Getting Into The Weeds

My latest article, Getting Into the Weeds, hit #1 on Seeking Alpha! It’s an extension of The Intelligent Investing Podcast I did with Eric Schleien (GSCM). Eric’s podcast is doing very well and about to break the top #100 in the investment space.  In the article I take the time to dig deeper into specific sector of the marijuana industry.  With the legalization in Canada coming tomorrow (October 17) it’s good to have a sense of the buzz surrounding the space.

Just to be clear, I’m not an investor in the space. I’m also not recommending investing in the space. While on the sidelines, I know a lot of people making plenty of easy money on cannabis stock. We have seen Canopy Growth (WEED) go from $2 to $75 in a very short-time. Tilray, a company with just $20 million in first-half revenue, was briefly worth $30 billion. That’s more than Twitter, CBS, Harley-Davidson, Fitbit and American Airlines. At its height Tilray’s enterprise value surpassed 85x bullish estimates for its 2020-year sales and 340x that year’s estimated cash flows. Fast easy money is tempting and contagious. I’m happy for them but I believe the party is not going to last. We have seen this story repeat itself in the past.

To me the investor’s high on the marijuana sector is a red flag, and signaled that a sobering up may be imminent. The speculative craze is fueling a future crisis. This is the same story that repeats itself over and over. The tech bubble that ended in 2000, the pre-crisis U.S. housing craze, and the cryptocurrency bubble are some of the most recent examples of speculative manias. In each case, a defensible investment thesis – that technology will eventually dominate the economy, American housing prices could only move in one direction, and the blockchain was going to revolutionize everything – was extrapolated to a form of ridiculousness where no price was too much to pay for related investments.

There are some serious questions about just how profitable these companies can become under legalization. I think most investors do not understand what the space looks like, how competitive it is, what the margins look like. Distribution costs, advertising and sales taxes will further erode profit margins and cause price compression, possibly squeezing companies whose production costs are too high out of the market. Some of the companies that have gone public suffer from weak management, and investors need to be ready for a fall in marijuana prices because too many suppliers have entered the market. I see the valuations being attributed to places that have virtually no production, virtually no off-take agreements, which don’t operate in multiple countries and have a very limited R&D.

I’m not a market timer, I don’t have a crystal ball, and I don’t what’s going to happen. But I know that a company without profits can’t survive in the long-run. Right now these stocks are being valued like junior mining companies. They are valued in the “promised” of future riches. Eventually, once they start producing (legal sales in our case) they are valued based on their fundamentals (cost, margins, distributions, market, profits etc.). This is similar to a junior mining company transitioning from exploring to producing.

It’s a space that I suggest proper judgement.

Article: Getting Into The Weeds

Podcast: #36: Getting into the weeds on marijuana stocks (we aren’t so high on them) + Update on BAM & TSLA ItunesGoogle. First 23 minutes is a recap on Brookfield Asset Management and Tesla. Weed talk at the 23 minute mark.

Enjoy!

Brian


Getting Into The Weeds

By Brian Langis

  • Canada is legalizing marijuana for recreational use on October 17, 2018.
  • The changes that are underway closely mirror the process that alcohol went through after prohibition ended in the 1920s: liquor regained social acceptance and the product proliferated.
  • Investors need to figure out what something is worth and try to buy it for less. Investing in the marijuana industry is not different in that regard.
  • Most investors do not understand what the space looks like, how competitive it is, what the margins look like. There are questions about just how profitable these companies can become.
  • The long-term prospects for marijuana are very positive. The question is how much are you willing to pay for it?

The cannabis sector has been on a two-year high. Cannabis related stocks are trading at sky-high valuation. “The sky is the limit” as the saying goes. Since August, the segment has surged to a new level of hysteria on a wave of announcements. The sector got a boost when Constellation Brands (STZ), the brewer of Corona and Modelo, agreed to add $4 billion to its investment in Canada’s lead weed company Canopy Growth (CGCWEED). The hysteria got a new boost when Coca-Cola (KOconfirmed an interest in spiking sports drinks with cannabidiol (NYSE:CBD), the non-psychoactive ingredient of marijuana. And thanks to the DEA approving Tilray’s (TLRY) plan to import pot from Canada, a company with just $20 million in first-half revenue was briefly worth $30 billion. Continue reading “Getting Into The Weeds”

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Tesla: Bulls Vs. Bears

My article on Tesla was published on Seeking Alpha two weeks ago and since I was away on  vacation I didn’t have time to publish it on the blog. This article can be seen as a companion to the podcast I did, The Intelligent Investing Podcast with Eric Schleien.

