Group Jean Coutu: An Update For The Patient Investor

This is just a sample. The full article is available at Seeking Alpha.
Reposted from Seeking Alpha
By Brian Langis

Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.1228 Price of 1 USD in CAD

Group Jean Coutu (OTCPK:JCOUF) (PJC) was one of my better investments last year. My initial research article, Group Jean Coutu – An Opportunity For The Patient Investor, I made the case for investing in PJC. It’s much easier to pick a winner when management tells us exactly what they are going to do when they announce a capital return plan upward of $500 million in share buybacks and special dividends. This article is an update; therefore I suggest reading the original research to have a better understanding of PJC.

Investment Summary

Please note that the actual publishing date was October 24, 2013 but it was written before. The actual returns described below represent a full year but is three days short of the publishing date.

PJC1PJC.A +37.74% vs. JCOUF +21.33% vs. TSX +10%, Oct 22, 2013 – Oct 21, 2014. Source: Google Finance

pjc2

If you held the Canadian version, PJC.A, your investment is up 42% including dividends. This is superior to the 10% the TSX provided and my own initial valuation. If you held the American version, JCOUF, your returns were negatively impacted by the drop in the Canadian dollar. However, with a 26% return including dividends, it’s still respectable and superior to the S&P 500. PJC also increased their quarterly dividend 17.6% from $0.085 to $.10.

My approach to investing in PJC is similar to the one I would take if I would be buying a private enterprise. PJC has the characteristics of what I’m looking for: a good old cash rich drug store retailer with solid reliable free cash flow, no debt, modest growth, heavy insider ownership, long-term potential, and that provides goods and service essential to the community. In today’s investing environment, PJC would classify under the boring investment tab and that’s not a bad thing.

With a 40%+ return, you would have thought that PJC is a sexy high flyer stock. Anybody that is familiar with the company knows that’s certainly not the case. Group Jean Coutu is a snail. It’s slow, but steady and consistent. PJC’s lack of an “aggressive” growth plan really bugs analysts. When you listen to the analysts’ conference call, they always sound so disappointed that management didn’t declare some big splashy news or some kind of enormous acquisition. It is indeed for the patient investor. The analysts also weren’t impressed with last year’s massive capital return program because it wasn’t sexy enough. It’s mind boggling that the stock price lagged for a while after they repurchased $400 million in shares. PJC did make the analysts happy at one point when it went down the “flashy road” in 2004 with the mega acquisition of Eckerd drugstores in the U.S. That turned out to be a disastrous blunder. Now PJC is buying one store at the time. Francois Coutu, the CEO, wants to get to 500 stores within five to 10 years, both by buying independents and building new stores. I agree that it is a torture to see PJC open only a few locations a year with a little bump in same-store-sales (SSS), but I’d rather be safe and steady than reckless.

PJC Financial Summary

PJC3

Full article at SA.

 

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Nike New Hockey Skate For Toronto Maple Leafs

Leaf Nike Shoes

The Pittsburgh Penguins are a first class organization.

Penguins - First Class

The Pittsburgh Penguins are a first class organization. They honored today’s fallen Canadian soldier by playing “O Canada” before their game tonight. It’s nice to see a sense of unity.


Video credits: NHL

The Montreal Tax

Montreal Forum 1989, Getty Images

Montreal Forum 1989, Getty Images


My brother sent me this article to read posted on TSN by Rick Westhead, “Westhead: Why Montreal is the worst NHL city…when it’s tax time”. Well the title of the article is not shocking to anyone, what is shocking is that nobody seems to be talking about one the main reason why Montreal has difficulty attracting top talent.

Combine the rich history of the Montreal Canadiens, the pressure, the media, the over-zealous fans, the French environment, and the beautiful complicated province of Quebec, it’s not a surprise that there are many reasons why a free agent would or wouldn’t sign for the Montreal Canadiens. When a player signs a contract to play in Montreal, he’s well aware that once he wears the Habs jersey it’s a different beast than let say playing in Raleigh, North Carolina.

