Spirit AeroSystems, Inc. - A Maker of Cloud Cars

Over the past several months we have noticed that the investment metric of the month is the price to book ratio. This metric, at least to us, seems to be replacing the ever ubiquitous, price to sales metric, the metric that several years ago was the penultimate investment metric.

The Wax Ink Raw Value Worksheet includes all sorts of metrics. The only reason it does is because the individual investors we market to, and the money managers we work with, want them. In short, we include them because our marketplace thinks they are important.

Our view, and it is the view we have held for the past 26 years, is that purchasing a stock is no different than purchasing a new car or truck. When you purchase a new car or truck, you know the instant you sign on the dotted line, the value will go from a big number to a not so big number thanks to depreciation. The problem is, you get no price reduction for depreciation.

Since many buyers intuitively know this, they haggle over price, attempting to get it as low as reasonably practical, not only to keep their payments down, but in hopes of one day recapturing just a bit of the losses suffered through depreciation.

Yet when it comes to investing, nobody seems to follow the same philosophy they follow when buying a car. They simply buy the stock because an analyst or for entertainment purposes only newsletter, thought it was a great investment.

At Wax Ink there are four investment metrics we pay attention to. Our Price to Buy Target, our Price to First Sell Target, our Price to Close Target, and our Risk Adjusted Buy Target.

We pay attention to these metrics because unlike most other investment sites, we think actually determining a value for the stock we want to purchase is important.

So based on our analysis of a company's financial information, we determine what to us is a Reasonable Value for the stock, based on a 5 year hold. And miracle of miracles, we do that before we purchase a stock.

We explained all of this to one of our newer money manager accounts last week when we were asked about Spirit Aerosystems Holdings, Inc. (NYSE: SPR), an independent designer and manufacturer of non-OEM aircraft parts.

Basis
Financial information related to Spirit Aerospace Holdings, Inc. 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 February 26, 2010.

What They Do
The company is the largest independent non-OEM (original equipment manufacturer) aircraft parts designer and manufacturer of commercial aerostructures in the world, as well as the largest independent supplier of aerostructures to The Boeing Company, Inc..

In addition they are one of the largest independent suppliers of aerostructures to Airbus. Aerostructures are structural components such as fuselages, propulsion systems and wing systems for commercial and military aircraft.

The company was formed in February 2005 as a holding company and commenced operations in June 2005 following the acquisition of the commercial aerostructures manufacturing operations of Boeing.

The company manufactures aerostructures for every Boeing commercial aircraft currently in production, including the majority of the airframe content for the Boeing B737, the most popular major commercial aircraft in history.

As a result of their unique capabilities both in process design and composite materials, the company was awarded a contract that makes them the largest aerostructures content supplier on the Boeing B787, Boeing’s next generation twin aisle aircraft.

In addition, the company is one of the largest content suppliers of wing systems for the Airbus A320 family, and a significant supplier for Airbus’ A380.

Sales related to the large commercial aircraft market, some of which may be used in military applications, represented approximately 96% of the company's net revenues FY09.

Short-Term Investment The stock closed recently at $19.01, with First Resistance at $20.55, a 7% increase from a recent close, and Support at $15.03, a 21% decrease from a recent close.

The stock is currently trending downward and just moved from an oversold condition. Since we think the stock may trade in the $19-$20 range over the near term we have no interest in making a short-term investment at this time.

Long-Term (5 Year Hold) Investment
To us the company's financials are just not that compelling. Certainly the industry in which the company operates plays a large role in creating a balance sheet worthy of investment. For instance, the company's inventory rate is 1.56 meaning that the company turns its inventory slightly more than once a year, not something many investors are comfortable with.

One of the positive notes is the company collects its receivables on average every 18 days, while paying its bills on average every 47 days, meaning that the company's suppliers are providing them company with an interest free 30 day loan. To us, this bodes well for management.

