Educational materials nr. 7This article is about Balance Sheet metrics.
They are including metrics, which show proportions and structure of the company. Structure of the company include own capital, assets and loans. It can tell also about financial stability of the company too.
Equity-to-Asset — relation equities to assets. Show using own resources in producing of the products.
Cash-To-Debt — relation cash to debt. If more — that is better. If this indicator is higher then 1, that means, that company can pay her debts more then 1 time. Indicate financial strengh of the company.
Debt-to-EBITDA — relation debt to operational income. Helping metric.
Debt-to-Equity — relation debt to own capital. Critical meaning — 0,4. This meaning can depend from sector of the company and current expectations and situation of the company.
Interest Coverage — relation operating income to interest payments. Indicates financial strengh. If higher — that is better.
All of them are important in the complex analysis of the company and her financial stability. If company has good operational results, but not good financial stability and dangerous structure with high ammount of debts, she will not be good candidate for investing.
Valueinvesting
Educational Materials nr.5 Net Margin is bigger than Operating Hello dear investors,
This article is about rare situation, when net margin is bigger then operating margin. Such situation need to be analyzed well to understanding potential of the company.
This happen from external or internal reasons:
1. When company can’t pay taxes and/or have tax benefits. Company will not pay taxes untill she will get net profit as tax benefit. Profit from tax benefit can be holded or payed as dividends. It have good influence on stock growning. In some countries this situation can be because of low or zero taxation.
2. Net profit can be from non-operating activity. It is income from investing activity of the company, selling assets, currency course changing and so on. Company can make her status better in a financial statement. It will seems from big difference between P/E and P/E without NRI. That is mean, that company have most income not from operating activity and is bad signal for investors.
Analysis on a BIO case.
Net margine is bigger then operating in 8 times. Company has difference between P/E and Price-to-Free-Cash-Flow in 8 times. It means, that declared income does not supported by real result. P/E equality to the P/E without NRI means, that company have income just from operating activity.
In this case reason of bigger meaning net margin from operating margin is in taxation. Company does not have cash to pay taxes, so she had tax benefits. She wrote this tax benefits in net income.
Cases, when net margin is bigger then operating are rare and need serious research and analysis to understand profitability from investing in this company.
Wish you have good investing and big profits,
Financial analist and adviser,
Valerii Selin
Educational materials nr. 4Hello, dear community.
This article is about metrics, which show real finance situation of the company. They are based on Cash Flow Statement. Metrics, based on Income Statement can be unreal, but based on Cash Flow Statement are hard to forge.
Describing of them:
CFI – Cash Flow from Investing. Calculate with buying-selling securities, emission of bonds and dividend payments.
CFF – Cash Flow from Financing. Calculate with buying-selling of company assets.
CFO – Cash Flow from Operations. Is the most important in analyzing of financial situation. Calculate with sells, inventory costs, interest payments, taxes and cost of goods sold (COGS).
FCF – Free Cash Flow. Is sum of CFI, CFF, CFO.
P/FCF – relation price of the stock to FCF on stock. Is metric of overvaluation/undervaluation of the company. Is important near, close meanings of P/E to P/FCF. That is mean, that real activity of company has no difference or little difference from declared results.
Price-to-Owner-Earnings – Relation price of the stock to owner earning on stock. Show real activity of the company, unlike P/E.
Owner earnings – Profit of the owners of the company. Owner earnings = net profit + depreciation & amortization +/- another non-cash costs – average annual maintenance capital expenses.
But even Cash Flow statement do not secure from manipulations. For understanding real situation needs:
1. Exclude tax benefits related to employee stock options.
2. Exclude anomaly big changes in currents assets. For example, it is big changing of accounts receivables, inventories, accounts payable. All this changes tell, that company try to manipulate data to make better presentation of financial results.
3. Minus costs, which needs to support operational activity (taken from CFI).
Pros metrics, based on Cash Flow Statement:
+ Show real situation of the company business
+ Hard to forge – any changes are seen
Cons metrics, based on Cash Flow Statement:
- Needs checking and re-calculations
This indexes give a possibility to check veracity of financial results. And they complement analysis from Income Statement and Balance Sheet metrics.
Wish you have good investments,
Financial advisor and analyst,
Valerii Selin
Educational materials nr. 3Hello everyone, who are interested in value investing.
This article is about metrics, based on Income Statement data. They are used for first-look analysis to understanding is this company good for investing. This metrics show over/undervaluation of company. Undervalued companies are good to investing.
Description of indicators:
PE – relation of stock price to net profit on stock. Indicate over/undervaluation of the company. Her critical meaning depends from sector of economic, in which works company.
PE without NRI – relation of stock price to net profit on stock, but do not include unusual profits from non-operational activity (selling part of assets, real estate and so on). If PE without NRI is equal PE – company have profits only from operational activity and is good signal.
Forward PE – consolidated meaning future PE from analytics.
PB – relation price of stock to the book value of stock. Measure of over/undervaluation of the company. If PB = 1, it is mean, that company have fair value. Usually PB is more than 1 and become 1 or lower only in crisis.
PS – relation price of stock to sales/revenue.
EV-to-EBIT, EV-to-EBITDA, EV-to-Revenue – another variant of metrics under/overvaluation of the company. Can be used instead PE or with PE.
Revenue – Or sales.
EBITDA – Income after paying COGS (Cost of goods saled), SG&A (selling, general and administrative expences) and before payment of D&A (depreciation and amortization), taxes and interest rates.
EBIT = net profit – EBITDA after payment D&A, taxes and interest rates.
Enterprise value (EV) – price of company at absorption by other company. EV = Market Capitalization + Debt + Preferred Shares – Total Cash
Market capitalization = shares at market*price of share
PEG – relation price of stock to earnings growth on share for 5 years. Indicates market waiting. If PEG > 1, it is mean, that company is overvalued by market and/or analysts. If PEG<1, that mean, that company is undervalued by market and/or analysts. Uses as auxiliary metric.
Pros of this metrics:
+ They give “photography” of company on the stock market
+ Give a possibility to make comparative analysis with other companies.
Cons of this metrics:
- Don’t give a valuation of financial health of the company
- Don’t give a valuation of structure of the company
This negative sites decides by using other metrics.
Indicators, based on the Income Statement, are important part of analysis of the company and give understanding of her status at analysis moment and needs of next analysis. But using this metrics needs to use that with other elements of quality and quantitative analysis.
Wish You have good investing,
Financial analyst and advisor,
Valerii Selin
Educational materials nr.2 Hello dear community, wish you have good day.
As it was in educational materials number 1, for analysis of company actively use metrics. They include calculation financial data from financial statement. This calculation uses to compare with other companies in sector and to compare with history of company. Metrics are part of complex analysis. Sources of metrics can be taken from Morning Star, GuruFocus and other.
Bad meanings of metrics do not mean, that company is bad. On metrics have influence external factors and all financial data are based on a last published statement. That is why this indexes are analyzed with financial statements of the company. For example, big debts can be general characteristic of sector.
We can make classification metrics as:
1) Based on income statement. Used to understanding overvalue/undervalue of company at moment.
2) Based on Cash Flow statement. Indicator of financial health of the firm.
3) Based on Balance sheet. Useful when you need to understand structure of the equity, assets and debts – indicate money-management of the company.
Exist many other metrics, but they are used in special methods of analysis of company.