Taxes is one the main reason why a lot of free agents doesn’t not to play in Montreal. As the article points out, the players’ paycheck is cut in half because of taxes. When 50% of your money is gone, it’s definitely a motivator to play elsewhere.

I believe to attract top talent in Montreal, the Habs have to pay a premium, or something I call the “Montreal Tax”. Not only it’s more “complicated” to play on Montreal, the “Montreal Tax” would also compensate for the extra income tax the player has to fork over.

As an example, let’s assume that fictional player Zdeno Pacioretty gets two offers, one in Montreal and one in Dallas. Well a $5 million payout in Dallas is a $5 million pay cheque because Texas doesn’t have income taxes. In Montreal, a $5 million pay cheque is $2.5 million. To compensate for the “loss” income, the Habs might have to offer more money to sign Mr. Zdeno Pacioretty so he doesn’t feel penalized. This example gets more complicated when you have a salary cap and other restrictions to follow.

Actually the only time I remember sport media having a “serious” discussion about income taxes is when Ilya Kovalchuk ditched Jersey to go play in Russia. Russia doesn’t have income taxes, so his gross salary was actually lower than Jersey, but his net was much higher. There are several reasons on why I think it’s not really discussed when it comes free agent season.

First, it’s taxes. There’s nothing sexy about taxes. Bring up the word and people will switch channels or turn off the radio. A sports fan wants to talk about sports, not f*ing taxes.

Second, taxes are a complicated subject. Each province, state, country, district has their own code and rules. It’s an absolute mess that confuses everyone because the law is subject to interpretation. That’s why we have tax lawyers.

Third, taxes are outside everyone’s control. Everyone has to pay their fair share. The topic is beyond sports. It’s not like they can change the tax rate to accommodate certain players. In general, the whole tax code needs to review and adjusted to today’s reality.

Fourth, try talking about taxes without getting into a messy political fight. It’s not worth going there.

Below is a quote from the article that resumes well this post:
” In 2006, former Canadiens defenceman-turned-player agent Gilles Lupien told The National Post that Montreal was a great place to play hockey, but that its high taxes worry some players. His client Martin Lapointe for instance, had $25 million offers from Montreal and Boston in 2001 when he became a free agent. Lapointe (now the Director of Player Development for the Canadiens) opted for Boston, avoiding high taxes and the intense Montreal media.”

NHL SALARIES 1

NHL SALARIES 2.bmp

Data Source: TSN

Transforming Darden Restaurants

You might have noticed that the original website with the Starboard Value LP presentation is down or non-existent.

Below you can find the 294 slides super presentation below.

Starboard-Value-13D-On-Darden-Restaurants (132mb)

Below are some highlights from Starboard’s Transformation Plan:
Transformation Plan
Starboard’s Transformation Plan includes:
·
comprehensive, company-wide operational improvements (slides 90-158);
·
a turnaround plan for Olive Garden (slides 159-216);
·
a value enhancing strategy for Darden’s real estate assets (slides 217-229);
·
a separation of Darden’s restaurant concepts into the most logical groupings (slides 230-236); and
·
a franchising program designed to accelerate growth and improve returns on capital (slide 237-258).
Starboard has identified specific opportunities to increase annual EBITDA by $215-$326 million and believes that these quantifiable EBITDA improvements alone will create approximately $15-26 per share in value (slides 9, 91, 156).

EBITDA

Broke Athletes

SI

“It requires a great deal of boldness, and a great deal of caution, to make a great fortune, and, when you have got it, you require ten times as much wit to keep it” – Nathan Mayer Rothschild

I watched 30 for 30:Broke last night on Netflix last night and it’s a pretty depressing documentary about professional athletes going broke. I don’t expect you to shed a tear for these “millionaires” playing a game. This post is not about that. They have (had) the good life and good for them. They are 100% responsible for their career’s success and the way they manage their money. This post is about the public perception vs the reality. The public perception is shaped by the big multi-million dollar contract printed in bold in every single newspaper. It’s unthinkable that a pro-athlete with hundreds of million in earnings is broke. The reality is that the athlete doesn’t get that full “10 million dollar” cheque. And the reality they are less wealthy than the media portray them to be.

Like any income earner, a good chuck goes to taxes. Yes athletes pay taxes too, and sometimes in multiple states/province/countries. They are hit with the highest tax bracket because their income is considered regular income (not capital gain). So that $10 million turns into $5 million. Again that’s many times what many of us combined will earn in their lifetime. But it doesn’t end there. Some of it goes to your player’s union, healthcare and other programs. Then you have your platoon of “advisors” to support. These are people like you agent, manager, external coaches, lawyers, your posy, and other consultant of the like but they never seem to have a good financial advisor. Then you have your obligations such as supporting your family, your extended family, your wife, your buddies, your posy, your girlfriends, your baby mamas, and the ever increasing child support. Then you have these shady business investments that your cousin try to peddle on you because investing in mutual funds is boring. Then you have your lifestyle to take care of such as mortgages, cars, charities, and the fine life. Too many athletes spend more than they take in, especially in the NBA and the NFL. And a lot of them are broke even before their career is over.

The list of broke athletes is incredibly shocking, among the few notable names: Curt Shilling, Warren Sapps, Terryl Owens, Latrell Sprewell, Michael Vicks, Lenny Dykstra, John Daly, Evander Holyfield, Mike Tyson, Antoine Walker, Allen Iverson, Dennis Rodman, and Scottie Pippen. You can add hundreds of name to that list.

Every athletes should watch this documentary. For a professional athlete, once your career is over, you have the second half of your life to live. Athletes’ financial education is pretty poor if any. You would think that the Universities that used the athletes to milk millions of dollar would have provided a free financial seminar. You can’t live the NFL lifestyle anymore because you don’t have NFL money coming in. Everybody, not just athletes, need a real talk about money. Just before you start your career, or even before your earn your first paycheck, you need to attend some kind of financial boot camp. Its a terrible ending for many that had a the privilege of making millions playing a game they love. While many of them live like kings, many of us are actually richer them.

MTY Food Group – One Big Fishy Trade

Reposted from Seeking Alpha
By Brian Langis

MTY Food Group
TMX: MTY

USA: OTC:MTYFF

This article is about two things:

1) A quick overview of the Q3 results.

2) The abnormal trading volume (again) leading up to the results.

For those who are unfamiliar with the company, I suggest you read my research report on MTY to have a feeling of what the company is about. My investment thesis hasn’t changed since then.

MTY is a company that I admire and I am currently long. MTY is managed by Mr. Stanley Ma, nicknamed the “King of Food Court” in Canada.

For the purpose of the article I will be referring to the Canadian symbol traded on the TMX. Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.1177$ Price of 1 USD in CAD.

MTY Food Group has a 52-week low of $27.84 and a 52-week high of $34.54 and its share is currently trading for ~$29 following a 10% drop since the Q3 results were release.

The Business

When you buy MTY, you’re not investing in the restaurants directly. Rather, you’re buying into a royalty stream based on a percentage of the restaurants’ sales and much more. For each plate that is sold MTY earns royalties. MTY simply collects royalties and has very low capital expenditures and financial risk. You eliminate a huge risk when you are not managing the restaurants yourself. The math is simple; more franchises => more sales =>more royalties. Because of this successful recipe, MTY receives recurring revenues and as a result it currently sits on $45 million at the end of last quarter. This growing war chest is looking for targets that will be accretive to MTY.

1- Results

MTY Q3 results wasn’t a homerun but remained respectable. Revenues, system sales, cash flow, number of stores and earnings were up, mostly driven by acquisitions. Q3 EBITDA was flat. On the negative side, MTY is still struggling with Same-Store-Sales (SSS), which are down -1.6% for the quarter. This is the 9th consecutive quarter of negative growth. The SSS needs to be addressed and fixed.

Below is a graph of the highlights and results.
mty1

 

On Wednesday, the trading day following the Q3 results, the stock dropped 8.43%. The Q3 results didn’t warrant a drop.