We talked about the most hated or loved stock in America: Tesla. Elon Musk and Tesla are a very polarizing topic. The most hardcore short-sellers believe that Tesla is a fraud, Elon Musk is a conman, and the stock is worth less than zero. Fanboys believe in Elon Musk’s mission of transitioning the world to sustainable energy and will have become one of the most valuable and successful companies in the world. Both camps are deeply entrenched in their position and it’s very interesting to see them go at it. I also published a companion to the podcast on Seeking Alpha; Tesla: Bulls vs. Bears.

The podcast was recorded three weeks ago. When Tesla is the subject matter, a lot can happen in two weeks. Tesla, the drama filled company that gets TMZ style coverage, is one of the main reasons why I stay away from the stock. Even though the shorts have a very compelling investment thesis, the market seems to think otherwise. Tesla currently trades at $375 a share. When the article and podcast was published Tesla traded at $300. Seemingly out of the blue, Elon Musk proclaimed that he might pull his money-losing Tesla off the market for $420 a share! He also claimed that he has funding secured.  This story is not over.

Here’s the SA Article. The full article is available on Seeking Alpha.


Tesla: Bulls Vs. Bears

By Brian Langis

Summary

  • Elon Musk and Tesla are a very polarizing topic. Tesla may be the most hated or loved stock in America.
  • Tesla comes with a lot of noise and buzz. Facts, figures, and claims are exaggerated, spun, and manipulated to one’s interest or to simply distract from the real issue.
  • I have front row seats to a good heavyweight fight between Tesla bulls and bears.
  • It’s not the first time Tesla faces an existential crisis.

I had the pleasure to be back on The Intelligent Investing Podcast with Eric Schleien to have an in-depth conversation on Tesla (TSLA). If you are even reading this, you are fully aware that Tesla has turned into a full blown soap opera. The podcast and this following article try to make sense of the Tesla drama.

Since Tesla is a very polarizing topic, let’s start off with the disclosures regarding Tesla:

I’m not a shareholder and never was. I’m not a short-seller and never was. I don’t have an agenda. I don’t have a horse between the short-sellers and the bulls. I’m not a “hater” or a “fanboy”. I don’t have a secret source inside Tesla’s factories. I didn’t pay anybody for information. I don’t own a Tesla. I find the debate between the Tesla bulls and bears very interesting.

Bloomberg Headline ( Link)

I long hesitated writing an article on Tesla. I wrote short one back in January 2014. Tesla is one of the most popular (or unpopular) stocks on Seeking Alpha and the media. There are a couple of pieces published every day and it wasn’t clear at first how I could add value to the debate. It’s has all the ingredients for a juicy story. The combination of a very colorful CEO on a mission to save the world, a flashy company that is disrupting the auto and energy industry, and with billions of dollars at play makes this stock very emotionally divisive. Musk and Tesla comes with a lot of noise and buzz. Facts, figures, and claims are exaggerated, spun, and manipulated to one’s interest or to simply distract from the real issue. And I think this is where the opportunity is. With so much being said, it’s hard to see the forest for the trees. We need to take a step back and get a little perspective. I will write about the good and the bad. While the goal of this article is to provide clarity, I’m aware that this article won’t change people’s mind since folks with money on the line are deeply entrenched in their position. I haven’t seen a bull turned bear on Tesla or vice versa.

I have front row seats to a good heavyweight fight between Tesla bulls and bears. These two opponents have very opposite points of view. In one corner, we have the bulls, aka the fanboys. The fanboys are “believers”. They believe in Musk and that Tesla will achieved its mission of transitioning the world to sustainable energy and will have become one of the most valuable and successful companies in the world. The legacy car companies like GM and Toyota are dinosaurs that won’t be able to compete with Tesla because of its EV head start and superior technology. Musk has also talked about turning humans into an interplanetary species. He makes you dream. In the other corner, we have the bears, aka the “haters”. The extreme version of the bear thesis is that Musk is a straight up fraud and Tesla is going to bankrupt. The milder version of the bear thesis is that Tesla is overvalued and a correction is due.

