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Duff & Phelps Corporation Class Message Board

  • kkhater kkhater Jun 12, 2010 3:30 AM Flag

    The DUF paradox - unique to this stock

    There is an interesting paradox with DUF that arises from the fact that they are experts at valuing companies. Consider the following:

    Let's start with some assumptions. DUF is perfect at valuing companies including itself. The valuation of DUF did not change dramatically throughout 2009. DUF is not building up cash for an acquisition (an assumption supported by the fact that they aren't using the money to buy other companies). DUF isn't obligated, by contract, to buy back the minority interest shares at a certain schedule (this assumption may be wrong - I have no idea what obligations DUF has as far as buying the shares that are not common stock)

    In 2009, DUF had around 80 to 90 million in cash. Also, in 2009, DUF raised around 140 million by offering common stock at around 15.50 per share. Subtract underwriting costs and it was actually 14.75 for DUF. Now, assuming that DUF perfectly values companies, and remembering that they already have a ton of cash, then by doing an offering of common stock at 15.50 what they are in effect saying is that their company is overvalued at that price. If they felt that the stock were at fair value, they wouldn't have made the offering. If they felt the stock were undervalued, then they would have used the 80 million cash for a stock repurchase.

    Now, here's the paradox. They use most of the proceeds to buy minority interest shares at around 15.00/sh OR 0.25/sh more than what they received on the offering. But we just concluded that DUF feels that at around 15.00/sh, the company is overvalued? Why would it knowingly buy something that it thought was too expensive?

    So, one or more of my assumptions is wrong...which is it? Maybe they were plannning, in good faith, on buying another company...the deal fell through, they had more cash than they knew what to do with so they started buying out the minority interest. Maybe DUF has to buy minority interest shares and doesn't have a choice, per se...their hand is forced. Maybe they thought the value of DUF was fluctuating such that at some periods they felt 15.00/sh was expensive and at other times 15.00/sh now looks like a pretty good deal. Who knows?

    If you look at my posting history, I have been intrigued with this stock, mostly from a negative perspective. The irony is, I probably use the same general principles in determining stock's potential that they use when valuing a company. So, I really do see the importance of their work. BUT, at the end of the day, the value of the company are the individual employees...and they can leave at anytime. Now, they pay very generous salaries so that retention isn't a problem. That's smart...but things can get ugly quickly in any corporation...and the changes in senior mgmt are no doubt hurting stock price. In fact, if I understood the annual report correctly, the minority interest partners could be competing with DUF as we speak, and it would all be perfectly fine. As an amateur value investor, I love companies with lots of cash, low debt and low EV/EBITDA...but this company, I don't see any meat and potatoes that will give the company long lasting value. I also don't think this is a good short either. I don't think employees will kill the golden goose either. That would be dumb. I think this will trade in the 10 to 20 range for years to come.

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    • The 20009 offering at $15.50 was a secondary offering, not a primary offering. Also, read the 2007 prospectus and the company's organizational documents to understand the company's structure.

    • Thanks for your obviously have some good insight.

      The point of the thread is based on general principles, so looking through transcripts may not be as helpful as one might expect. The paradox, as I see it is, is as follows: What does it mean when a company whose business is to value other companies, issues more shares despite having a boat load of cash. One conclusion is that they thought that they were overvalued at 15 dollars per share.

    • Maybe they purchased minority shares so that some original investors could exit. This firm was created by VCs who probably wanted to get out with a handsome return after the company went public.

      • 1 Reply to lowreyjoshe
      • Got no problem with minority interest shareholders getting out. I mean, heck, they have to get out eventually. What doesn't make sense to me is that the minority interest shares are bought back by DUF at a very expensive price using cash. But when they acquire another company, it is done by issuing more shares. It's like the minority interest shares a treated with kid gloves to maximize the price at which they trade. While other activities are done to maximize the burden on the shareholder. For example, just now, they acquired a company by issuing more, I don't know the price at which those shares were issued at...but it was at a time when the stock was trading at around 11. But 8 months ago, they bought back minority interest shares at 15...they're buying high and selling low. Now, all this may be how they structured their contracts years ago...I certainly don't know. But at the end of the day, when you do the math, the net result is a transfer of money from common stock holders to the minority interest holders that does NOT get offset by the paltry dividend that is paid out despite the cash hoard.

        And another thing that makes you scratch your head...they announced a stock repurchase program....but they just issued more shares at a time the stock was trading at a low. So, which is it are you undervalued or overvalued...they should be telling me....they're the experts. Why the cash hoard? Is it for a rainy day? Is it for a bigger acquisition? Who really knows, can't tell because of their very inconsistent behaviour.