In 2006, Li Lu delivered a speech at Columbia University where he discussed his investment in shoemaker Timberland. Check out the full lecture here.
He found the idea from Value Line, and then after it caught his eye, he developed a relationship with the management team and purchased the stock for around $28-30, in August/September 1998.
Here is the original page from Value Line that Li Lu presented to the class.
Below, I outline the key elements of this investment that Li Lu explained in his lecture.
Timberland had a low price-to-book ratio
As we can see below, Timberland had $275m in equity in 1998. At $30 a share, their market capitalisation would’ve been $342m, which is a price-to-book ratio of 1.2x.
Also, after further research, Li Lu discovered that most of this tangible, fixed equity is in buildings and real estate, which gave downside protection and a margin of safety.
Timberland had high return on invested capital (ROIC), revenue growth and improving margins
Timberland was gearing up for the fourth quarter which would usually lead to sales that would leave Timberland with around $100m in cash by year’s end. This means their deployed capital was roughly $175m (book value minus $100m).
As we can see below, on $855m of sales with a 13% operating margin, Timberland would be earning $104m in operating profit, which is roughly a 60% ROIC, which is very high.
Furthermore, since 1988, revenues had increased substantially and the operating margin had improved to be above 13%.
The stock was trading so cheaply due to shareholder lawsuits, which Li Lu analysed and gained comfort from. He ensured the management were trustworthy and operated with integrity.
Here is a quote from Li Lu:
S
eeing that the stock was controlled by the founding family (seen in the image below), Li Lu was sceptical that they could be committing fraud or tampering with the books.
He then saw that there were shareholder lawsuits against Timberland’s management. Here is how Li Lu summarised the situation.
He decided this was not a big issue.
Li Lu then visited the community of the CEO, met with management and found that they were one of the most admirable families he had ever met.
Ultimately, the stock was selling at a P/E of roughly 5x, with a high ROIC and trustworthy and skilled management. Li Lu then bought the stock.
Takeaways
This case study of Li Lu’s investment in Timberland provides three main takeaways:
