Investment Thesis, Industry Competitive Advantage, & Investment Risks Sections Seminar

1. Investment Thesis, Industry Competitive Advantage, & Investment Risks Sections Seminar October 13, 2010

2. Where do you start? • Must first identify growth drivers! • What factors will affect the future success of the company? • What will cause the company’s sales to increase? • What factors will affect the company’s costs? • What factors will affect the company’s competitive position? • No forecasts are made at this point – this is only an identification exercise!

3. How to identify growth drivers • Look at the company’s history • Management discussion in past 10k’s • Listen to management’s explanation of their results from operations. • Listen to earnings announcement conference calls • Look at the Risks paragraph in their most recent 10k

4. Other Section – Original Research • This is were you perform outside-the-box thinking in order to gain a competitive edge relative to other analysts covering your company. • You need some empirical evidence that is as objective as you can obtain to support the analysis you have make of the company’s growth drivers.

5. Investment Thesis vs Growth Drivers • Next, you seek to forecast the likely future course of the growth drivers you have identifies. • You then seek to determine how these forecasts will impact your company’s results. • Your investment thesis statements are a succinct summary of the results of this research.

6. Comparative Advantage Analysis • Again, the focus is the growth drivers. • How will your company perform relative to its competitors given your expectations for the future course of the growth drivers you have identified.

7. The Risks to your Investment Thesis • For each investment thesis statement, there needs to be one or more corresponding investment risks identified. • The voice here is “If I am wrong in my investment thesis statement, this is where/how I will most likely be wrong!”

8. TSTY – Key Issue #1 • Investment Thesis: • Three valuation methods indicate TSTY is significantly overvalued. • Investment Risk: • TSTY could be acquired at a premium price by a larger more efficient manufacturer, a private equity firm, or a hedge fund for strategic reasons. • However, the lack of brand equity makes TSTY an unattractive acquisition target.

9. TSTY – Key Issue #2 • Investment Thesis: • TSTY has limited long-term growth potential. • Poor market outlook for non-nutritious bakery goods among increasingly health-conscious consumers. • TSTY cannot generate sufficient cash to finance its Strategic Growth Initiative. • Investment Risk: • TSTY might experience a highly successful marketing campaign. • TSTY might develop new products which appeal to new trends in consumer tastes. • TSTY could uncover new ways to enhance productivity • However, achieving these benefits and implementing these changes may take several years.

10. TSTY – Key Issue #3 • Investment Thesis: • TSTY is in a cash-poor financial condition • Gross profit margins far below peers. • TSTY operates in a very competitive and mature industry forecasted to experience low growth during the next 5 years. • Positive cash flows from operations are being offset by negative cash flows from investing and financing.. • Investment Risk: • The stock market is inefficient and some investors find TSTY’s low relative valuation attractive. • However, the catalysts required to drive the price of the stock higher over the next 12 months will not be present.

11. TSTY – Key Issues #4 & #5 • Investment Thesis #4: • The rising health consciousness of consumers is a major challenge facing TSTY and its industry. • Random sample of over 3000 consumers in TSTY’s core distribution area found that 76.5% of them classified the company’s products as “junk”. • A face-to-face interview with a long-time independent sales distributor confirmed TSTY’s brand equity problems and demand challenges • Investment Thesis #4 : • The occupiers of the top four positions in the company own only a minimum number of shares and thus the interests of top management may conflict with those of TSTY’s shareholders.

12. SYM – Key Issue #1 • Investment Thesis: • SYM’s should be valued as a soon to be liquidated REIT rather than as a retailer. • Stock performance has been more correlated with a real estate index than with its closest retail competitors. • Investment Risk: • Family control makes liquidation catalyst indeterminable. • However, if liquidation is deferred there is a low downside risk of 3.71% annually over the next 5 years. • Real estate market could correct. • However, the fundamental value of the real estate provides a downside floor. • Control shareholders could take the company private • However, this is unlikely because of the appreciation that has occurred in the price of SYM’s shares and the large amount of debt that would have to be assumed.

13. SYM – Key Issue #2 & #3 • Investment Thesis #2: • The sale of the Dallas store suggests liquidation. • The store was profitable. • SYM’s was made an enticing offer which was confirmed by the CFO • Investment Thesis #3: • There is hedge fund interest in SYM’s • Dimensional Advisors recently purchased 8.34% of outstanding shares.

14. WPC • Investment Thesis #1: • Buy recommendation supported by valuation approaches. • Investment Thesis #2: • WPC has stable sources of income • Investment Thesis #3: • WPC has maintained their conservative borrowing standards. • Investment Thesis #4: • WPC management’s impeccable track record will help the company navigate the challenging credit markets that currently exist.

15. WPC • Investment Risk #1: • WPC’s investment team not so independent. • However, WPC has achieved high returns with this structure. • Investment Risk #2: • Investors in WPC managed REIT’s experience a 10% haircut. • However, WPC REIT’s have been successfully sold in the past. • Investment Risk #3: • Performance fees now based on operating cash flows rather than assets under management. • However, long-term leases usually experience highly stable cash flows. • Investment Risk #4: • WPC may have trouble raising capital for its CPA17 REIT and maintaining historic returns. • Default risk is substantial risk to WPC’s revenues and asset values. • However, analysis revealed an average risk of BBB on directly owned leased properties and an average risk of BB+ in the REIT’s managed by WPC.

16. PVH • Investment Thesis #1 • PVH is cheap • Investment Thesis #2 • International licensing will continue to be the driver for the company • Investment Thesis #3 • PVH’s retail and wholesale businesses will not hurt them that much in the current business downturn • Investment Thesis #4 • PVH has a strong balance sheet and cash position

17. PVH • Investment Risk #1 • Major retailers/licensees bankruptcy and/or consolidation • However, consolidation will improve the efficiency of the industry and not reduce in the long run the number of retail doors and PVH can find replacement licensee partners • Investment Risk #2 • Extended recession – PVH will be negatively impacted • Investment Risk #3 • International licensing revenue grows slower than expected • However, business interests of licensees are aligned with PVH which will mitigate this risk • Investment Risk #4 • Currency translation loss • However, PVH’s diversified portfolio of licensees will mitigate this risk. • Investment Risk #5 • Larger wholesale discounts and returns than expected • However, don’t worry because tested in scenario analysis.