Pros:
1. Easy to use and interpretation;
2. Some objectivity in analyzing of company;
3. Easy-to-understand calculations;
Cons:
1. Exist risk of manipulation of financial data in financial statement. Some guarantee exist, when company have an audit;
2. Need to check financial statement;
3. Do not give all-include analysis, needs research of environment and sector of the company;
Metrics are good in analysis of the company: easy-to-use, objective, possibility to understand situation on market and comparing with competitors. But they must be complete with qualitative analysis. This is comparing with competitors, analysis of market and research of financial statement.
Wish You have big profits and good investment,
Financial analyst and advisor - Valerii Selin
Educational materials nr.1Good day, dear community. Today I will tell you about value investing.
Value Investing is investing, based on economical indexes of the company and her real (fair) value. Real value is a guarantee of stable growing of the company.
This kind of investing is not for speculations. It was created for long term investment. Decision about investing is after quantity and quality analysis.
For quantity analysis use special indexes with own evaluation criteria (price to earnings , cash to debt and other). Quality analysis include fundamental analysis . It is analysis of economics, industry and sector.
Often use comparative analysis with competitors and environment. Important part is analysis and checking financial statements of the company.
The most famous value investors are Peter Lynch, Benjamin Graham, Warren Buffet. All of them had success using own variants of value investing.
Pros:
1. Big profitable;
2. It needs less time on investing;
3. Long term;
4. Less influence of speculations.
Cons:
1. Can be big losses in crisis (more than 50%);
2. Need more resources, than usual trading;
3. Influence of news and fundamental factors;
4. Need better investing preparations.
Wish You profits and good investing,
Financial advisor and analyst – Valerii Selin
BUY: A Micro Cap Company Aiming To Improve The Health Of CattleHere is an idea that I am going to pursue this coming week - feel free to join me.
Let me give you the profile of the company.
Name : ImmuCell Corporation
Sector , Industry, Country: Healthcare | Biotechnology | USA
Plain English Overview :
They create health products, in the form of pills & vaccines, to make for healthier cattle.
The goal is to reduce the use of antibiotics in the American food chain.
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I've divided the fundamentals into 6 parts . These six parts are based on research, and I think they are the most important criteria to consider when thinking about investing in a company, especially a small one.
Fundamentals
VALUE
-- P/B: 1.3
DILUTION
-- 7M shares
QUALITY
-- Debt/Equity < 0.3
-- Long-term debt/equity < 0.3
CASH
-- P/C: 5.3
OWNERSHIP
-- Insider: 28%
-- Institutional: 20%
GROWTH
--Quarterly revenue growth: 11%
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Now let's talk about technicals , briefly.
The stock is at the bottom of its range and is putting in a double bottom with a breakout ('W').
All in all, the stock seems like a pretty good idea to pursue - as long as you position-size (i.e don't risk more than 5%), I think it's not a bad idea. 📈
Target 4.90I decided to position myself on this company because it allows me to position on silver and at the same time invest in a solid company.
I believe that silver has more growth potential than gold and is more attractive for the current price. I will use this company to invest in silver and at the same time to protect myself from inflation.
Buy PVR at 950-1000 Rs, has potential to gain more than 100%Technical Part : Stock was rejected upside after last week rally, it didn't have any price support in that trajectory, we saw the profit booking on Monday.
Some might say, it happened due to financial report but that was just a bite at the cherry.
Now stock has retraced more than 50% and heading towards 61.80%. It is Excellent Bargain Price where you can get in,
Stock has great upside potential of more than 100%
Fundamental Part: High growth Stock
P/V ratio 4.15, Good
EV/EBITDA ratio 6.19,Excellent
High FII investment
Return on asset and Profit Margin has decrease due to this quarter otherwise it was good
"Overall it is a great purchase, if you hold it for more than 6 month. People will rush towards entertainment once everything will be okay"
INTC is very cheap imoAs of today INTC is trading at a 12.5 P/E ratio with yearly earnings of $5.15 per share. Their shares outstanding have been falling at a 5.5% rate every year(good thing). They have a very healthy book value and current ratio with debt and interest completely under control. Their Cash Flow is $8.35 per share and they payout 1/4 of their earnings as dividends.
Warnings: Growth is expected to be around 2.5% annually which is even smaller when you factor in inflation. This is more of a value grab than a growth play
INTC is one of the worlds largest semiconductor chip makers. They develop advanced digital technology products like microprocessors, chipsets, and motherboards and other integrated circuits for electronics and other devices that I cannot possibly describe in one peragraph.
PFE Is A Value StockPfizer has maintained the same amount of revenues since 2010 which actually means it’s shrinking a bit (inflation) but this stock has a lot of value to offer. Their annual EPS is $2.80 and they pay out an annual dividend of $1.52 (4% yield) of which increases 16c every year. They have a healthy and steady Cash Flow of $4.20 and their shares outstanding have decreased at a 2-3% rate every year.
Pfizer is a Pharmaceutical company that develops and markets medicine for humans and animals valued at 200Bn
Value Investment - RUBI - Sales RecoveryAll comments and likes are very appreciated.
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Description
I do hope that the federal government will do its best to support millions of families that will suffer during 2020.
This report is about the more mundane topic of a stock recommendation.
I do believe that the combination of stimulus from the federal government, and Federal Reserve, plus a peak in COVID-19 infections will allow the US economy to begin to recover later in 2020. To maximize risk and return I am recommending a company in the digital advertising industry whose stock price has declined 57% since Feb 19th. Sales and profits will be depressed in 2020, but sales could double by 2023. The name of the company is Rubicon (RUBI), and they have a strong balance sheet to withstand the financial pressures expected over the next six months.
We know that the near term news will be horrible. Twitter, an advertising driven business pre-announced March 2020 quarterly results today. Advertising sales grew about +13% year over year in the months of Jan & February 2020. In the month of March 2020 sales appear to have plummeted by (44%). The analyst at JP Morgan reduced his 2020 profit forecast and now projects that EBITDA for Twitter will decline year over year by 50%. Inspite of this dire forecast, Twitter’s share price rose today, despite a valuation of 6x times reduced 2020 EV/sales, and 30x times reduced 2020 EV/EBITDA. Rubicon is a more attractive investment and I will explain why for the remainder of this report.
Comparative Income Statements:
The most similar public company to Rubicon is Tradedesk (TTD).
The Rubicon business has a lot of operating leverage with over 44% incremental EBITDA margins.
Tradedesk provides a view of the financial statement profile Rubicon will show as sales triple.
The table below shows how as RUBI sales triple over a few years its EBITDA can rise seven-fold as
EBITDA margins rise from 12% to 32%. Tradedesk a first cousin, is a larger version of Rubicon.
Firm TTD RUBI
Year 2019 2019
Sales $661 $223 Million
GM% 77% 67%
EBITDA$211 $27 Million
EBITDA 32% 12%
Comparative Valuation:
I have assumed that advertising sales at Rubicon, Tradedesk and Twitter decline (30%) in 2020.
The weakest quarter will be June 2020 where sales could decline (50%) year over year.
Even after its decline Tradedesk trades at 12.8x times 2020 EV/sales that are depressed.
Twitter is valued at 6x EV/sales for 2020.
Last year a direct competitor of Rubicon was acquired for 5x times EV/sales.
Rubicon as the small cap in the group is valued as 3.2x EV/sales for the depressed 2020 year.
RUBI has a strong balance sheet with $150 million in cash and no debt after the Rubicon-Telaria merger closes. Even if the company loses money in 2020 for one or more quarters the company has plenty of cash. At the current $5.63 price/share RUBI is trading at 4x times cash.
When To Buy The Stock:
Over many years of investing I have noticed that cyclical stocks tend to bottom in the quarter of maximum year over year sales decline. The June 2020 quarter will have the maximum sales decline with the assumption of a 50% decline. Thereafter as the economy reopens sales will improve and the stock price should as well. Our stock recommendation could be a little early, but this report provides you the background information to decide if you wish to wait a month or two to invest in Rubicon.
