Back in May I ran a screen to identify possible 1YPEG stocks. There were five companies that passed the basic test and the subsequent sorting out. One of them was Diamond Hill Investments. DHIL is an Ohio based investment firm. It provides investment advisory services and fund administrative services. It was formed in 1990. The market cap is only $680 million.
DHIL versus Saul’s General Approach and Philosophy.
Growing Fast. Yes. Revenue growing 28%, earnings growing 43%.
Long Way to Grow. Yes. One, DHIL is a small investment firm. Two, they say that they are now sized to be able to manage $20 million to $30 million in assets under management. They currently have $15.9 million AUM, growing at 21% the last 2-1/4 years. So, three to four years of growth ahead without adding staff or facilities.
Recurring Income. Yes, more or less. Over 70% of income is from advisory and administrative contracts with investment funds (the majority of which are DHIL proprietary funds). As long as the assets under management are steady or growing, this income stream repeats. It is not dependent upon new “sales”.
No Debt. Yes, $33.1 million cash, $45.4 million in investment portfolio, $107.7 million total assets. No long term debt. $33.4 million total liabilities of which $20.0 million is accrued incentive compensation.
Insider ownership. Yes. The CEO owns 9.3% of the company directly. Ooops, just saw a newer form 4. He now owns 7.2 %, having sold on November 17, 18 and 19.
Moat. No. I suppose their moat is as wide and deep as last quarter’s fund’s performances.
Reasonable P/E. Yes, currently 19.33 versus revenue and earnings growth of 28% and 43%.
The non-GAAP earnings adjustment that DHIL makes removes the after tax income from its investment income. I assume their cash is invested in their own funds, although I haven’t confirmed that. They feel that removing this income focuses the performance on the business and removes the stock market gyrations. It seems that they do not add back in the stock based compensation which in FY2013 was $7.3 million versus a net income of $22.1 million. This would have a very significant impact on the 1YPEG (lowering it substantially).
One of the dangers of owning this company is the dependence upon the economic macro events and stock market sentiment. A market downturn will hurt DHIL doubly in that AUM will drop as investors flee the market and the market value of AUM will decrease (and the investment income will likely decrease as well).
My purchase of DHIL has been profitable. Purchased at $190.50, DHIL currently at $229.19 (up $6.90 on Monday) so I’ve gained 15% in 6 months. The board declared a $5.00/share special dividend on October 28th. I am tempted to buy more but my first purchase was at a p/e of 17.7, equal to $202 today, so not a better value point a la TMF1000. And, the TTM growth rates are decelerating the last 3 quarters, from 28.4% to 22.5% for revenue ad 53.7% to 43.8% for earnings. Anyway, this is 0.3% of my portfolio and just an attempt to use Saul’s method so maybe I’ll boost it to 0.6% .
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KC