On the downside, management allowed the company's debt to increase by almost $306 million, year over year. While we realize interest rates are at historical lows, and that the company's average interest rate declined slightly more than 2% year over year, we note that the company spent almost $2 million more in interest payments year over year, making us curious about a plan by management to reduce debt going forward.

Valuations
Based on our preliminary review of the company's financial information, we think a Reasonable Value Estimate for the stock is in the $36 to $39 range, and based on that estimate, would set an initial Buy Target in the $21 range.

However, we realize that investing is not done in a vacuum. There are tremendous risks based on the world's current economic uncertainty. This economic uncertainty can cause the companies that Spirit AeroSystems does business with, to delay, or even cancel orders.

Because of these potential economic uncertainties, we think investment risk is increased, and have adjusted our initial Buy Target downward into the $16-$18 range.

Final Thoughts
Buying individual equities is not for the feint of heart. The risk of loss of investment capital is ever present.

Sound consideration regarding the need to add a particular equity to a portfolio should be a contributing factor. Determining what an individual equity may be worth down the road should also be apart of any investor's due diligence.

We believe as many seasoned money managers do, that price determines return, and failing to give reasonable consideration to the price paid for any equity may leave investors paying for a Rolls Royce, but driving a Yugo.

Wax

Worksheet
To download the Wax Ink Raw Value worksheet for Spirit AeroSystems, please click here.

Vistaprint N.V. - A Distant Vision

We admit it, for many of you, we are about to bring back a few memories, and just maybe, create a few new ones.

How many remember the band Journey? Hmmm..that's more than we thought. Okay, how many remember the song Faithfully? Wow, we are impressed.

Imagine you and another at a Journey concert in the early 80s. Steve Perry starts to sing Faithfully. The crowd starts to lip sync with Perry and all of sudden it isn't two people lost in the music, it's one person living the music.

Who would have thought that the next 25 years would pass that fast? I know at Wax Ink, those days seemed such a short time ago.

Investing for retirement happens the same way. Before you realize it, the days have passed, and our working lives have come to an end.

For quite some time we have tried to supply investors, not the investors of Wall Street, but the blue collar investors of Main Street, with reasonably considered ideas that could be factored in to their retirement thinking.

This week's company, Vistaprint N.V., (Nasadq: VPRT) is no exception. Well, almost no exception.

The idea actually came from the Motley Fool's 11 O'Clock Stock feature, where every business day for the next 50 days, one of the Motley Fool analysts will present their stock idea for investor consideration.

Basis
Financial information related to Vistaprint N.V. contained in this report is based on the company's most recent SEC Form 10-K filing for fiscal year ending June 30, 2009, as filed with the Securities and Exchange Commission on August 31, 2009, with updates from the company's most recent SEC Form 10-Q filing, as filed with the Securities and Exchange Commission on April 30, 2010.

What They Do
The company is an on-line provider of customized marketing products and services to small businesses world wide.

They offer a broad range of complementary products and services ranging from printed business cards, brochures and post cards, to apparel, invitations, announcements, holiday cards, calendars, creative design services, copywrite services, direct mail services, promotional gifts, signage, website design, website hosting services, and e-mail marketing services.

Short-Term Investment
The stock closed recently at $32.64, with resistance at $46.60, a 43% increase from its recent close, and support at $30.33, a 7% decline from its recent close, creating a tempting proposition for short-term investors.

However, a recent announcement by the company that fourth quarter sales were below expectations sent the stock price into a downtrend, falling from a recent high of around $51 to its recent close, which is well off its March 2010 high of almost $62.

While we happen to think the recent announcement is much ado about nothing, we are reminded of the old adage that the trend is you friend.

So while we are aware of the trend, we think that with fairly tight stops under a trade, now would actually be a very good time to take a short-term position.

Long-Term (5 Year Hold) Investment

For a company with a market cap of just under $1.5 billion, we think the financials are in very good order, with low debt to equity ratios.

Additionally, the current ratio, quick ratio, and cash ratio, are all within our investment quality ranges, as are the days receivables outstanding, and the days payables outstanding, allowing the company to turn its inventory almost 32 times per year.

