Sirtex Medical Ltd.

Sirtex Medical Ltd.

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Sirtex (SRX) got a takeover offer of $28 a share. Its board recommends shareholders take it.

I spent a reasonable chunk of my portfolios on SRX, bought for my children their first shares with their savings… averaging about high $11 to $13 on the accounts… at $28 and some 2.5% dividends in less than a year… I don’t get lucky this often so when I do, you bet your azz I’m going to gloat about it.

Well, the takeover offer kind of take my thunder a bit because any company can be taken over, and any idiot with cash can pay too much, or pay at all, for what they’re getting. But ey, it made us money and making money mean you’re smart, alright. So stop interrupting a person self-complimenting himself (apparently if you put a dash between two words, it’s never a wrong word)… might learn something. Definitely learn something. Might not be what’s intended but lessons for sure. Note to self, you’re definitely not rich or famous enough to crack bad jokes and still keep an audience. Note II, stop talking to yourself, only eccentric billionaires and actual genius does that.


So… What made Sirtex a quality company worth backing the truck in and load up when it was anywhere under $16?

Note that from a recent high of $40 it dropped to $20 then $15s then $10.50s… all within a year or two. With the CEO getting kicked out for allegedly trading on insider information; a series of “bad” results from their major R&D studies to expand the one and only existing product to other diseases; and a couple of pending class action lawsuit.

All those and me having practically no knowledge of medicine but still thought SRX was such a great bargain I have to load up. No, not recklessness. That’s with other stocks I don’t want to talk about.


1.  Increase Retained Earning. Stable or lowered Contributed Equity.


SRX Retained Earnings


Retained Earnings (Green) and Contributed Equity (Black) are two of the few main metric an investor should look at to determine an established company’s quality. That is, determine its (historical) performance to shareholder wealth.

C.E. are capital shareholders fork out. R.E. are the earnings retained ( I know) after such things as dividends are paid out.

A quality business takes in little or no additional cash from its shareholders. That is, C.E. remain relative flat or stable over the years, with jumps in contribution only done very rarely and done for very, very good reasons. And always contributed with additional growth and profit returned to shareholders soon after.

Any established business that do not show these pattern you can bet are either of poor quality, or are being touted as “innovative” and investing for growth in the future. Depends on the age of the company…


2. Cash Flows Pay for Itself


srx netcash


All companies, as the statement of cashflows tell us, do three things: Make and sell widgets; find new ways to make new widgets or sell it; get money or pay dividends.

A quality business make enough from its making/selling operations to fund its investing activities and repay its debt and/or dividends to shareholders.

In other words, the net operating cash (green) should be positive while net investing (blue) and financing (red) cash should be negative due to spending rather than cutting back; re/paying rather than raising more cash.

Then the net cash flow (yellow line) should ideally be positive. i.e. operating cash, year on year, tend to pay for other activities combined.


3. Cash Conversion Cycle


SRX cashconversion


What makes a good business? One that make cash before it even wakes up. Well… a good business contribute to society, make the life of its client and customers better, give to charity, put all employees well being ahead of profit… People do accuse me of being cynical and negative. Don’t know why.

Anyway, a good business, cash-wise, makes money quick (not quick money as that’s unreliable.. you’d want to make money quickly and often). How do you make it some 200 days before the year even start? Sirtex does it by paying its suppliers nine months after purchase while collecting what’s owe to it in two. It also hep that its inventory doesn’t stand idle for too long either.

So if you supply to Sirtex, you better redo your credit policy.


4. Return on Equity


srx ROE


Return on shareholder’s equity in the 20s and 30s… forget about it.

Though you ought to break down ROE’s component to see why the return is high or low… knowing that Sirtex has no debt you know its returns are not due to leverage but a quality operation.


What Price.

With earnings currently ranging from $50M to $60M.

Current sales only some 5% of its market potential. Expansion plan into Asia/China; further expansion into Europe… new studies show potential for use in right-sided colon cancer [?]…

Using Ben Graham’s rule of thumb valuation for growth stocks. Putting the p.a. growth for next decade at 5%p.a. and assuming a minimal earning power of $50M… That put its fair value at $925M, or $16.59 a share.



srx val danginvestor



$28 Offer Implication.

What’s does the takeover price implies? Using the same measure of Graham’s it’s assuming earning power of $60M and growth at about 9%p.a. for next decade.

Not an outrageous assumption. Quite reasonable.

Will there be other bigger pharma being more reasonable? Hope so.

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