Chris BlumasDye & DurhamDND.TODON'T BUYAug 14, 2024

Still no earnings recovery in sight. Balance sheet has been trending down. On a bounce, sell and move on.

The chart says it all--how not to manage a company. Doesn't know where they went wrong. They probably grew the topline without paying attention to the bottom.

An example of a company his firm wouldn't touch. That doesn't mean it won't recover, but a lot of things are happening. Management turmoil, family issues, board fight, legal proceedings. Might get back to $30 eventually, but that doesn't help the people who bought at $45.

He wants dividend income and a consistent approach from management.

This name is cheaper than it ought to be. It's in a whole separate risk category, so only if you want to take some real risk. All things being equal, should be higher in January than it is now.

Never a big fan. Reminds him of Valeant, which bought drug companies and then jacked up the prices simply because they could. DND had the same model. It's descended into a soap opera.

The disaster at DND seems never-ending. Revenue is declining, debt remains huge, and it is barely in line with its covenants. It will likely get hit with year end selling, and the company clearly is floundering. We would have no interest here.
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No, keep holding. Superstar that collapsed. Latent value that current management is not accessing. If you're patient, someone will find a way to surface some value. Intrinsic value higher than current share price. 

Plantro has pulled its bid, so it certainly might become a seller. Frankly, the stock has become a bit of a basket case. It has been up for sale. Management has revolved. It buys back stock and then issues stock. But the main issue is debt. 12-month cash flow was $81M. Obligations net of cash are $1.4 billion. We would consider it low quality and too risky. Yes, it could be sold. But we would have said that a long time ago as well.
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Better opportunities elsewhere in higher-probability stocks. Very competitive business. He doesn't understand the analysts' price target average, and that's what lures people in.

He owns a small position. Leverage is the biggest concern but the valuation of its assets is good. It needs to monetize their financial services base. There has been a situation with the CEO.

Under activists' pressure, the CEO has decided to step down, which was likely because the company decided it was going to lose anyway in the upcoming special shareholders' meeting. DND says it has received expressions of interest from ''inbound parties', at 'attractive premiums' but has paused its strategic review while it focuses on the special meeting and possible revamp of its board. Investors liked the news and the shares rose. But the future of the company is still very much in flux. The meeting is Dec 17 and if Engine Capital wins we could see a new board composition and a new direction for the company. It has potential, but a massive amount of debt. It is probably better off selling itself, in our view, due to its debt and small size, but right now it is hard to call. We would see it as a HOLD until the meeting is resolved and some clarity comes out. 
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Software is very widely used in the legal industry. In the last quarter ending June 30, reported loss of $105M. But last year the CEO made $98M, the second-highest-paid CEO in Canada. Stays away because it's not making $$.

We think DND is still a HOLD for a few reasons:

DND possesses a portfolio of high-quality businesses with decent pricing power (gross margin around 87%).
In recent quarters, management is also committed to doing share repurchases at an aggressive pace, cancelling more than 20% of total shares outstanding within one year. 
Also, cost control initiatives and a recovery in the real estate market as interest rates peak could be a near-term catalyst for the share price to gain momentum.
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We think DND is quite cheap given the quality of the portfolio of legal software businesses they possess strong competitive advantage positions (few competitors). The company is also actively repurchasing shares recently at an aggressive pace, and management also believes shares are significantly undervalued. However, the leverage is high.

The recent lawsuit is relatively minor, we think it is just normal business issues. On the other hand, the business model is quite controversial as DND will acquire niche legal software companies that possess strong pricing power (only one or a few providers) through a leveraged balance sheet, and raise prices to create shareholder value (the practice similar to Valeant in the past or TDG). DND did raise prices quite aggressively but we don’t think DND gouges its customers like Valeant in the past.
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