MTY is trading at 18x 2015 EPS and 13X ttm EV/EBITDA. It’s not exactly cheap but it’s not extremely expensive. MTY is a free cash flow generation machine with low capex. Mr. Ma has generally reinvested all the FCF in acquisitions that generates more FCF. It’s a nice business to be in. Based on future cash flow generated, it’s a nice buy and hold company if Mr. Ma keeps his current acquisition plan going.

2- Abnormal Volume

In general, MTY is a pretty sleepy stock. MTY is a ~$555 million market cap company that doesn’t make much noise. MTY is in the news (sort of) when they release their quarterly results four times a year and when they announced the occasional acquisition. That’s pretty much it. Stanley Ma is a quiet under the radar CEO and his personality is the furthest thing away from a media cheerleader. He could actually use the help a PR firm to help promote the company. A typical trading day for MTY has approximately 20,000 shares exchanging hands.

This is not the first time that there’s abnormal volume leading up to a news release. I previously addressed the issue over the summer on my personal blog, MTY Food Group Leak?, right after MTY announced an acquisition. To be brief, at the time volume has exploded right before the news was released and the stock went up right after. Leaks are present in any public companies. A lot of people are involved when it comes to acquisitions and financial reporting. It’s almost impossible eliminate leaks, so it almost expected that there’s higher trading than usual before an acquisition is announced.

However the volume activity on October 7, 2014 caught my attention. The opposite happened then the summer event. Instead of buying before good news, there was major selling before a 10% drop the next day. What’s interesting is that MTY has never disclose the date and time they release financial statements. Except for the insider involved in the preparation of financial statements, nobody knew that there were going to be released on Tuesday October 7 after the market close at 5pm. That was not public information.

Below is a 30 day table of the price history and volume of MTY. As you can see, it seems that somebody or some people found out.

mty2

There are a few observations from that table above.

1- Before Q3 results were released, volume has increase 15.2x its 30 day average. We saw 318,314 shares being traded instead of average of 20,935 shares being traded daily. Remember that nobody knew that the Q3 results were released at 5pm. The number of trades is slightly higher than its 30 day average, suggesting that it was big block of shares being traded.

2- The approximate daily trade value was $10.3m. That’s 14.9x the daily trade value we saw over the last 30 days.

3- Before October 7, there wasn’t a trading day were volume exceeded 100,000 shares. The highest trading day of the month had 71k share exchanged. Not a single day came close to the 318k share volume on that October 7 day. Like I said, MTY is a pretty sleepy stock on normal days.

This suggests that somebody with big block of shares knew that the results were coming in and dumped the shares. The last insider trading information I have is a director buying the stock by in June 2014. It doesn’t look like it’s a director or management dumping the share. The other piece of the puzzle is why somebody would sell his block when the results were fine. The dumping of shares created a bloodbath of -8.43% the next day.

I pulled up a Google Finance chart. You can see below that a major block of 293.6k share was traded at noon. Looks like somebody needed some $9.4m of lunch money. Eliminating that trade, there would have been about 24,000 being traded that day, right at its daily average.

mty3

Conclusion

Sensitive information leakage has become a daunting problem in today’s world. Leaks are present in any public companies. A lot of people are involved when it comes to acquisitions and financial reporting, making monitoring impossible. You can’t eliminate people having access to privilege information, but there must be a way to curb people taking advantage of it.

Massive trading volume before an unannounced quarterly release is definitely a red flag. The main question is: Was there trading based on privileged information?

It’s important to note here that I’m not making any accusations but simply stating an observation. However it’s an observation that I believe is worth investigating further. I don’t think that it’s a coincidence that there’s fifteen times the average daily volume right before a result announcement.

Editor’s Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Additional disclosure: As with all of my articles, the opinions are my own. You should do your homework and make your own best judgments about the company. (I know that this resembles the boilerplate disclosure that you see in every email that you get from your broker but I really mean this and I am not saying it to avoid getting sued.)