Last month I mentioned taking a small position in Neptune Marine Services to give me the right to participate in their SPP. I followed that post up with this initial analysis on NMS. The offer closes this Friday and after my heroics, or was it histrionics, with the ANZ SPP a few weeks back I decided to give myself a couple days leeway. Today is pony up day and that is what I’ve decided to do. As always this is not recommendation.

I still don’t feel comfortable investing in NMS and am breaking a personal rule by investing when I have doubts. One of my favourite quotes is capital is scarce and investment opportunities are plentiful. Warren Buffett expressed the same sentiment when he compared investing to baseball without strikes. He said you can wait for the right pitch all day and there is no penalty other than lost opportunity. So, when the fielders are asleep, step up and hit the pitch.

NMS is not in my hitting zone, it’s a fast curve ball with the potential to strike me out.

I’ve read through Neptune filings since 2006. Listened to most of Christain Lange’s webcasts at BRR and for balance re-read Mergers and Returns! The Acquistive Company by Aswath Damodaran. Here are a few excerpts from that.

High Growth and it is cheap (at least in your accounting statements): To understand why investors were attracted to acquisitive companies, you have to begin by first recognizing that most investors like to see growth in earnings and most do not care whether that growth comes from internal investments or from acquisitions. You have to follow this up by understanding how acquisitions are accounted for in accounting statements. If accounting rules allow firms to show the benefits of the growth from acquisitions, in the form of higher revenues and earnings, but hide (at least partially) the costs of the acquisitions, it should come as no surprise that acquisitive companies can look very good on a number of accounting dimensions.

Acquisitions and Value Creation
Can a firm create value by acquiring other firms? While taking a skeptical view of this proposition, you can, at least in theory, see ways in which acquisitions and mergers can increase value. A company can acquire companies that are undervalued by the market and take advantage of market mistakes, thus playing the role of a canny portfolio manager. A merger can work by creating synergy, a rationale much used and misused in acquisitions. Finally, a firm can also create value by buying poorly managed, poorly run firms and turning them around. In this section, each of these value-creating motivations will be described.

The most significant evidence that acquisitive firms are more likely to be exposed to accounting problems comes from looking at history. It is telling that of the 10 most acquisitive firms of the 1990s, serious accounting problems were unearthed at 7 firms – Enron, WorldCom, Tyco, Lucent, Cendant, AOL Time Warner and Conseco.

Start with acquirers who stay focused and disciplined: Acquisitive firms that attempt to stay within their core businesses or play to their key strengths when making acquisitions should be considered better candidates for your portfolio. These firms will also need to maintain that discipline even in the face of pressure from the outside.
And don’t overpay for target firms: The key determinant of whether you as an investor gains from acquisitions is the acquisition price. An acquisitive firm that does a good job of valuing synergy and control should then follow up by ensuring that it gets at least a share of these perceived benefits for its stockholders. Acquisitive firms that enter into bidding wars intent to win at any cost usually do, but their stockholders pay the price.
And prudently fund their acquisitions: Acquisitive firms that fund acquisitions without pushing their debt ratios above acceptable levels or viewing their own stock as free currency are likely to be better investments in the long term.
Avoid accounting complexity: Acquisitive firms that try to present the most information they can about acquisitions and that do not play accounting games are much better investments in the long term.

I have a non-investing reasons to buy into the NMS story. Plus I like to unleash the speculator inside me from time to time. Heck it would be un-Australian of me not to

Here is what I did like from all my reading and listening:

• Christain Lange joined Neptune and decided on a growth strategy. He clearly articulated the strategy and has delivered on the strategy. He comes across as honest and straight forward and focused on the medium term time frame.
• He has built the company and appears to have a good team to manage it.
• They provide conservative guidance and update the market when appropriate.
• The acquisitions are likely to slow, so a clearer picture of organic growth should emerge.
• The acquired businesses have all been immediately accretive and purchased at a lower EV/EBIT to NMS. Lange has not overpaid.
• and finally if things do turn sour I will not be the last rat to leave the sinking ship. Stocks like this attract “true believers” and story stock investors. They should pad any fall.

Related posts:

1. Valuing Intangibles – Why bother!
2. BHP, Investing in Cyclical Companies
3. Neptune Marine Services Initial Analysis