I try hard to look at Tesla from a rational and objective point of view and this is a difficult task. I also suffer from my own biases. From the outset I’m a fan of Elon Musk but skeptical about investing with him. I’m a fan for what Elon has accomplished and tries to accomplish. I’m a skeptic because I’m not into fairy tale stories and I understand basic high school math. But whether you like Elon or not, his journey from his youth to present day is very interesting and inspiring. Ashlee Vance’s biography of Elon Musk is an excellent book that covers his journey. Of course Musk is a flawed individual. He has personal foibles and challenges as everyone else.

Let’s try to cut to through the clutter and noise.

Continue reading “Tesla: Bulls Vs. Bears”

A Primer On Brookfield Asset Management

My latest article on Seeking Alpha. This article can be seen as a companion for The Intelligent Podcasting with Eric Schleien. It took a while to get it published and it’s worth the wait. The topic is Brookfield Asset Management. The summary of the article is below. The full version is available here.


A Primer On Brookfield Asset Management

Summary

  • Brookfield (BAM), an under-the-radar company, is one of the largest alternative asset managers in the world.
  • Its CEO, Bruce Flatt, also low profile, is a value investor who has delivered tremendous value to investors over the past 16 years.
  • Brookfield finds opportunities that everyone else deems as uneconomic. If there’s a dearth of capital, expect Brookfield to be sniffing around. A crisis is a good time to find value.
  • Management is a key part in investing in Brookfield. They hold 20% of the company.
  • It is reasonable to assume that BAM will continue to increase the amount of assets with harvestable cash flow. Assets Under Management is also expected to significantly increase.

*Brookfield Asset Management’s Class A Limited Voting Shares are co-listed on the NYSE under the symbol (BAM) the Toronto Stock Exchange under the symbol (BAM.A)and Euronext under the symbol (BAMA.) I will be referring to the American symbol for the article. Dollar amounts are in USD$ unless mentioned otherwise. BAM currently trades for ~$40 with a market cap of $40 billion. It’s currently trading down from its all-time high of ~$44.

I had the privilege to be a guest on The Intelligent Investing Podcast with Eric Schleien. We mainly talked about Brookfield Asset Management but we barely scratched the surface. Since I wanted to elaborate on some points, I wrote this primer on Brookfield as a companion guide to the podcast. I have no affiliation with The Intelligent Investing podcast whatsoever, but I am a fan of his work.

Brookfield Asset Management (BAMBAM.A) is one of the most under-rated, under the radar, low profile company in the world. Brookfield doesn’t make headlines. For those of you that are in the investment business, you are most likely familiar with the global value investor Brookfield, its CEO Bruce Flatt, and the tremendous success the company had under his leadership. For the folks that are not in the investment industry, you wouldn’t know that Brookfield owns a large chunk of the arteries and pipelines essential to how global economy functions. BAM owns some of most prized real estate in the world, such as Manhattan’s prestigious World Financial Center. In Berlin, it owns Potsdamer Platz and, in London, Canary Wharf. And that’s just the real estate. In Ireland it supplies Facebook with electricity. A good part of Chicago is powered by Brookfield. It owns 36 ports in the UK, North America, Australia and Europe, and in India and South America it manages 3,600 kilometres of toll roads.

Brookfield Place “World Financial Center. Source: therealdeal.com

Brookfield is a global alternative asset manager with $285 billion in assets. They employ a value investing style, where they shop around the world for bargains, with a penchant for distressed assets. BAM has the distinction of being an owner-operator of their assets. BAM’s modus operandi is to buy the asset on the cheap, fix it, improve the cash flow and value of the assets, sell it at maturity, and efficiently redeploy capital back into new development opportunities. A quick Google search of Brookfield Asset Management would freak out most investors. Among the results, you will links to Jared Kushner’s infamous 666 Fifth Ave. deal, mall operator General Growth Properties (GGP),Brazil, and Canada’s controversial Trans Mountain pipeline; basically deals that contribute to lack of sleep. But isn’t it odd that Brookfield finds opportunities that everyone else deems as uneconomic? All these moves have an anti-herd contrarian mentality. If there’s a dearth of capital, expect Brookfield to be sniffing around. A crisis is a good time to find value. It seems to have worked out well for the company. Brookfield’s formula for making contrarian investments by going where capital is most needed and in the shortest supply has worked well for Flatt in his 16 years as CEO.

