The Dhandho Investor - Abhimanyu's Dilemma · Mohnish Pabrai Managing Partner Pabrai Investment FundsInvestment Funds Irvine, California, USA [email protected] Teel. +199 9

Abhimanyu’s Dilemma

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Risk vs. Uncertainty

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Low Risk + High Uncertainty = High Rewards

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Abhimanyu’s Dilemma

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• Founded 1994; Bought 3 mothballed facilities for close to zero.

• Dunkirk: $1 Million Cash Paid; $10-20 Million a year in FCF potentialpotential.

• Bought stock at $14-15/share in 2002.• Had earned $1 26/share in 2001• Had earned $1.26/share in 2001• Dunkirk could add $1.50 to $2.50/share in earnings in a few years.

• How could I miss?How could I miss?• No downside; Huge Upside!

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• One year later (2003), USAP was trading at $5/share versus our purchase price of $15 in 2002!

Severe industry slump Business was break even• Severe industry slump. Business was break-even.

• Dunkirk losing money.

• What was intrinsic value?

• Hard to tell, but easily over $5/share.Hard to tell, but easily over $5/share.

• Conclusion: Do nothing. Wait!

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• One year later (2004), USAP was trading at $10-11/share.

• Dunkirk slightly profitable.

• Rest of business profitable.

• Huge backlog and growing• Huge backlog and growing.

•IV easily over $11/share.

• Conclusion: Do nothing. Wait!

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• Rule No. 1 and Rule No. 2.

• In 2005, USAP trades at $15/share.

• Now we can sell at break-even.

• Buy More? Sell? Do Nothing?• Buy More? Sell? Do Nothing?

•Answer: Buy More: IV over $30/share.

• Thesis finally playing out after 3 yrs.

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• In 2006, USAP is rocking!

• Huge Backlog.

• All plants running fullout 24x7

• Stock goes over 90% of IV• Stock goes over 90% of IV

• Start Selling: ROI – 19-100%annualized.annualized.

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A Current Dhandho Stock Pick• Meets seven of the nine criteria in The Dhandho Framework:

1. Simple Business2 Existing Business2. Existing Business3. Distressed Business in a Distressed Industry4. Durable Moat5 Few Bets Big Bets Infrequent Bets5. Few Bets, Big Bets, Infrequent Bets6. Margin of Safety – Huge!7. Low-Risk; High-Uncertainty Business

• Do your own thorough research before making any investment.• Pabrai Funds has lost money in the past on several stocks.

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Delta Financial Corp. (DFC)

• Subprime Mortgage Lender.

• Severely Distressed Industry – Several bankruptcies in 2007

• Delta is very different, but it’s stock price is at a throwaway price due to the severe industry distress and misunderstood business.

•50% loans originated at own Retail Centers – 1.1% (Ultra-Low)

• 78% average Loan to Value. 92% of Loans are Fixed Rate78% average Loan to Value. 92% of Loans are Fixed Rate

• Conservative portfolio accounting – revenue recognized over life of loan but expenses recognized immediately.

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Delta Financial Corp. (DFC)

• Minimal California Exposure

• Mostly a Re-fi Lender. Not affected much by housing starts.

• 1/3 owned by insiders; Plus Pabrai Funds owns 19.8%

• About 1/2 of the total stock is “locked up”• About 1/2 of the total stock is locked up• 20% of shares are shorted.• Float is quite thin. If you buy, please use limit orders.• Market Cap: ~250 MillionMarket Cap: 250 Million• Earnings out today – higher volume today.

• Solid Management –They are the biggest owners . Conservative.

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Delta Financial Corp. (DFC)

• Intrinsic Value:

• Mortgage Banking Earnings Engine: >$1.50/shareSecuritized Portfolio Fair Value Adj : >$8 31/share• Securitized Portfolio Fair Value Adj. : >$8.31/share

• Excess Book Value: ~$4.25/share

• Earnings will be growing as now there is less competition• Earnings will be growing as now there is less competition and DFC has been hiring and growing its business.

• Earnings could be much higher than $1.50/share in 2-3Earnings could be much higher than $1.50/share in 2 3 years. Let’s apply a 15x multiple on it.

• Intrinsic Value: >$35/share; Current Stock price: $10.20!!

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Delta Financial Corp. (DFC)

Pabrai Funds Buys DFC

SubprimeMeltdown

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Thank You.

Mohnish PabraiManaging PartnerPabrai Investment FundsPabrai Investment FundsIrvine, California, USA

[email protected]

Tel. +1949.275.5652e 9 9 5 565

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