dhandho vic nyc 2006 - valuewalk.com · mohnish pabrai managing partner dhandho! low risk + high...
TRANSCRIPT
www.pabraifunds.com
Mohnish PabraiManaging Partner
Dhandho!Low Risk + High Uncertainty = High Rewards
www.pabraifunds.com
Defining Dhandho
• Mr. B. U. Patel – Founder/CEO of Newport Beach, CA based Tarsadia Hotels – Probably the richest South Asian in Southern California.
• From a 20-room Anaheim, CA motel to 4400 rooms - a 28-year Dhandho journey.
www.pabraifunds.com
The Patel-Motel Dhandho Model
• Refugees from East Africa – Strong entrepreneurial drive with nothing to lose.
• Buy a small single model with the family living in and working all the facets of the motel. • Highly leveraged. No downside.• Maximize cash flow and reinvest in another motel.
Heads - I win! Tails - I don’t lose much!
www.pabraifunds.com
• The Patel-Motel ends up being the lowest priced provider due to an intense focus on operating costs.
• Porter would call this “Sustainable Competitive Advantage” and make it a book.• Buffett would call it a “Moat”• Mr. Patel would scratch his head and say … Dhandho?
• 1/3 of all motels in the US are Patel Owned.• Over 20,000 motels – Over $40 Billion in Value.
The Patel-Motel Dhandho Model
www.pabraifunds.com
Enduring Arbitrage Spreads
Nearly all successful startups step in to fill a gap – some arbitrage spread that exists.Eventually virtually all gaps close
Some can close in a few months and others can persist for decades.
The Patel-Motel Arb is low cost producer and hence low cost provider.
As they scale this diminishes.As they compete with other Patels, its gone.
www.pabraifunds.com
Dhandho is Business Arbitrage
Not only are Dhandho entrepreneurs not risk takers, they are arbitrage players.
30 Miles
• Start with 1-2 Chairs.• Charge a bit more.• Expand as business grows• Upside: Good; Downside: Minimal• Eventually premium disappears.Town A
Pop: 40,000
Town BPop: 30,000
Emerging Town CPop: 200 to 1000
Heads I Win; Tails I Don’t Lose Much
www.pabraifunds.com
The Birth of Virgin Atlantic
How much does it cost to start a trans-Atlantic airline with a Boeing 747?
Airplane Cost, Reservation System, Advertising/Branding, Ground Staff, Crews …
Virgin started with no written business plan and total outlay of under $500,000. Maximum loss with total failure was under $3 Million.
www.pabraifunds.com
Virgin Atlantic Dhandho
The “mental business plan” was done in one weekend by 1 person with zero experience in airlines.
No elevator pitch, no VCs, no board, no advisors.
Capital-intensive business started with virtually no capital.
Found a gap and saw a way to exploit it.
Dhandho Arbitrage
www.pabraifunds.com
The Virgin Group
200 companies; 25,000 people; $7 Billion Revenue
Common theme for all businesses – virtually no capital to start-up. Classic Dhandho. The VC model of the future. All start with Dhandho arbitrage and brand.
www.pabraifunds.com
Low Risk + High Uncertainty = High Rewards
The Patels and Branson:
Twins separated at birth?
Both took virtually no risk. However, they had tremendous uncertainty about the future.
The odds of getting a high return on their investment were very high.
No brainers!
This framework is a very powerful one for equity investors to use.
www.pabraifunds.com
Some stocks have a very murky future.Markets, even efficient markets, have a very hard
time with these type of stocks.Canadian Oil Sands: What is the future price of oil?Covanta: Future electric rates and tipping fees?Silicon Valley Bank: What are those warrants worth?Frontline: What are future charter rates for tankers?Level 3 Bonds: Will they survive or go bankrupt?
Low Risk + High Uncertainty = High Rewards
www.pabraifunds.com
Pinnacle Airlines – Ultra Low Risk
Market Cap: $190 Million (PNCL)
Excess Capital: $90 Million ($4.09/share)
2006 Net Income: > $2.25/shr. (9 Mos. = $1.87)
Net Stock Price: $8.62 less $4.09 = $4.53
Net P/E Ratio: 2
Liquidation Value: $210 Million ($9.55/share)
www.pabraifunds.com
Ultra High Uncertainty
Single Customer – Northwest Airlines
What will the new NWA contract look like?
EPS: From $2.50/share to $1.75? $1.50?
Use of Excess Capital?
Future Northwest Relationship?
New Pilots Contract – what will change?
www.pabraifunds.com
Ultra High Reward Potential
Symbiotic Relationship – Hard to severe.
Pinnacle is an extremely low-cost, efficient operator.
Next few years are like to be very good for US airlines.
Regional Jet Sales are likely to take-off.
www.pabraifunds.com
Pinnacle’s Pedigree
On the Magic Formula ($1/25 Search)
Highest Earnings Yield on the List (38%)
Pre-Tax Return on Capital > 100%
Write-up on Value Investor’s Club – 6.2 Rating
Only 3 stocks (out of hundreds) have a rating above 6.2 in last 6 months!
Disclaimer: Do your own independent research!
www.pabraifunds.com
Publisher: John Wiley
April 6, 2007
Pre-order your copy on Amazon today!
Thank you!
www.pabraifunds.com
Thank You.
Mohnish PabraiManaging PartnerPabrai Investment FundsIrvine, California, USA
Tel. +1949.275.5652
www.pabraifunds.com