As with any value-seeking investor, I love a company that has a business model a chimpanzee could comprehend. The more basic the business is, the easier it is to determine where it's going. Add on top of that a strong management team and you've got yourself a winner.
Winmark (WINA 0.61%) is a perennial favorite of mine, though the stock has been a bit pricey during the last year. The company needed some bad news to drag down the price into undervalued territory. Well, that hasn't happened yet, but it has had some hiccups lately that could cause a temporary dip upon its earnings release.
Wonderfully unsexy
You may not be familiar with Winmark, and that's because it rarely makes the papers. It franchises out a few different second-hand goods stores -- Music Go Round, Plato's Closet, Play it Again Sports, and Once Upon a Child. It's other fantastically complimentary business is small-business leasing. Founder and CEO John Morgan is a business leasing expert, having built and sold a very similar company (minus the second-hand goods stores) and made himself very wealthy doing so.
Winmark was founded in 1988 and flew way under the radar for the majority of the time since then until bargain hunters uncovered the secret in 2009 and sent the stock price up many times over. Since early 2009, the stock has appreciated more than 500% in value. Both top and bottom lines have been steadily increasing over the last few years due to solid organic growth of the franchise business boosted by the cash-generating business-leasing unit. Insiders and 5% owners own most of the company, with CEO Morgan holding more than 1.6 million shares personally, or more than a third of the entire outstanding amount.
On all fronts, the company is a fundamentals-heavy investor's dream with one caveat: valuation. The last few years have made it a pretty expensive stock, though not out of the ballpark like many growth companies. If only there were something to bring the stock price down a few pegs for us penny-pinchers.
Hooray for bad news!
Luckily, the company has had some recent missteps. Management recently announced that, for the fourth quarter, there would be some impairment charges due to bad investments. This includes a $1.8 million reduction in the carrying value of one investment alone and a pre-tax income reduction of $2.5 million. For a company that earned $4.2 million in net income for the September quarter, this is going to be a substantial hit to the income statement.
Now, being a company that isn't riddled with corporate wrongdoing and sells something that isn't likely to ever be called the gadget of the year, Wall Street pays little attention to the stock -- exactly zero analysts from the major shops are currently covering it. This means no analyst estimates and that there might not be the ridiculous double-digit drop in stock price when a well-covered company has a quarterly misstep. But we can still hope, right?
A blip no more
Not all bad news is good news for value investors (though much of it is). But for Winmark, the bad investments are a temporary blip in an otherwise smooth-sailing shop. After the fourth-quarter and full-year report, the company should go back to business as usual, printing cash and taking names. Management recently announced that it would be introducing a new women's second-hand goods concept to be named Style Encore. Morgan cites a surge in the acceptance of "gently used" items among shoppers who remain price conscious following the financial crisis and economic downturn.
On the whole, Winmark is opening more stores, building out its leasing business, and just being a well-run company that consistently generates alpha for shareholders. If there is a substantial pullback come the earnings release, it will be time to back up the truck.
For another franchise winner...