The one major downside, at least to us, was the free cash flow the company generated during FY10, $0.36 per share. Granted, growing annual year over year revenues at almost 30% has a tendency to eat up free cash flow.

So while we were pleased to see that year over year net income increased 19%, we think long-term investors should pay close attention, and not become so enamored with income growth that they lose track of the company's ability to grow free cash flow.

Valuations
Based on our review of the company's financial information, with emphasis on the company's FY10 data, we think a reasonable value estimate for the stock is in the $34 to $38 range.

The stock is currently trading at a 35% discount to its March 2010 highs, signaling a buying opportunity for many investors. But current price levels are placing the stock at 4 times tangible book value, which we think makes the stock a touch pricey.

Final Thoughts
We all come to a place in our lives when we realize that the years have simply passed.

Hopefully as they did pass, we have taken the time to have some fun, to enjoy whatever the work is we do, and equally important, to have wisely invested the few dollars we have managed to save.

So while thoughts of days long past may make us smile, thoughts of days yet to come, surrounded by those we have spent a lifetime caring for, should make us smile even more.

Knowing as lovers, as parents, and as investors, we have taken the time to consider what is truly important in life, and planned accordingly.

Wax

Worksheet
To download the Vistaprint N.V. Raw Value worksheet, please click here.

Dorman Products, Inc. - The Value of Patience

One of the things we seldom pay attention to, is our own portfolio. The reason for that is because over the years we have learned there are several things investors need to train themselves to do if they are to be successful over a lifetime of investing.

First of course, is a develop a regular stream of savings. We believe that successful investors pay themselves first. In other words they treat making deposits to their savings plan the same way they treat paying a bill. The difference is, the bill that gets paid first, is their savings plan bill. That rule, in our opinion, should never be broken.

The second thing investors need is time. We believe, and experience has shown, the longer an investment is held the larger the investment should grow. But for that to work, investors must take the time to do a little homework before they buy a stock.

For instance, a few questions that should be asked are; How does the the company earn its money? Does management seem entrepreneurial in their thinking? What is a reasonable value for the stock? To us those are basic questions that should be answered when considering adding a stock to a portfolio.

The third thing we think that is required is patience. Many years ago, we came across an article by Ron Baron, the founder of Baron Capital Management, in which Mr. Baron said that his goal for his clients was to find stocks that would double in price every five years. Wow what a great trick we thought at the time. But we have found that Mr. Baron's goal was very achievable when patience is applied to an investment.

In 2005 we came across auto parts manufacturer Dorman Products, Inc. (Nasdaq: DORM). The economy in 2005 was not bad. Americans were starting to really get geared up to spend money they didn't have by borrowing against houses they didn't own, houses that weren't worth what was paid for them to start with.

One of the things that many people believed they had to have in addition to a new house was a new car.

Dorman Products is in the replacement auto parts business, and serves the automotive aftermarket, a market that was seeing little demand and even less growth in 2005 since the vast majority of spenders were buying new cars not repairing old cars.

But life is like a wheel (pun intended), and what goes around comes around, setting up a good opportunity to take a position in Dorman Products. 

Basis

Financial information related to Dorman Products, Inc. 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 5, 2010. 

What They Do 

The company is a supplier of automotive replacement parts, fasteners, and service line products primarily for the automotive aftermarket, marketing 103,000 different automotive replacement parts, including brake parts.

Approximately 21% of  the company's parts and 69% of net sales consists of parts and fasteners that were original equipment dealer "exclusive" items at the time of their introduction.

Original equipment dealer "exclusive" parts are those which were traditionally available to consumers only from original equipment manufacturers or salvage yards and include, among other parts, intake manifolds, exhaust manifolds, oil cooler lines, window regulators, radiator fan assemblies, power steering pulleys, and harmonic balancers.

Fasteners include such items as oil drain plugs and wheel lug nuts. 

