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The BMW Method
Re: Quick Take on Simpson Manufacturing (SSD)

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By lewellen180
October 20, 2006

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First...

Wow, am I glad I found this board. Some smart, canny people here, I think.

I very much enjoyed reading IcyWolf's post. (One of my best friends is half arctic wolf; she has excellent instincts also, but never became interested in the markets per se.) If I may, permit me to respond to some of the points...

IcyWolf wrote:
But beyond that wolven digression ... When I gaze upon the SSD charts at BigCharts ... the lines tell me a few things .... Nice steady growth from about 96 to about 03 ... and then a sharper growth rate starting in 03 into the beginning of 06 (with a several month test of resolve for bulls in between <g>), then it starts to fall quite strongly. And maybe, just maybe its marking a bottom (instead of pausing before continuing the downslope slide <wry grin>)and has started to turn ... but I don't see the confident surge in volume this ole wolf usually associates with Mr.Market recognizing a mistake .. do you? Oh, right ... you folks like to try to catch the falling daggers us wolves avoid <laugh> .. how could I forget?

Let me post some of the valuation ratios as a function of time, again taken from the SIpro database:


Time                  P/E         P/Book       P/Sales
-------------      ------      ------       --------
Current                11.9        2.15         1.45
2005 average       16.9        2.94         1.94
2004 average       17.4        3.02         2.00
2003 average       17.2        2.55         1.86
2002 average       14.7        2.17         1.63
2001 average       16.4        2.26         1.56
2000 average       14.2        2.25         1.49
1999 average       14.4        2.46         1.58


As IcyWolf noted, things really popped up starting in around 2003; it shows up in the valuation ratios as well as the price charts. The P/E stayed high, and the price/book and price/sales increased for another few years before all went down hard.

And I certainly share the concerns about having enough data for mean-reversion estimates, long-term growth, etc, that IcyWolf expressed. As a recent student of value investing in general, however, the data above would seem to indicate that not only have the valuation ratios reverted to mean, they've blown quite a ways past them. (Not so much for the price/book, granted, but all three of the metrics are running at 7-year lows right now.) It's also less expensive than the industry median on the P/E, although more expensive by the other metrics.

Of course, none of this means the bottom can't drop out, or the market crater the price out of sheer spite (or so it feels, sometimes). But...

SSD also tends to be pretty good about maintaining good profit margin metrics and return on assets/equity ... both better than its peer group currently, and consistently stable over time. That, given the recent market conditions, I find to be rather impressive. Their debt situation also seems to be well under control, both in an absolute sense (almost no long term debt at all, and total liabilities / assets have been running at a fairly consistent range, say 10 - 20%, since 1999) and relative to the industry median. That being in the case, it should be in a better position to weather a slowdown storm (pardon the pun) than its median competitors. In short, I'm not especially worried that the company itself will implode.

Regarding the short-sellers, I really don't see why, other than they make "specialized products" in "housing." But then, I'm not a short-seller, and while I try to think like them as an exercise, I tip my hat to the levels of intelligence and diligence the good ones exhibit.

We've already had a very interesting discussion regarding the competitive moat, so I won't rehash that here other than to say it impresses me quite a bit also.

So, yes, this might indeed be a falling knife we're trying to catch here. However, as IcyWolf also noted, we might be close to the bottom. If so, all we have to do is reach down and pull it out of the floorboards. If not, I think based on what I've learned so far, we stand a good chance of grabbing the hilt in any case.

Of course realizing that thesis might take some time, but then it's my understanding that patience is required in BMW methodology also.

For me, I've already taken a small position, about 1% of the portfolio, mostly to remind me to keep looking at it. :-) Seriously, however, I will be adding, oh, 10-20% of my new money each month into SSD until I'm happy with the total amount of the position, or there's enough of a price rise that follow-on analysis indicates the stock is fairly valued.

In for a penny ... now to put in that pound over time. :-)

Good roads,

- Lewellen180


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