Chart: Yahoo! Finance.

Under Flatt’s leadership, from February 1, 2002, to May 1 2018, BAM returned 1110%, or 11x your money, compared to 1.4x for the S&P 500. This doesn’t include dividends.

BAM, known for its low profile, is not afraid to display their great performance in their latest annual report (pdf). BAM mentions that they target returns of 12% to 15%. These numbers under estimate their real returns. The figures below include dividends:

Source: BAM 2017 Annual Report. Page 8.

BAM is a global alternative asset manager. What are alternatives assets? Well traditional assets are stocks and bonds (equity and debt). Alternative assets can be real estate, infrastructure (ports, pipelines, toll roads etc…), renewable energy and private equity among other things. Alternative assets are a little bit of a misnomer because all assets are composed of equity and debt.

Brookfield loves “real” assets. The emphasis is on “real” because we currently live in a world where investors highly value intangible assets. Some of the top companies by market capitalization barely have any tangible assets. For example, Facebook (FB) and Alphabet (GOOGL) are highly valued for their intangibles/intellectual properties, and sometimes that can be hard to value (e.g. network effects). Brookfield is the exact opposite; they love these tangible hard assets with a nice cash stable cash flow that can grow in value over time.

Brookfield likes to focus on long-life, high quality real assets. “Long-life” because BAM invests in assets like a hydroelectric dam that can last over a hundred years. “High-quality” because these assets are considered critical to the economy, scarce, and have a high barrier to entry. They also come with a 15 to 20 years contract with clauses for yearly price escalation and inflation. For example, one of BAM’s publicly listed partnerships, Brookfield Renewable Partners (BEP), sells the majority of its power under long-term, inflation-linked contracts that allow them to capture increases in power prices over time. This provides stable cash flows for a very long period.

Who also likes the investment profile of “alternative assets”? Pension funds, institutions, insurance companies, university endowment funds, sovereign wealth funds among others. Over the last twenty years, there has been an increase to their portfolio allocation to alternatives, and the shift seems to gather pace. Why is that? Pension funds have long-term obligations and in a world of low interest rates, they seek return outside the stock market with less volatility.

Institutions’ thirst for alternative assets provides Brookfield with the type of capital they need, which is a lot and patient. BAM is typically one of the largest investors in their funds. This provides an alignment of interest with their investors. Below is a list of BAM’s publicly listed partnerships (L.Ps) and their equity ownership interest. BAM also manages over 40 private funds.

Brookfield Property Partners (BPY) – 64% – Operations include the ownership, operation and development of core office, core retail, opportunistic and other properties. BPY consists of 147 properties totaling 100 million square feet of office space. BPY also has a portfolio of regional and urban malls (mostly GGP). Brookfield Renewable Partners (BEP) – 60% (*Wrote about here). – Operations include the ownership, operation and development of hydroelectric, wind, solar, storage and other power generating facilities. BEP consists of 217hydroelectric stations, 76 wind facilities, 537 solar facilities and storage.Brookfield Infrastructure Partners (BIP) – 30% – Operations include the ownership, operation and development of utilities, transport, energy, communications and sustainable resource assets. BIP’s main assets are ~2,000 km of natural gas pipelines, ~12,000 km of transmission lines, and ~3,500 km of greenfield electricity transmission developments, ~10,300 km of railroad tracks, 4,000 km of toll roads, 37 port terminals, and BIP also owns ~15,000 km of natural gas transmission pipelines, primarily in the U.S., and 600 billion cubic feet of natural gas storage in the U.S. and Canada. Brookfield Business Partners (BBU) – 68% – Operations include a broad range of industries, and are mostly focused on construction, other business services, energy, and industrial operations.