2021 A Much Better Year:
Our assumption is that the digital advertising market declines by (30%) in 2020 and then grows 30% in 2021. Rubicon is expected to gain market share (explained later) which will drive 50% sales growth in 2021 for the entire company.
On December 19, 2019 Rubicon (RUBI) and Telaria (TLRA) announced an all stock merger where Telaria shareholders will receive 1.08 shares of RUBI for every 1.0 share of TLRA that they own. A completion of the merger is expected within a month. Company management had forecasted $20 million in cost synergies in December 2019, with most of the savings linked to public company costs and no employees being furloughed. With the economy plunging into a recession we believe the company may seek to cut costs by a total of $50 million.
Company Description:
Once upon a time buying and selling common stock on the New York Stock Exchange was done by humans. Today the process has been automated by computers. Today buying and selling advertising space on the television and the internet is still mostly done by humans. The automation of this process has begun and it is called “programmatic advertising.”
TradeDesk is the largest programmatic exchange for advertising buyers and here is a quote from one of their advertising agency customers. “We believe advertising will be transacted digitally,”
“The future of all media is digital and programmatic …eventually all media will be digital and it will be transacted by machines.“
Companies that succeed in automating the process of buying and selling advertising inventory, have the opportunity to create enterprises worth tens of billions of dollars in market capitalization. Brands such as Apple or Colgate are the buyers of advertising inventory and can make programmatic purchases via Trade Desk which has a $9 Billion market cap. Publishers are sellers of advertising inventory such as Hulu television or Spotify. There is an opportunity for one or more companies to help the publishers automate the process of selling their advertising inventory. Both Rubicon Project and Telaria are striving to become programmatic advertisers for publishers like Spotify and Hulu, and in this large $100 Billion digital advertising market create an enterprise with a multi-billion dollar market capitalization.
Advertising Market:
Over $333 Billion was spent in 2019 worldwide on digital advertising. About two-thirds of that ad spending is in several captive walled gardens such as Google $104 Billion or Facebook $70 Billion. The remaining $100 Billion of advertising is spent in the open internet which is the market that Rubicon and Telaria serve. Eighty percent or $80 Billion of this advertising is sold the old fashioned way with a sales-force. Twenty percent or $20 Billion of this advertising spend has been automated with advertising exchanges.
Key 4 assertions in the Rubicon-Telaria investment thesis:
The $20 Billion programmatic advertising market is going to grow at a 6% CAGR during 2019-2023 as publishers opt to sell more of their advertising inventory through these automated marketplaces.
Rubicon-Telaria will benefit as a consolidator and grow its programmatic market share from 6%
Catalyst
An end to the stay at home policy by April should allow the economy to begin to recover.
A full recovery may take years, but sales should improve from the lows that will be seen in the June 2020 Quarter.
I and/or others I advise do not hold a material investment in the issuer's securities.
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All comments and likes are very appreciated.
Best Regards,
I0_USD_of_Warren_Buffet
Value Investment - GOOS - Further ExpansionAll comments and likes are very appreciated.
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Canada Goose (NYSE: GOOS) is a vertically integrated 63-year-old manufacturer and retailer of outdoor apparel for men, women, and children-- traditionally known for the famous parka. Canada Goose (CG) is an organic growth story controlled by an excellent family owner/operator and Bain Capital. Multiple upcoming catalysts drive future growth, including a further expansion into China, an upcoming brand extension into shoes, and continued diversification into apparel and light jackets. Since coming public, its stock and sales have doubled; however, the underlying operating profits have gone up five-fold. Fixed cost leverage has become more apparent as the business continues to scale and shift from the low margin wholesale business to the direct-to-consumer (DTC) channel, which has a gross margin uplift of ~ 3,000 basis points. It is rare to find a business growing top-line at a 40% CAGR in tandem with expanding margins (GM +2,200 bps; 5 years), trading at a discount to luxury peers, while stock is off almost 50% from all-time highs. The stock is down due to a multitude of, what we believe, are short-term issues, including volatility in wholesale inventory/shipments, a 61% build in inventory y/y, exposure to unrest in Hong Kong, the China Coronavirus, and recent selling by Bain Capital at the stock’s recent peak. While these issues have put pressure on the stock, we believe virtually all the issues are transitory, known, and fixable over time. In our view, these short-term pressures have created an excellent entry point, given the vast white space opportunities and growing global demand that is nascent in its lifecycle.
The Real McCoy
The global parka movement was essentially created by Canada Goose, with its signature fur trimmed hooded jackets. On the back of these famous parkas, Canada Goose has launched itself from a regional Canadian brand to a global leader in luxury outerwear. This is a brand with a long lineage of producing some of the highest quality outerwear across the globe, and that sense of quality is synonymous with its brand extensions into other categories such as apparel, light outerwear, and eventually, footwear.
While the Canada Goose brand is quite familiar in cold weather climates within North America, the brand is still in its infancy in other parts of the U.S. and even more so globally. For instance, the brand started its direct-to-consumer push just over 5 years ago and only recently opened its first two physical stores in Toronto and New York City in 2016. Canada Goose is unique in that, while it has global brand recognition, it is only one third the size of its closest competitor, Moncler. Globally, there are only 20 physical stores and sales are still below CAD $1bn. Given the vast whitespace, we think there is 25%+ sales growth with 30%+ EPS growth for the next 3-5 years and double-digit EPS growth for at least the next decade is feasible.
The distribution network and manufacturing capabilities have been built out over the past few years to satiate strong product demand. Consumer demand has historically outweighed the amount of product Canada Goose can manufacture in Canada. While it is a good problem to have, CG management has had to invest a significant portion of free cash flow back into the business to continue this growth trajectory. Over the past two and a half years, the team has built 4 manufacturing facilities (8 total facilities within Canada). Furthermore, a recent acquisition of Baffin (shoe manufacturer) in November of 2018 was a natural brand expansion into a new category that we think is relevant to Canada Goose customers. Capital spending has been extremely high, given all the recent fixed cost investments to keep up with top-line growth, which has doubled approximately every 2 years. Capital spending in FY 2019 as a percentage of sales was 8.2% (versus peers ~4%) and, given the planned C$75mn (7.5% of sales) investment in FY 2020, capital spending should start normalizing further with more free cash flow generation being used on the recently initiated stock buyback.
It is clear that the Canada Goose brand resonates well with consumers as a global luxury outerwear brand; however, the market still does not value it as such. If one factors in CG’s growth rates relative to peers, Canada Goose trades at a steep discount to almost all luxury peers and a steep discount to its closest competitor, Moncler. We believe much of the disconnect is from the consensus perception of the brand within North America-- most of which we think is misplaced when taking into consideration three quarters of the incremental growth is coming from outside North America. Below are a few viewpoints we’ve heard over the past few months after speaking with investors in the space.
Consensus View
Canada Goose is a saturated brand that is starting to experience brand fatigue.
North America is a fully penetrated market with limited growth opportunities outside of the traditional cold weather markets.
A parka retailer like Canada Goose sells a commodity product that is exposed to malls and physical store-based traffic trends.
The high multiple more than reflects any future growth and/or margin expansion priced into the stock.
This is another recent IPO that is overpriced and overhyped.
China geopolitical issues and the never-ending trade war will directly impact Canada Goose.
Concerns around demand and product/sales being pulled forward from distributors.
The Hong Kong protest situation will impact the brand longer than expected.
