Thou Shalt Not Steal

LoJack Corp. (LOJN)

People will always be inclined to steal, fornicate and envy. A business model that thrives on the violation of one of the Ten Commandments is intriguing. And when you combine that with a leading market position, strong returns on capital, international growth, and a reasonable valuation of 9x free cash flow, this presents a lollapalooza-like effect: factors (social, psychological, and economic in this case) that "are all operating in the same direction."(1)

I quote from the business overview of the MD&A section of the company's 2006 10k: “We are a leading global provider of technology products and services for the tracking and recovery of valuable mobile assets. Our proprietary technology, wireless network and unique integration with law enforcement agencies provide an effective means for tracking and recovery of stolen vehicles and construction equipment." Brevity is good.

LOJN earns 83% of revenues directly through networks of new and used dealers. The systems have a 90% recovery rate in the US and are integrated directly with law enforcement to track and recover equipment, vehicles, motorcycles (and now cargo and laptops). Insurance premium discounts are also mandated or offered in some foreign markets and some states within the US. Growth is a tale of domestic vs. international: while Q4 international revenue is up 59% abroad, it's down 8% domestically on a 13% decline in unit volume--largely attributable to the state of the current domestic consumer and decline in car and light truck sales.


While the current domestic environment is challenging, LOJN has a super-clean balance sheet, strong growth, spins off excess cash, a valuable brand and sound economics. The 1.19M cars stolen in '06 in the US speak volumes of how people routinely break the Ten Commandments. LoJack has a nice business built around that.


Quick Snapshot:
Pricing power: yes
Oligopoly: yes
Recurring revenue: yes
Brand strength: strong
ROIC > Cost of capital: yes
Balance Sheet: A+

Disclosure:

none as of time of post

(1) Charlie Munger

Demographic Investing

I wish I could boil it down to a nifty list of "The Top 10 Demographic Trends to Supercharge Your Portfolio". Alas, such attempts made by populist business publications do one thing: they use sound ideas, only smattered with gimmickry, to sell magazines. Real 'trends' are often over-priced, as the saying goes, if it's in the news, it's already priced in. So do yourself a favor, ignore the next cover of Fortune and BusinessWeek.

This is not to say long term demographic trends don't matter. The key is what to avoid. As Keynes poignantly stated: “The difficulty lies not so much in developing new ideas as in escaping from old ones.” Avoid the trendy demographic stocks trading at 40x earnings. However, Warren Buffett has used reasonably priced, out-of-favor companies with idiosyncratic risk, to make deft long-term demographic bets (think of human thirst and the psychological power of Coke; men's shaving habits and Gillette; aging and his recent purchase of stock in GlaxoSmithKline).

On to an interesting trend. The increase in Hispanic/Latinos is a demographic worth mentioning which includes the following characteristics: high birth rate; relatively young; increasing economic clout; less likely to use formal banking; and, while not working extremely hard, enjoys lots of Spanish television. If you want lists, Texas has been less impacted by housing. Here are Texas banks with strong Hispanic/Latino population exposure: SBIB, PRSP, CFR. Check 'em out. Another compelling company to research is Televisa (TV). TV trades at 8x Ebitda, has a reasonably clean balance sheet and generates a lovely 28% return on equity. The women on the telenovelas aren't too bad either.

Imperial Sugar Co: more than a thousand words

Thoughts and prayers go out the families involved in this horrific event after an explosion killed 5 and injured dozens at an Imperial Sugar refinery near Savannah, GA.

That said, the prudent investor asks, "and then what?" The Georgia refiner is one of only two of IPSU's facilities and has a production level of 14.5 million hundredweight or just under 1.5 billion pounds of sugar. This amounts to 57% of the firm's refining capacity and $482M of the company's $851M of '07 refined sugar sales. The question stands. For an interruption in refining that will likely come due to this tragedy, is a market value drop of $20.3M, or 2.4% of sales, commensurate with the underlying risks of production disruption and possible litigation?

The company faces further battles as Mexican sugar is now duty free as of 1/1/08; also, the Farm Bill (subsidies) expires on "September 30, 2008 and is currently under review by the U.S. Congress. The current version of the Farm Bill passed by the U.S. House of Representatives has several key factors which may negatively affect the Company's ability to purchase its raw sugar requirements (fiscal year 10k, page 10)."

All that goes into the sugar you enjoy with your morning coffee.

Emile: or, On Investing

In his classic treatise on education, Emile: or, On Education, Rousseau extols the virtues of a responsible, natural, and deliberate education with a particular emphasis on maintaining one's natural qualities in a corrupt society. Surprising to some, this work, which Rousseau believed to be the "best and most important of all my writings" has parallels to financial markets. This is fitting. Many investors are obsessed with multi-disciplinary training, and often rightly so. Investing could be seen as the ultimate intellectual exercise which incorporates, among other fields: math, psychology, philosophy, and history. Below are points to consider.

On developing an investment thesis:

“The spirit of my education consists not in teaching the child many things, but in never letting anything but accurate and clear ideas enter his brain.”

On financial analysis:

“It is a question not of knowing what is but only of knowing what is useful”

On circle of competence:

"Thus we are reduced to a very small circle relative to the existence of things”

On contrarian investing:

"Take the opposite of the practiced path, and you will almost always do well."