I started looking at ACV after reading your blog. I don’t own it — still researching.

Bilbo

Sally Beauty hit $10 during the day today. I guess I’m not the only one that thinks this stock is worth $10. Now I have to determine if it is time to sell, or if Sally Beauty could be worth even more than $10. I was somewhat confident of my $10 estimate, but I’m not so sure I can be confident with a higher valuation without at least seeing at least one more quarters worth of data.

I think the stock has gone up because even if investors liked both ACV and SBH pre-spinoff, it wasn’t in their best interest to buy before the dividend. Consider that most mutual funds (in my opinion) wouldn’t want that $25 dividend. Furthermore, some international investors (think Bermuda, Cayman, etc) don’t pay capital gains taxes, but pay a 30% withholding tax. So they probably waited until after the dividend. I dont think this is the only reason SBH jumped early on.

It’s a good company, simply put. It has many more opportunities now that it is spunoff. That’s the reason it jumped. I’m skeptical of the $10 valuation. Seems a little arbitrary. But I do like the company as I discussed at http://www.thinkintrinsic.com/companies/s/SBH

Jordan

Also, debt is good if the price paid for it is reasonable. I think a big reason for Greenblatt’s postive stand on debt was that it increased the selling pressure from the big institutions. This stock has done nothing but go up since spun off so I’m not sure that’s the case here.

One point to add to your analysis is that this spinoff is essentially a LEVERAGED BUYOUT in which YOU can invest. A private equity firm (CD&R) owns 47.5% of Sally Beauty and has representation on the Board.

I have written an analysis of this attractive spinoff over at my site, http://www.thinkintrinsic.com. I’ve also linked to your report because I think everyone can benefit from.

So, here’s the link to the (free) Sally Beauty Holdings report at TI:
http://www.thinkintrinsic.com/.....ial_report

I failed to take into account the brand new independence of this business, and was thinking in terms of established businesses.

Also, this is the same situation as with WU. When they were spun-off, they were laden with about $3bil in debt if I recall as well.

Thanks for the follow-up, sir. Have a great holiday!

I don’t normally view leverage as a bonus. It increases risk and diverts earners away from shareholders. However, Joel Greenblatt makes some good arguements why leverage (low cost leverage) is a good thing for new spinoffs.

If you look at a spinoff as an IPO with a lot of new growth potential, the owners of the company equally enjoy the future growth in earnings. With a highly leveraged spinoff, debt holders only earn their fixed interest rate and the all the rest of the earnings get funneled into the equity holders.

Let’s look at an example of a $1 billion company where debt covers 80 percent of the enterprise value of a company and stock makes up the remaining 20 percent. If the company grows by 20 percent in value as a result of the spinoff restructuring, then the company is now worth $1.2 billion.

Debt holders are paid 10% for their capital, which is $80 million, that leaves $120 million for shareholders. $120 million divided by the original $200 million that shareholders invested give a 60 percent return!

I’m a bit tired right now, so I might have goofed up this explanation. The concept basically comes down to that if you are confident something is going to grow in value, investing in it with leverage will compound your returns. That’s how real estate investors make so much money off of relatively slow appreciating real estate assets.

Interesting analysis. I’m curious as to why you view leverage/loads of debt as a bonus.

Five reasons why Sally Beauty Holdings is a fat pitch of a spinoff opportunity. Joel Greenblatt would be proud of this one.
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