The Coronavirus impacting demand in China.
The Chinese boycott and political issues with regard to Huawei could permanently impair the brand in China.
Variant View
Canada Goose is the original innovator in winter apparel fashion and functionality and has significant pricing power.
Transition to a direct-to-consumer focus from wholesale will continue to help margins expand going forward.
The direct-to-consumer transition from wholesale has rapidly accelerated fixed cost leverage with gross margins expanding ~ 2,200 basis point in 5 years.
The consensus growth profile for Canada Goose is highly conservative given Asia/China expansion, brand extensions, and coming footwear line (Baffin acquisition).
Canada Goose is one of the few global luxury brands in its infancy that has had consistent top-line growth along with consistent margin expansion.
A Unique Customer Engagement Experience
Canada Goose has a unique approach to its retail presence, with most stores offering some sort of cold weather experience to showcase the brand’s various products. Its most recent opening in Toronto took it a step further by offering no for-sale inventory; the store is comprised of an entire buyer experience built around a snow storm, a cold room, and a crevasse traverse room. Canada Goose’s strategy for their stores is more about brand building and experiences than the traditional retail model. The end goal is to drive customers to its online platform, which has the highest operating margins. Additionally, the unique retail approach gets customers excited about the brand and compels them to share their experiences on social media.
Stock Weakness
The stock is down for a multitude of reasons-- from PETA outcry over the use of coyote fur on the hoods, to concerns over the volatility of seasonal inventory builds, as well as Hong Kong unrest. At one point, Canada Goose was at the center of an international controversy where it was put in the spotlight after the CEO of Huawei, Meng Wanzhou’s arrest. Meng’s arrest in Vancouver caused the Chinese to target any global Canadian brands, and by the circumstances of its name, Canada Goose was a target. During this political entanglement, Canada Goose’s stock cratered 17% and at that time valuation was extended and trading at over 12x EV/sales, and almost 70x LTM EV/EBITDA. Moreover, at roughly the peak share price, Bain Capital and Dani Reiss initiated two large secondary offerings. In less than six months, over 51% of the float was dumped onto the open market and over 18% of the fully diluted shares, putting tremendous pressure on the stock following this supply shift.
06/22/2018: 10,000,000 shares offer by Bain, Dani Reiss, and John Black at $62.42 per share. Bain sold 8.4mn shares, Dani Reiss sold 1.5mn shares, and John Black sold 100,000 shares.
11/28/2018 10,000,000 shares offered by both Bain and Dani at $64.52 per share. Bain sold 8.49mn shares, Dani Reiss sold 1.5mn, and Jean-Marc Huet sold 10,000 shares.
On the most recent conference call, concerns regarding Hong Kong created yet more uncertainty of the protests, potentially impacting sales and store traffic at its 2 flagship locations. Furthermore, there are some labor cost headwinds with minimum wage increases (Now C $14/hr) in Ontario, Canada, partially mitigated by having over 1,350+/2,000 manufacturing laborers in Manitoba (C $11.35/hr) and Quebec (C $12/hr). In addition to all these concerns, management is remaining elusive with regards to giving more short-term transparency the sell-side desires. Canada Goose CEO, Dani Reiss, is focused on the long-term vision of the company, which can, at times, lead to frustration from investors and the sell-side; but he remains a focused owner operator with a 5+ year vision for the company. This is further exemplified by the way Dani has handled the acquisition of Baffin shoes and the almost constant bombardment of sell-side questions on the timing of an upcoming Canada Goose shoe line. While there are certainly some transitory issues, we feel the company is better positioned as a global brand than it was at the time of its IPO, yet the stock is trading at its cheapest multiple since coming public on a PEG, EV/sales, and forward P/E basis. The market at these levels is pricing some of these concerns as permanent events-- something we think is unlikely.
Throttling Demand While Shifting from Wholesale to DTC
Management has a mid-term target of throttling wholesale distribution to a growth rate of no more than high-single-digits. The real crux of the bull thesis is that margins will hold up and expand further as DTC transitions to become a larger portion of the revenue mix. Early on the wholesale channel was the backbone of the company, management realized the importance of a direct-to-consumer approach whereby management would have more control over inventory and sales. This strategy mimics some of the vertical integration at both Moncler and Lululemon, where direct-to-consumer makes up over 77% share of the business at Moncler and a large share of the business at Lululemon. Canada Goose’s rapid rise in DTC has been unprecedented with regards to execution, from 2015 at minimal levels of DTC business, to having more than half the sales derived from the high margin DTC business.
“We plan our direct-to-consumer and wholesale business well, and we are not afraid to be sold out. If somebody can’t find the product they want in a certain year they’ll come back for it next year, our products are special, they are not commodities” --Dani Reiss, CNBC
“The allocation model privileges our in-stores first and then e-commerce. And then we consider the replenishment of wholesale orders, only when it makes sense to do so.” --Johnathan Sinclair. Q2 2020 CC
Abundant Future White Space Opportunities
At roughly one-third the size of Moncler in terms of sales, there are tremendous global white space opportunities for this well-respected 60-year-old family-run business that has primarily been relegated to North America. While Canada Goose still derives most of its sales from Canada (> 35%), three quarters of the incremental growth is coming from outside North America. To put this into perspective, Canada represents over 35% of Canada Goose sales yet represents only 2% of the global luxury market. Furthermore, the physical store penetration is still relatively nascent, since Canada Goose only has 20 global flagship locations and two stores in Europe and five stores in the United States.
Though arguments have been made that Canada Goose products are only relevant for cold weather climates, we think that Canada Goose has done an excellent job at expanding into adjacent categories in light outerwear, raincoats, apparel, sweaters, hybrid knits, and accessories. With its strong global brand power, we think Canada Goose can continue to use product extensions to expand its addressable market throughout various geographies, especially in China. In 2020, of the five planned international stores, three flagship stores are planned for China. China remains a vastly underpenetrated market despite the brand recognition there.
China remains the dominant market for luxury good spending globally and the only large market to grow year-over-year, but it has represented only a fraction of Canada Goose’s total sales. While Asian consumers tend to have an affinity to the brand, the first physical mainland China store was the Beijing flagship store, which opened less than thirteen months ago. Even though China only represents a fraction of sales, we predict that as the brand matures, future Chinese sales could represent over 40% of the company’s total sales-- similar to that of other large European luxury brands.
Luxury Outerwear Duopoly
In 2003, Moncler was taken over by Italian entrepreneur Remo Ruffini, who introduced Moncler as a global outerwear brand. When Moncler IPOed on the Milan Stock Exchange in December of 2013, it was 27 times oversubscribed and rose 47% on the first trading day. Today, there are only two global luxury brands that primarily sell functional and fashionable outerwear-- Canada Goose and Moncler. Originally parka and coat specialists, both Moncler and Canada Goose have begun brand extensions beyond those niche categories by utilizing their strong brand-power to move into adjacent categories. While Moncler price points are slightly higher on average, Canada Goose has also come out with a higher priced line of outerwear called BRANTA and has had various higher priced seasonal collaborations with worldwide designers, which typically sell-out in the first few days. Though Moncler and Canada Goose sell very similar items, individually, they have vastly different strategies. Moncler has been on an aggressive global store expansion with 205 current stores, whereas Canada Goose has a global store base of only 20.