Long before Brookfield was an asset manager, BAM invested its own capital to develop, own, and operate assets. It’s in the early 2000s that BAM began other private investors to partner with them. As an owner-operator, BAM works to increase the value of the assets within their operating businesses and the cash flows they produce. They do this through their operating expertise, development capabilities and effective financing. This is significant because if it’s done properly, this is how Brookfield achieves superior returns. BAM has over delivered on their target of 12% to 15%. Once the asset has achieved targeted returns and cash flow has “matured”, BAM sells the asset to a buyer looking to achieve a yield of 5% to 7%. Most institutions are fine with that kind of return since the asset has been “fixed” and “de-risked”. Below in the article I provide a real example on how BAM operates.

 

Full article here.

On The Future Of Disney And ESPN

My latest article on Seeking Alpha focus on Disney and the future of the business. The full article is available on their website here.


On The Future Of Disney And ESPN

By Brian Langis

Summary

  • Focus on the long-term, 5 to 10 years.
  • Disney’s approach to streaming ESPN and Disney+ could determine the future of television.
  • Disney could be viewed as a service company in the future – that would benefit the stock.
  • The Media segment is Disney’s biggest segment and is under pressure. It will take ESPN+ to replace the losses.
  • In 2006-2007, analysts and shareholders hated Netflix for investing in the streaming platform instead of focusing on DVD rental.

The following article are some thoughts and insights on the future of Disney and ESPN. If you are looking for a DCF model of the next ten years this is not the right article.

I love Disney (DIS). I have two small children and Disney helps with me with parenting. I’m also a Disney shareholder, so is my daughter when I gave her one share at her first Christmas. As a shareholder I do need to follow the company for myself and my family.

Part of the investment thesis is based on Disney’s capacity to transform itself from a traditional TV/Media to digital streaming with ESPN+ and Disney+ (I don’t think Disney has released the name for their streaming platform, so I’m calling it Disney+). A Disney+ app set to debut in 2019 will offer on-demand viewing of Marvel, Pixar, Lucasfilm and other television and movie content. Yesterday Disney released their Q2 results. Below is the revenues break-down by division Q2:

  • Media and networks: $6.14 billion vs. $6.09 billion expected
    Parks and resorts: $4.88 billion vs. $4.69 billion expected
    Studio: $2.45 billion vs. $2.19 billion expected
    Consumer and interactive: $1.08 billion vs. $1.14 billion expected

The Media segment is Disney’s biggest segment and is under pressure (-6% net income last quarter) however the Parks and Studio division is helping absorb the subscriber loss bleeding at ESPN. “The Worldwide Leader” in sports is going through an identity crisis (what’s going on with SportsCenter?), is losing rapidly losing subscribers (peak ~100m vs ~80m today) due to cable cutting , and is hit by escalating rising cost attached to their massive sports-right contracts. To help the transition to digital and to “save” ESPN, the Company unveiled a paid streaming service as ESPN looks to combat mounting subscriber losses that have weighted on the bottom line of Disney. Disney has big plans to sell its stuff directly to consumers (Direct-To-Consumer or D2C). ESPN+ is a first step. D2C bypass intermediaries and allows Disney to control the user experience.

Read the here.

 

ECN Capital Preferred Shares Is Victim Of Collateral Damage

My latest article on Seeking Alpha is on the drop on value of ECN and its preferred shares on March 16th. It turns out that the drop in share prices has nothing to do with its fundamentals or any related bad news. Below is a short summary of the article. Full article at Seeking Alpha.


ECN Capital Preferred Shares Is Victim Of Collateral Damage

Reposted from Seeking Alpha
By Brian Langis

Summary

  • Both classes of preferred shares fell for unexplained reasons.
  • ECN preferred shares seem victim of collateral damage by the company’s association to Element Financial.
  • The recent selloff provides an interesting investing opportunity.
  • Both classes of preferred shares provide a yield of +7%. More upside once they reset.

 

ECN Capital (OTCPK:ECNCF) [TSX:ECN] is primarily traded on the Toronto Stock Exchange under the ticker ECN.

Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.2839 Price of 1 USD in CAD as of March 23, 2018.

I just wanted to drop a short note on the ECN Capital (ECNCF, ECN.TO) preferred shares. Both classes of preferred shares have taken a hit on March 16, 2018. Why it happened is not exactly clear, and this article will dive into the possible causes. I’m not the first one to look at the unusual drop. KT Investments has his take on what happened to ECN Preferreds here. For a more in-depth analysis on ECN Capital, you can read my article here and the one by Montrealer.