Approximately 90% of the company's products are sold under the company's brand names and the remainder sold for resale under customers' private labels, other brands, or in bulk.

The company's products are sold primarily in the United States through automotive aftermarket retailers such as AutoZone, Advance Auto, and O'Reilly, or through national, regional and local warehouse distributors such as Carquest and NAPA, or through specialty markets and salvage yards. 

Through its Scan-Tech subsidiary, the company is increasing its international distribution of automotive replacement parts, with sales into Europe, the Middle East and Asia. In addition, the company is increasing distribution of automotive replacement parts in Canada through its Dorman Canada Business Unit. 

Short-Term Investment 

The stock closed recently at $23.34 with resistance at $26.00 and support at $21.34. In addition, the trend has recently turned positive. We note that the Stochastic chart shows the stock as being overbought and the MACD shows that the best time to have taken a short-term position was around the first week in July.

With 11% to the upside from its recent close, 9% to the downside from its recent close, and noting the stock appears to be in an uptrend, we think a short-term trade may be the thing to do for those investors so inclined.

However, short-term investors should be aware that should the stock price break through current support, the next level of support isn't until $18.50, a 21% decline from a recent close.

Accordingly, we think short-term investors should place a stop under their trade and continue to adjust that stop in lock step with changes in the stock price. 

Long-Term (5 Year Hold) Investment 

Of the long-term investment metrics we like to focus on, the majority were what we consider investment quality. For instance, the Current Ratio, Quick Ratio, and Debt to EBITDA ratio were all at investment levels, as were Debt to Equity and Earnings Growth.

What was not acceptable, and it is a metric that always gives us pause, was the Stock to Debt Ratio, a simple metric that compares the capital spent on stock repurchases to the capital spent on reduction of debt.

During FY08, the company spent 7 times more capital on debt reduction than it did buying back company stock.

However, in FY09, the company spent 9 times more capital buying back company stock than it did on debt reduction.

To us, there is simply no excuse for such behavior on the part of management, especially considering that the company does not pay a dividend.

We are incensed that such events are allowed to occur. So much so that we think the fair thing for management to do, is to forgo 100% of their salaries and bonuses until the $800,000 gap between debt reduction and stock repurchases is reduced to $0.00.

In addition, we think management should agree that should such an event be allowed to happen again, not only will they forgo 100% of their salaries and bonuses, they should agree to automatic termination with no severance or termination package, and that such termination would include the loss of any company provided insurance coverage. 

Valuation

Based on our review of the company's FY09 financial information, we believe a Reasonable Value Estimate for the stock is between $39 and $41, which would normally place our Buy Target in the $23-$25 range.

However, because management decided to pat their collective rear-ends and take a victory lap over debt reduction and a gross profits increase, all the while ignoring the common shareholder, we believe there is increased risk to owning Dorman Products stock.

Accordingly, we think a lower Buy Target for new investors as well as those stockholders adding to existing holdings, should be in the $15-$16 range. 

Final Thoughts 

We have owned Dorman Products stock since July of 2005 and have a cost basis of $11.34.

Every year we perform a cursory review of the stocks we hold in our portfolio and every five years we take a little closer look at those stocks. Last week, we took a look at Dorman.

The company continues to focus on efficiencies by cutting costs and eliminating waste, events that have become integral to the company's budget process, and ones we view as extremely positive on the part of management.

But along with the positive comes the negative, and it is our opinion that management needs to pulls its hand out of its pants, get its mind back from Arkansas, and focus on eliminating the company's debt, increasing the company's cash, decreasing the company's accounts receivable, and paying company shareholders a dividend before a single penny is wasted buying back company stock.

But that aside, we have indeed doubled our invested dollars over the course of our 5 year hold of this stock, something we attribute not only to buying at the right price, but holding the stock long enough for the price we paid to have a positive impact on the return we are receiving.

Tangible proof at least to us, that patience is among the keys to successful investing. 

Wax

Worksheet

To download the Dorman Products Raw Value worksheet, please click here.