Moncler’s product strategy is also quite different in that it produces a substantial amount of new designs every season in limited quantities and also uses independent designers under its Genius product line to continue to refresh the brand every year. Conversely, Canada Goose’s core products are more timeless in its design, with the signature parka remaining essentially the same design since its inception decades ago. Canada Goose also does some modest innovations, with its aforementioned collaborations and BRANTA line of clothing, though not nearly to the extent of Moncler. Another difference in strategy is Moncler typically makes small quantities of different designs and allows them to sell-out or eventually be marked down; Canada Goose makes higher quantity batches in the hopes of utilizing its distribution network to fill in pockets of demand. In our view Moncler has more fashion risk on an annual basis, whereas Canada Goose has risk in its higher inventories of certain lines of outerwear, potentially risking inventory markdowns. This inventory markdown risk is partially mitigated by controlling the wholesale channel inventory levels as well as the potential to reposition inventory globally for demand pattern changes. Finally, Canada Goose still has not ventured into the discount outlet channel like Moncler, which has recently started opening up outlet centers to liquidate unwanted product at up to 50% off. Eventually Canada Goose will need to go to the outlet route, but for now, demand is so high that it can continue selling out products at full price.
“With core products, the degree of risk around obsolescence or non-saleability is minimised (with CG) as opposed to a company, and I’ll have to use the word Moncler, that makes new products almost every season, where you are risking the consumer not liking what you do, and how do you get rid of it, and so on and so forth. To me, the whole word around inventory and inventory management is critical.” -Paul Silvertown
Canada Goose may have taken some pointers from Moncler on its direct-to-consumer business, but some of its true innovation lies in its retail-light business model. This model was exemplified with Canada Goose’s recent opening of its Toronto flagship store. Throughout the store, a customer can purchase a Canada Goose jacket through online shopping kiosks and can have the purchase delivered by the end of the day. The intent of giving customers a retail experience they can talk about and share on social media is to produce its own organic marketing as well as reinforce the brand quality and trust. The genius of the approach is driving customers to its highest margin channel-- ecommerce. Early on, Canada Goose focused on driving its younger customer base to its online channel. Based on conversations and data compiled from various sources, we estimate that Canada Goose has 20%+ online sales, compared to Moncler at around 10%.
The last difference in strategy we’ve noted is where the products are manufactured. Canada Goose has remained committed to manufacturing core products in Canada to focus on quality control and maintain ability to manage the product inputs in the manufacturing process. For their knitwear sector, Canada Goose does outsource to Italy. Moncler’s manufacturing strategy, which is to lower costs, produces their products in cheaper eastern European countries such as Bulgaria, Moldova, Hungary, and the former Soviet Republic of Georgia. While this helps to boost margins even further, we think it hurts the French and Italian heritage of the brand.
A mild winter has raised new concerns, with John Morris at DA Davidson recently sending out a note notifying clients about discounted Canada Goose products in the wholesale channel. Based on our checks we disagree and tend to side more with Omar Saad of Evercore ISI who commented that, “There is no meaningful discounting on the ground.” Our recent checks actually indicate significantly more Moncler items being discounted, especially online. On the Neiman Marcus website, we found 38 Moncler designs on sale, with most discounted 50% off the MSRP. Of the Canada Goose products that came up on a sales search, there were only two items on sale-- both were scarfs and one was completely sold out. On the Saks Fifth Avenue website, we found 35 Moncler designs on sale and zero Canada Goose products on sale. Bergdorf Goodman had four Moncler designs on sale and zero Canada Goose sales. Finally, Bloomingdales had zero products on sale for both Moncler and Canada Goose. A quick search online at Nordstrom, and six Moncler designs came up with the majority at a 40% markdown; a search for Canada Goose sales revealed no items marked down. We also tried to load Canada Goose items into various shopping carts and use coupon code metasearch functions for discounts, but we had no success in lowering the MSRP.
While it’s tough to get a full handle on the wholesale channel with both online and brick-and-mortar sales, we think that Canada Goose’s online channel is an excellent indication of overall inventory and sales, especially now that management is prioritizing the DTC channel over the wholesale channel. Selling out of inventory on CG’s online channel should indicate very light inventory or complete sell throughs at the wholesale level in various designs. For instance, we went through all of the men’s outerwear, which included over 125 designs on Canada Goose’s website; of the various size and color combinations, we noted 725 fully sold out. Canada Goose women’s collection appeared to be even more popular with only around 110 designs in outerwear, in total 879 color and size options were fully sold out. This does not include designs that completely sold out in every size, but we think it gives a good approximation of the demand in the most prioritized channel. One caveat is the data doesn’t fully reflect less common sizes such as XXXL and XS, which are made in much smaller quantities.
We conducted the same analysis on Moncler’s website; of the 150 men’s designs only 421 color and size combinations were sold out for all men’s outerwear. For Moncler women’s outerwear, there were over 165 designs available online, with only 333 color and size combinations sold out. What’s remarkable about this is that Moncler has always had more designs with a shallower level of inventory because of the constant refresh the brand does almost every season. Though there is no indication of how many items were pulled due to being fully sold out in all colors and sizes, there were a few categories that remained on the site as “out of stock”. Another consideration is that Moncler has a much larger retail footprint than Canada Goose, and carries certain designs in its boutiques only-- so the comparisons are fairly accurate but not entirely apples-to-apples.
Moncler is more established than Canada Goose at almost three times the sales, however it has been growing at about half the rate of Canada Goose, all while sporting a significantly higher multiple. Additionally, there has been a recent takeout premium built into the price of Moncler based on Kerings potential interest. Even then we still believe that Canada Goose should trade at a decent premium to Moncler given its underpenetrated markets, nascent product extensions, and burgeoning brand awareness in both Europe and Asia.
Since coming public, Canada Goose has always traded at a significant premium to Moncler on both a EV/sales and forward P/E. Canada Goose’s multiple has compressed over the past 12 months, while Moncler’s EV/sales and forward P/E ratio have expanded in the past 12 months. The most glaring divergence is in Canada Goose’s PEG ratio vs. Moncler; in the past 12 months, it was roughly at parity, and now Moncler is trading at almost a 3 turn premium to Canada Goose. The huge differential in the PEG is unwarranted, even if one considers below consensus topline growth for Canada Goose.
Relative Value Comps
Global luxury retailers have always traded at premium multiples to the market, with their higher profit margins and duration of brand power. It also has been one of the few bright spots in retail with consistent growth and on average expanding margins. At the opposite end of the spectrum, the more commoditized fashion brands typically use aggressive discounting to generate store traffic and sales volume and typically don’t have the sustainable growth of the luxury peers. In the cohort of global luxury retailers we have included some of the top brands in their individual categories that we think are representative of the quality and brand power of Canada Goose. To our surprise, Canada Goose appears as one of the cheapest stocks among global luxury peers. The gap among peers is quite compelling, and clearly the market at this price is saying the growth rates will start normalizing at substantially lower rates than consensus estimates.
Risks
--Bain Capital and Dani Reiss initiate a sale of the business to a luxury conglomerate off a depressed multiple.
--PETA concerns around the use of animal furs for the hoods of Canada Goose’s signature parkas; based on industry conversations, it appears likely that Canada Goose will eventually eliminate coyote fur from the hoods.
--A high end discretionary product can be susceptible to economic cycles; the brand grew rapidly throughout the ‘08/’09 GFC, but given its global footprint, no assurances can be made that Canada Goose will be able to keep its growth trajectory.
--Continued geo-political issues and a renewed interest in a Chinese boycott of Canada Goose products.
--Continued counterfeits that degrade the brand value over time.
--A super-majority voting structure controlled by Bain Capital and Dani Reiss.
