 100K shares by the company.
Within a matter of weeks, all that is forgotten and the shares settle back to a level dictated by the market forces and other fundamental factors.

In case it is a truly huge buyback and does manage to move the price significantly, I'd suggest you sell your shares and take advantage of it.


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## CanadianCapitalist (Mar 31, 2009)

Assuming the stock is trading at a reasonable valuation, a share buyback is a more tax-efficient way of returning cash to shareholders than dividends. I agree with Banalanal. Share buybacks (assuming it is not done to offset dilution) boosts the earnings per share of shareholders and it will eventually boost the stock price. Dividends are the only way to return cash to shareholders.


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## Banalanal (Mar 28, 2011)

HaroldCrump said:


> If this were a private partnership, sure, that is how it would work.
> But that is not how it works in the open market.
> Buy backs does not guarantee anything.
> Very often, you will barely notice the effect of buy backs.
> ...


I'm not trying to be argumentative or rude, but this quote is what makes up market noise. Share buy backs are a fundamental, mathematically and logically sound, tax efficient way of increasing value to shareholders. It does not matter to me if "the market" doesn't like it. I will keep buying dollar bills for fifty cents if the masses think dollars are out of fashion.

Saying that the price is dictated by fundamental factors and market forces that disregard how many fewer or greater numbers of people are sharing the profits is absurd.


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## Argonaut (Dec 7, 2010)

You can play theorycraft all day long with share buybacks and its tax efficiency but in reality it never works like that. Case in point is BHP Billiton with its mammoth share purchasing programs ever since the Potash deal was scrapped, yet the share price continues to tread water. 

It takes an IQ of approximately 12 to buy one's own shares, and doing so shows management has no ideas to fund growth. The process is often made moot by the awarding of new shares to executives anyways. Issuing a dividend, committing to that dividend, and growing it shows a company is shareholder friendly. If the Worst Case Ontario happens and a company goes down or suffers an unforeseen event, the investor who collected dividends over the years will be hurt far less than the investor with a slightly larger share of a broken company.

This is not a slight to Banalanal or to Danier Leather, although it is not my type of stock. I just really dislike share buybacks.


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## humble_pie (Jun 7, 2009)

a serious problem with share buybacks is that they are frequently being "bought" only to be cancelled & re-delivered to executives as salary perks. IE the company's coffers are being plundered to pay the salaries & benefits of insiders.

at least a dividend would place pro-rated monies in the hands of all shareholders.

so what if a company buys & cancels 2 million shares over 3 years, but over same period of time issues 3 million options to its big nobs. The float, if anything, will gradually increase as the nobs convert their options to shares & cash out.

plus a 50% business owner whose partner dies does not end up with 100% of the business, as banal suggests. He still owns just 50%. The partner's heirs own the other 50%.


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## HaroldCrump (Jun 10, 2009)

Banalanal said:


> I'm not trying to be argumentative or rude, but this quote is what makes up market noise. Share buy backs are a fundamental, mathematically and logically sound, tax efficient way of increasing value to shareholders.


Banalanal, your point is perhaps valid as a matter of efficient market theory _on paper_.
As an individual investor, you can take advantage of it only in the very short term, i.e. literally on days when the company's agents are doing heavy buying.
You can sell into the temporary rally and cash out your profits.
Over long term, or even mid term, the effects are marginal, if any, of most buy backs.
There _are_ rare cases of huge buy backs that truly move the market and make the stock achieve and hold new levels.

But for the most part, it's all water under the Thames.
Just ships that pass in the night.
Long gone and forgotten before the morning dawns.

I, personally, would not bank upon a company's share buy back schemes to provide me sustainable capital gains (other than selling into the rally).


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