Thanks a lot for sharing the link, great info for everyone.

Thanks Jason. If anyone is interested here is a link to that will explain the impact on the value of NOLs in the event of a change in ownership and hence how they can be valued:

http://www.gibbonslaw.com/news_publications/articles.php?action=display_publication&publication_id=2754

Oh and great job of explaining why the NOLs should have ZERO value. I was thinking that might trip some people up since when I first started incorporating NOL’s into my analysis I probably would have ascribed some value to them, even if it would have been highly discounted.

Thanks so much for reading the blog and buying the book! Just out of curiosity do you have any analysis write ups/thoughts that you put together before reading the book? If so I would love to hear from you at my email jmriv1986@gmail.com Do you have any recommendations on things I could work on, do better, or explain better in the book?

Fantastic analysis! I agree completely that they are a terrible company and you did a great job explaining why they are such a bad company. Great job and hope to hear from you on the next case study whenever I get some time to do that. I plan to make the next case study a bit harder to determine.

I have been reading your blog for about 6 months and
recently purchased your book (a few weeks too soon!!!!) I thoroughly enjoyed
it. It was straight forward with great examples of the points you were trying
to make. I have been investing for a number of years but never really took the
time to learn valuation. After reading your book I thought I would take a stab
at Case Study #1. So here it goes:

I put a value of $0.00 on the shares of this company and
here is why:

1) The business operated at a loss in 2012 and I think
it has for some time; its working cap deficit is over $11 million. Therefore I
put all EBIT valuations at $0.00

2) It has gross margins of 70% which are great but
its G&A Expenses are over 71% of revenues and this is not a young company
looking to grow revenues. Contributors to this outsize G&A expense are the
executive compensation packages (which I think are excessive for a company of
this size) and I suspect that the expenses of the par 3 golf course may not
justify its existence when compared to the amount of revenue it brings in.

3) Its TOTAL assets are dwarfed by its CURRENT liabilities, by a factor of 16! The 2012 10K explains that the business is located on 65 acres on the Las Vegas Strip, but this acreage is leased not owned. Therefore I only place a value on the par 3 illuminated golf course, the 110-station driving range, and the club house. If you want to put a value of $1000000 fine but I would value them at their carry value in the 2012 10K due to their special connection to this specific business. Therefore I would put all asset/recreation valuations at $0.00

4) In the 2012 10K the company itself places no value
on the $21 million it has in NOLs; since they will likely never be used. According to Section 382(I)(5) of the tax code,
there is a rather convoluted scenario in which the NOLs would have some value;
it would be in a liquidation or bankruptcy and it would apply to the debt
holders who also own stock. If a debt holder were to convert their debt to
stock and their stake is pushed above 50%; the NOLs could be carried over, at a
50% discount and minus the value of the debt converted. In this scenario the NOLs
could be worth almost $6 million ($2.1 million when you factor in a 35% tax
rate) to a current holder of stock and debt in the company. Therefore I put a
value of $0.00 on the NOLs for the average shareholder.

5) The company has adopted ASU 2013-07 as of Sept
2013. This ASU “requires entities to prepare their financial statements using
the liquidation basis of accounting when liquidation is imminent.”

The company has great gross margins but nothing
else. There does not appear to be any competitive advantage that this company
has over other non-gaming entertainment facilities that could be used to drive
greater profitability. I think the company could have positive EBIT if the
G&A expenses (which I think are bloated) were reduced, but I do not think
management has shown any interest in reducing them.

Yoram,

Sorry about the very late reply. I just today got the message that you replied to the case study nearly a month ago. I deeply apologize.

Nice research and digging!

What do you think about the company as a whole? Would you buy it even if it is undervalued, which it is not. Its valuation is well over your conservative $1.02 estimate of intrinsic value. Even nearly a month again it was, and again I deeply apologize for not seeing that you replied a lot sooner.

Would you assign any value to the companies operations and if so does that add or subtract from the valuation?

Do you assign any value to the NOL’s and if so what value would you give them?

Again, I am very sorry and apparently I need to check my junk email folders more often and/or change my email settings.

The Case study company has a negative book value (according to the financial reports anyway) and negative EBIT, so we can’t value the company by price to book or do an (8x EBIT + cash)/share calculation as shown in your book. We can try to calculate the reproduction value as shown in your book as follows ($K):
cash 16.2 * 1 = 16.2
accounts receivable 2.3 * 0.85 = 1.96
property & equipment net of $787 accumulated depreciation as stated in balance sheet 669.4 * 0.6 = 401.6
total reproduction value of assets 16.2 + 1.96 + 401.6 = 422.4 divide by 4624 shares outstanding = $0.09
However, I suspect that the property value stated on the balance sheet is original cost and is way too low.

So given the location of the property is stated as located on the Las Vegas Strip just south of the international airport, I easily found the property on Google maps, and then looked up the property on the Clark County Nevada tax assessment website.
The parcel number is 177-04-101-009 and the taxable value is $3,479K (land and improvements).
So take (422.4 + 3479)/4624 shares = $0.84 per share replacement cost.
You stated the market cap is $4700K. So divide market cap by 4624 shares gives $1.02 share price.
I suspect the $1.02 share price is undervalued because it gives little value to the business, just the replacement cost of the property.

Thanks,
-Yoram

Johathan,

I finally got some time to look over BOBS most recent 10K and the link you sent me was to the 2012 10K. As far as I know the actual 2013 10K has not been released yet as I still cannot find the actual report on its website, morningstar, or anywhere else.

The only thing I found about its 2013 10K was this highlights page from Business Week: http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=BOBS

Jonathan,

I will get back to your question after I get some time to read BOBS most recent 10K that you sent to me so I can better answer your question.

I will do so. Sorry to bother you again, but there are two more details about the NOLs that I am trying to understand that I would apprechiate if you could clarify. First, the NOLs grew between the 2012 and 2013 reports even though BOBS turned a profit. Shouldn’t they be shrinking as they are used to offset taxes? Second, it seems to me that the NOLs only offset the taxes on the losses of R$40.6 and R$65.7 and rather than offsetting taxes of those full amounts.Especially the sentance: “The accumulated tax loss position can be offset against future taxable income” in the 2013 report leads me to believe this. Are you sure that the NOLs represent the actual tax amounts and not the taxable income that it can offset the taxes of? I sincerely apprechiate you taking the time to answer my amateurish questions!
Best Regards,
Jonathan