Summary
In May 2019, management initiated its first ever stock buyback, a 1.6 million share buyback amounting to about 1.5% of the fully diluted shares outstanding. It’s rare to see a high growth/high ROE company spending money to buy stock, but we think the buyback sends a clear signal that the stock price is compellingly cheap at these levels-- especially now, off almost 55% from its late 2018 peak. Multiple upcoming catalysts drive future growth, including a further expansion into China, an upcoming brand extension into shoes, and continued diversification into apparel and light jackets. Since coming public, the stock and sales have doubled; however, the underlying operating profits have gone up five-fold. Fixed cost leverage has become more apparent as the business continues to scale and shift from the lower margin wholesale business to the direct-to-consumer (DTC) channel, which has a gross margin uplift of ~ 3,000 basis points. It’s uncommon to find a business growing top-line at a 40% CAGR in tandem with expanding margins (GM +2,200 bps; 5 years), trading at a discount to luxury peers, while stock is off almost 55% from all-time highs. At just over 20x forward earnings and likely growing EPS at a 30%+ CAGR, we think the combination is quite compelling in today’s market for a global luxury retailer in its infancy.
Catalyst
--Sale of business to luxury conglomerate, Moncler currently being solicited.
--Successful brand extensions into accessories, shoes, and apparel.
--China success with new stores in 2020.
--Continued higher than expected topline and EPS growth.
--Further expansion of the higher margin DTC business taking more share from wholesale.
I and/or others I advise do not hold a material investment in the issuer's securities.
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I0_USD_of_Warren_Buffet
BITCOIN - WHAT YOU NEED TO KNOWHey there,
Thank you for supporting this idea with likes and make sure you follow me here on TV.
so I think everyone in this space saw what happend yesterday. The biggest percentage and point drop in Bitcoin in all of its history.
A rounded 40%decline in 1 day. An incredible number for any trader.
There are now some key questions to be asked:
What really valuable asset is able to drop 40% in one day?
What could have caused this spike and will it happen again?
Is this the end of Bitcoin?
To all of these questions, I sadly cannot anwser. You have to decide for yourself wether or not you still see value in Bitcoin.
It is very significant that Bitcoin broke the bottom growth of curve of the data science models and has not yet managed to come
back up to those.
While I do think that this is the final capitulation some people like Tone Vays have been waiting for and that the bottom is now in,
I too am troubled and have doubts in the real value of Bitcoin, if it is able to be manipulated by this degree.
Of course no fundementals have changed and Bitcoin is still the same as yesterday and the day befor, I do have doubts, wether
or not people will accept it as a store of value, if even after 10 years of existence, Bitcoin just now had its sharpest and steepest decline in 1 day.
So there you go. Technicals are not really applying here imo, since this is beyond any comprehensible movement.
Now is the time to BUY THE DIP. Even if I have doubts now, I have learned that it often is best to buy BTC when everyone is doubtful.
Oh and btw, there is now a 3DAY 9 buy of the TI Indicator Sequential, so this could be your time to buy.
Cheers,
Konrad
Value Investment - BIDU - Improved Profitability After The VirusAll comments and likes are very appreciated.
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Fair Value and Profit Drivers |
Our fair value estimate is $190 per share, with a 2020 P/E of 31 times and 2021 P/E of 25 times.
We expect a 5% CAGR in online marketing revenue in the next five years, driven by recovery in the longer term. This is because weak macroeconomics (resulting in weaker demand and pricing for ads), substantial increase in ad inventory by Bytedance and Tencent, and moving customers’ landing pages to Baidu’s platform play an important role in the current weakness. We do not expect these headwinds to persist in the longer term, except Baidu’s competitor still have room to increase ad load. As the moving of landing pages is completed, the economy recovers, iQiyi’s in-feed revenue improves after cleaning up unhealthy ads, and video content can be approved more quickly after the 70th national day on Oct. 1, 2019, we expect Baidu and iQiyi’s advertising revenue to recover from a low base.
We expect other revenue to grow at a 17% CAGR in the next five years, driven by strong growth at iQiyi. 49% of the others revenue was iQiyi’s membership revenue in 2019, which will see growth from increasing subscriber number and high-quality original and licensed content at iQiyi. Baidu will spend more marketing dollars up front for app installation and cultivating app usage, but revenue generated from the users will occur during the lifetime of the users. Hence, we expect to see revenue grow faster after initial investments. Should the return on investment be poor, Baidu will have no choice but to cut back on sales and marketing expenses, which will boost margin. DuerOS and cloud are also other areas of investments.
We assume operating margin will rise back to 20.2% in 2024, compared with 5.9% in 2019. Excluding iQiyi, Baidu’s core operating margin is assumed to rise to 20.2% in 2024 from 19.1% in 2019. We think our assumptions of only a small-margin recovery for Baidu’s core operation have sufficiently incorporated the ever-increasing competitive environment in the Internet sector. This is particularly true in searching for general information, because it is still a necessity, and wide-moat Baidu has a dominant market share of over 70% in search. We are confident that Baidu resume growth for search. Our five-year net revenue and operating profit growth are 9% and 40% respectively.
Wide-moat Baidu’s fourth-quarter 2019 results were largely within our expectations, and after fine-tuning our model, we are cutting our fair value estimate to $190 from $199. However, we think the shares are undervalued, as Baidu is on track for improved profitability after the coronavirus outbreak. Fourth-quarter 2019 year-over-year revenue growth was 6%, at the high end of the latest guidance range of 4% to 6% and its previous guidance of negative 1% to 6%. Meanwhile, Baidu core revenue in the quarter grew 6% year over year, excluding spin-offs, at the high end of the latest guidance of between 4% and 6% and the previous guidance of between 0% and 6%. Baidu’s net income was CNY 6.3 billion in the quarter compared with guidance of CNY 6.2 billion to CNY 6.7 billion. Net income of Baidu core rose 84% year over year, at the low end of the guidance of 83% to 90%. Management said it expects 2020 first-quarter revenue to decrease 5% to 13% year over year for Baidu and to drop 10% to 18% for Baidu core compared with advertising peer Weibo’s 15% to 20% drop. We assume an 18% year-over-year decline in the first quarter; a 3% decline in the second quarter; followed by a 9% increase in the second half of 2020; and no growth in the full year of 2020 for Baidu core revenue. Our non-GAAP operating expense plus cost of revenue for 2020 is 7% higher than the annualized level that is based on the more rational level in the fourth quarter of 2019. Our five-year revenue and operating profit CAGR are 9% and 40% (low base in 2019 due to record low margin of 6%), respectively, versus 9% and 11% previously.
Risk and Uncertainty |
We think Baidu faces high levels of risk, given intense competition along with questions as to whether its AI-related investment will generate satisfactory returns.
Though Baidu is the largest search engine in China, it is competing with the other two Internet giants, Tencent and Alibaba, and Google’s potential return to Chinese search market is also a threat. Regarding the search engine business, Tencent invested in Sogou, and Alibaba acquired UC Web, which owns a mobile search engine, Shenma. Competition has extended to each key area of mobile Internet usage, such as navigation, O2O services, online video services and so on. Baidu’s margins have been significantly dragged down by aggressive spending in video content and O2O marketing but recovered to 18.5% in 2017 from 14.2% in 2016 as Baidu divested margin-dilutive businesses.
The major Internet companies in China have been investing in AI-related business, such as cloud computing, voice and image recognition, and autonomously driven cars. At the current stage, it is difficult to predict whether Baidu will be the final winner in AI and whether the returns will reward its investment.
In addition, regulatory risk is a concern. Following the Wei Zexi incident in early 2016, Chinese authorities launched new regulations for online search and advertising, which clearly defined paid search results as advertising. These regulations took effect Sept. 1, 2016. Given stricter standards for online advertisers, Baidu’s online marketing services revenue growth declined to 1% in 2016. If the local authorities release more policies regarding Internet business, such as online advertising and online finance, Baidu’s revenue could be negatively affected.
Since 2017, Baidu has discontinued the disclosure of MAUs for its mobile search and mobile maps, which is possibly due to weaker numbers.
I and/or others I advise hold a material investment in the issuer's securities.
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All comments and likes are very appreciated.
Best Regards,
I0_USD_of_Warren_Buffet
Value Investment - ACB - Defensive Stock All comments and likes are very appreciated.
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Fair Value and Profit Drivers |
Our fair value estimate for Aurora is $6 per share, assuming a 1.33 CAD to U.S. dollar exchange rate as of Feb. 13 and based on a DCF with a 10-year explicit forecast.
We forecast Canadian medical volume to decline about 3% per year on average from fiscal year 2020 to 2029 as consumers shift to the recently legalized recreational market. We forecast recreational volume to rise about 15% per year on average as distribution expands, consumers convert from the black market, and non-consumers become consumers. We forecast prices will grow about 2% per year on average as capacity will rise adequately to meet demand.
We forecast about 18% average annual volume growth for Aurora’s international medical business amid wider legalization and distribution. Our volume forecast is muted by the emergence of cheaper suppliers in lower cost labor countries; however, Aurora’s production expansion into some of these countries helps protect its share. We forecast prices will rise roughly 3.5% per year on average, as it will take time before lower cost producers can effectively compete.
We expect the company’s operating margin excluding mark-to-market plant items will become positive by fiscal 2022. By 2029, we expect that margin to reach about 35%, due to the full-ramp up of production and fixed cost leverage against overhead expenses.
We forecast Aurora to reach positive free cash flow generation in 2023, as capital expenditures remain high in the near-term to fund capacity expansion. On average, we forecast capital expenditures 23% of sales through our 10-year forecast period and falling to about 8% by 2029, as we think Aurora has frontloaded capacity expansion through investments and acquisition. This will allow capital expenditures to fall rapidly while still allowing Aurora to meet demand growth.
We assume a cost of equity of 7.5%, reflecting the low cyclicality of revenue, our forecast 35% operating margin, and low operating and financial leverage.
Risk and Uncertainty |
As a cannabis producer, Aurora faces numerous risks, largely around regulation. However, it faces additional investing risk relative to its Canadian peers.
The most important risk is the pace and status of legalization, which determines when and where cannabis can be legally sold. Aurora’s home market of Canada has already legalized recreational cannabis, so U.S. legalization remains uncertain.
Aurora does not operate in the U.S. and is focusing on the Canadian and international markets instead. As such, the impact is minimal. However, peers with better U.S. exposure have more potential upside as a result. Current laws make it virtually impossible to operate a cannabis company in both the U.S. and Canada, excluding hemp-derived CBD. Although there is growing public support for legalization, it is politically divisive, with most Republican support coming only in the form of state’s rights. This poses a risk for federal legalization and adoption of recreational cannabis.
Regulation around supply is also a risk. Businesses must be licensed by governments to operate cultivation and dispensaries, with licenses specifying production levels. However, governments have at times expanded too slowly or too quickly.
Another risk is the black market. Years of government efforts have done little to stem illegal cannabis, but a change to the ease of accessing black market supply could impact pricing power and thus profitability.
In addition to operational risks, Aurora also faces significant financial risk. The company has yet to generate positive free cash flow. Unlike its peers that have funding backstops through their deep-pocketed strategic investors, Aurora has higher dependence on capital markets. There is material risk that Aurora would need to issue incredibly dilutive equity to fund itself amid ongoing cash burn. For example, Aurora had to offer dilutive terms to satisfy convertible notes holders and issue stock at low prices through its at-the-market equity issuance program.
I and/or others I advise hold a material investment in the issuer's securities.
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All comments and likes are very appreciated.
Best Regards,
I0_USD_of_Warren_Buffet
Value Investment - KHC - Company to Watch in 2020All comments and likes are very appreciated.
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Fair Value and Profit Drivers
After reviewing results through the first nine months of 2019, we're holding the line on our $50 fair value estimate for Kraft Heinz. We continue to expect sluggish top-line performance near term (which management has attributed to reduced inventory levels at developed market retailers and unfavorable promotional spend), with our forecast calling for a more than 4% reported decline this year. Further, we still anticipate cost pressures in manufacturing, packaging, and logistics and elevated investments behind its brands will eat into profits, and expect operating margins to hover in the low-20s. Our valuation implies fiscal 2020 price/adjusted earnings of 18 times and an enterprise value/adjusted EBITDA multiple of 14 times.
The question for Kraft Heinz Co. is whether new management can execute a turnaround. CEO Miguel Patricio has a marketing background; it remains to be seen if he can fix the company’s fundamentals in an industry struggling to reinvent iconic consumer brands to remain relevant.
A key tenet of Kraft Heinz's strategic focus has been on driving cost saves--targeting more than $1.7 billion in savings the past few years. Up until now, the bulk of these savings resulted from corporate workforce reductions (affecting about 4,900 employees, or 12% of its total employee base), a rationalization of its North American manufacturing network (with a net of six plants closed), and enhancements to its supply chain.
In line with our thinking, Patricio's early read on the business is that it's failed to pivot from one centered on intense cost-cutting (following the merger of the two businesses four years ago) to one anchored in rooting out inefficiencies and boosting brand investments. This aligns with our outlook, which calls for the firm to extract $2 billion by fiscal 2020 to fuel its brand spend in light of the intense competitive landscape; we anticipate 65% of its savings will drop to the bottom line, with the remaining 35% reinvested in marketing and research and development. In this context, we expect marketing and R&D will expand to nearly 6% of sales in the aggregate (versus less than 5% the last few years) over the course of our 10-year forecast. Further, we posit input cost inflation pressures are unlikely to subside (partly due to higher protein costs related to a reduction in the supply of hogs stemming from China's African Swine Fever and elevated transportation costs versus recent deflationary trends), which stand to eat into the firm’s margin trajectory. As such, we forecast operating margins will remain in the low-20s over our 10-year explicit forecast, generally in line with fiscal 2018 (but below its mid-20s peak in 2016 and 2017).
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While Kraft Heinz’s shares retreated at a high-single-digit clip following its fourth-quarter print, we don’t think there has been a material deterioration in the story over the past several months to merit such a pullback. Rather, we believe that under the direction of CEO Miguel Patricio (who joined the firm just more than six months ago from wide-moat Anheuser-Busch InBev) Kraft Heinz is stocking up on the ingredients necessary to strike up a more flavorful recipe for the long term (pivoting away from blindly rooting out costs, in favor of sustainable efficiencies, with the intent to funnel a portion of any savings realized to elevate the standing of its brands).
We attribute a portion of the market’s disfavor to the slight delay in the time over which the firm intends to convey the details of its strategic direction, which is now set for early May as opposed to March prior. However, the underlying premise behind this shift (affording the recently appointed head of the U.S., Carlos Abrams-Rivera, who joined Feb. 3 from Campbell Soup, time to reflect on the tenets of its approach and interject his perspective) seems reasonable. And despite this extended horizon, we don’t think the drive to incite change is on hold.
In the aggregate, we see little in the fourth-quarter results (a 2.2% decline in organic sales, a 20-basis-point shortfall in gross margins to 32.2%, and an 80-basis-point erosion in adjusted operating margins to 20.0%) or near-term guidance (suggesting pressure at the sales and profit lines is unlikely to subside in 2020, generally in line with our expectations) to warrant a material change in our $50 fair value estimate. Further, we’re holding the line on our long-term outlook, calling for 2%-3% annual organic sales growth long and operating margins remaining in the low-20s over our 10-year explicit forecast. We continue to posit patient investors should consider stocking up on this no-moat name, which trades 45% below our valuation.
Risk and Uncertainty
We think Kraft Heinz's intent focus on extracting significant costs (at the expense of brand spend) has resulted in the degradation of its brand intangible asset (eroding its brands and retail relationships). Further, attempts to extend the distribution of Kraft's products over Heinz's international network may continue to falter if efforts to tailor its mix to better align with local tastes and preferences prove insufficient.
We also surmise that consumers perceive a few of the categories in which Kraft competes--namely, cheese and packaged meats, which in the aggregate account for around one third of total sales--as commodified, implying purchase decisions are more likely to be based on price rather than brand. In addition, Kraft generates just over 20% of its sales from Walmart, and its bargaining clout could diminish as the base of retail outlets continues to consolidate and market share shifts to mass merchants and warehouse clubs at the expense of traditional grocery stores.
Bouts of unfavorable weather could place upward pressure on input prices for products such as dairy, coffee beans, meat, wheat, soybean, nuts, and sugar. In response to the rampant cost inflation in the cheese, meat, and coffee categories a few years ago, Kraft put through significantly higher prices, but was unable to fully offset the profit hit, given the lag in the benefit. Further, transportation and logistics costs have soared and show little sign of abating, which stands to crimp profit prospects across the industry.
Finally, even with a new management team at the helm, it is unclear whether the firm will be able to orchestrate sufficient change to bolster its financial performance. We think this sizable task could prove more challenging given the intense competitive landscape in which it plays, as it consistently goes to bat against other leading branded operators, private-label fare, and smaller, niche foes (which have proven more agile in their response to evolving consumer trends).
I and/or others I advise hold a material investment in the issuer's securities.
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All comments and likes are very appreciated.
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I0_USD_of_Warren_Buffet
Value Investment - BATS - Defensive StockAll comments and likes are very appreciated.
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Fair Value and Profit Drivers
Our fair value estimate for BAT’s ADRs is £46, which implies 2020 multiples of 15 times earnings, 12 times EV/EBITDA, a free cash flow yield of over 6%, and a dividend yield of 4%. These are roughly in line with historical valuations and are sandwiched between those of Philip Morris International, BAT’s closest comparable with slightly higher implied multiples, and Imperial Brands. This is appropriate, in our view, because it reflects the companies' relative positioning in the heated tobacco category.
The key underpinnings of our valuation are the pricing power of the combustible business and the sustainability of operating margins. We assume a midcycle organic sales growth rate of 2%, below our 4% benchmark assumptions for consumer staples but roughly in line with that of Philip Morris. The growth rate is driven entirely by pricing power, boosted by BAT's wide economic moat. We forecast an annual volume decline of over 2% on average over the next five years, with price/mix of 5%, a touch below the levels of recent years.
On an adjusted basis, and excluding equity income, we forecast a normalized EBIT margin of 43%. This is 5 percentage points above the margin achieved in 2018, boosted by the integration of and synergies from the higher-margin Reynolds business (it achieved a 45% EBIT margin in its final year of independence) and in line with our assumption for Philip Morris International. BAT has guided to synergies of $400 million per year within three years by management, and from BAT’s own cost-efficiency efforts.
We assume a stage II EBI growth rate of 3.5% and a discount rate of 7.4%.
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There were few surprises in British American Tobacco's preliminary 2019 results, with volume and revenue roughly in line with our forecasts, although operating profit was a little light. We are reiterating our GBX 4,500 fair value estimate and wide moat rating. The stock is materially undervalued in our opinion, and we think the market is pricing in too pessimistic a scenario, but the realization of the upside to our fair value estimate may depend on an improvement in total nicotine volume trends, a factor that these results show remains uncertain.
BAT's revenue grew 5.7% on a reported basis and by a similar amount on a constant currency, adjusted basis, slightly above our forecast. The modest beat was entirely due to strong price/mix, with volume in line with our expectations. Our expectations were not particularly ambitious, however, and we would like to see stabilization in the 4.4% decline in full year tobacco volume. Developed markets are the drag, with volume in both the U.S. and the Europe and North Africa segments down 6% in 2019. By category, combustibles declined at a rate slightly faster than 6% in both regions, mitigated by double-digit volume growth in vapour and triple-digit growth in modern oral and heated tobacco. These categories remain too small to move the needle in the top line, however, and the group volume decline of 4.4% is below BAT's recent historical average, and implies a contraction in the nicotine market as a whole. A continuation of that trend is what we think is being priced into the stock.
The critical issue for investors is whether volumes can normalize. At present, very strong price/mix (of 10% in 2019) is supporting revenue and earnings growth, but we worry that sustained pricing at this level will eventually lead to increased price elasticity and slow revenue growth. Our valuation assumes a growth algorithm that is more balanced between volume and pricing.
Business Strategy and Outlook
The advent of e-cigarettes has created the most significant change in the industry since the 1960s. Early forms of e-cigarettes have existed for a generation, but with the consumer arguably less brand-loyal and more aware of health issues than ever before, the industry is on the cusp of a seismic shift to next-generation products. It seems likely that conventional tobacco will remain the driving force of the industry profit pool for at least the next decade, but Big Tobacco manufacturers are nevertheless placing their bets on the new categories most likely to win share of smokers.
To date, British American Tobacco probably has the most hedged position across the emerging categories. Its Vype brand has gained some traction in the U.K., while the acquisition of Reynolds gives it access to Vuse. The company's total 2018 research and development spending of GBP 105 million is well below the $383 million (GBP 295 million) spent by PMI last year, and the $2 billion (GBP 1.6 billion) of capital expenditures its rival invested in its heated tobacco facility in Bologna, Italy. In heated tobacco, BAT's Glo has taken tobacco market share of around 5% in Japan in 2018, although it lags PMI's iQOS. We believe heated tobacco is the category most likely to successfully attract smokers, but we do not regard the first-mover advantage as being sustainable in the long term, and it is possible that BAT will regain share through next generation products over time.
BAT has doubled down on the combustible business with its acquisition of Reynolds American. We see Reynolds as an incredibly strong asset in a market with plenty of remaining potential for raising prices, and we view the deal positively from a strategic standpoint. The Newport brand is experiencing volume declines at a much slower rate than the rest of the U.S. industry and retains very strong pricing power in the midsingle digits. Nevertheless, it is this aquisition and the increased exposure to the menthol category that is a key reason for the recent weakness in BAT's stock, and the overhang of potential menthol regulation is not likely to ease in the short term.
I and/or others I advise hold a material investment in the issuer's securities.
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I0_USD_of_Warren_Buffet
SF - The Best Value investing stock in 2020’s SET.“Value Investing does work, but not all the time. If it works all the time, it won’t works.”
I want to show it to you with the monthly graph because we’re talking about the Fundamental today. SF or Siam Future development is the retail-shopping based. Despite the very bad market conditions, SF out performed every other stocks in its sector with the very high revenue increases! But the crazy thing is that “ it is the cheapest !” . Yes! The cheapest in its sector with P/BV of 0.85 and PE of 5.8! It also has a very low long-term debt with consistent growth. By comparing it with the rest of the sector. The price of it should at least be 12-15 Baht.
The market can be absurd sometimes. All you have to do is grasp the opportunity. I can’t give you the buying point. It all depends to you. The price can sit here for years or it can breakout tomorrow. I also don’t know. But giving this pearl some attention won’t hurt you right?