In short, ECN is commercial finance company. ECN Capital operates in four verticals: Home Improvement Finance (Service Finance), Manufactured Housing Finance (Triad Financial Services), Rail Finance, and Aviation Finance. It is well managed and is led by Steve Hudson. Hudson’s focus on capital allocation has created value for shareholders, especially when he was the CEO of Element Fleet Management (OTC:ELEEF) (EFN.TO). Hudson eats his own cooking; he owns millions of shares of ECN. ECN is profitable and has plenty of assets to back the preferred shares.

The purpose of this article is to try to make sense of the drop of ECN Capital Preferred Shares Class A and C. ECN Capital Class A (ECN.PR.A) was trading above par back in November with a 52-week high of $26. It’s now down to $22.60. Class C was trading in the high $23 range for most of the year until recently. It’s now trading at $20.60 a share. ECN’s financials are fine, there wasn’t any bad news, and the rise in interest rates should benefit both classes of shares because of their fixed reset features. It’s worth pointing out that other fixed-resets preferred shares have been doing well. So what’s going on with the preferred?

First let’s look at the criteria of each class:

ECN Capital Class A – ECN.PR.A – Reset: Dec 30, 2021. (Issued November 2016) (Prospectus on SEDAR)

  • Shares Capital: 4,000,000 shares @ $25 for $100,000,000
  • 5 Yr Canada Gov Bond + 5.44%. Yield Floor: 6.50%
  • Price: $22.80
  • Current Yield: 7.17%
  • DBRS Rating: Pfd-3 (low)

ECN Capital Class C – ECN.PR.C – Reset June 30, 2022 (Issued May 2017) (Prospectus on SEDAR)

  • Share Capital: 4,000,000 shares @ $25 for $100,000,000
  • 5 Yr Canada Gov Bond + 5.19% Yield Floor: 6.25%
  • Price: $20.73
  • Current Yield: 7.51%
  • DBRS Rating: Pfd-3(low)

Both Class A and C took a tumble this month.

Best Buy’s Successful Turnaround Lessons

Below is a preview of my latest article on Seeking Alpha. It’s short but good. Best Buy was considered dinosaur in 2012 and they managed to turnaround the business. How did they do it? They are now thriving.

I’m not a shareholder but I’m interested in the story.

*Note from the author: This is my first published article since 2016. I’ve received numerous great comments in the past, and some of my followers have asked where my next article was. Writing is a hobby for me. Here’s my breakdown on Best Buy’s turnaround.

For the full article click here.


Repost from Seeking Alpha
By Brian Langis

Every day it seems that I’m reading about a brick-and-mortar business heading for the slaughterhouse. If you have been out of the loop, here are some sample headlines just from the LA Times:

Source: LA Times

Despite what seems to be the retail apocalypse of the brick-and-mortar store, a success story has gone unnoticed and deserves more attention. You probably noticed that your local Best Buy (BBY) is actually not dead and is doing just fine. Best Buy, once a struggling business, managed to successfully turn around its business. The Best Buy turnaround story should be a case study. In it are plenty of lessons for the businesses looking to fight off the online juggernauts. This led me to further study how Best Buy managed to avoid the pitfalls that ailed many other brick-and-mortar retail chains.

A few years ago Best Buy was going down the tube like many of its peers (e.g. Circuit City, Radio Shack). Best Buy was a victim of “showrooming”; Consumers would show up in stores to check out the product to end up purchasing it online at a better price. As a result, sales and profits slumped, and Amazon would just take more market share. In this 2012 article from the LA Times, the author claimed he got a better deal for a fridge at Sears. When you are losing sales to Sears, you are in trouble. Below is the Best Buy five year chart:

Best Buy is up 4x since late 2012, far outpacing the broader market.

Back in 2012 Best Buy was trading at around $11 with a quarterly dividend of $0.17 per share. It’s now trading upward of $56 with a quarterly dividend of $0.34 per share. So how did Best Buy manageto quadruple its stock price, double its dividends in five years when many people (including me) thought this company was going straight for the cemetery, another victim of Amazon.com and other online sellers?

What are some the lessons?

For the full article click here.

What’s Going on with Retail (and it’s not the weather)

Interesting comments on page 15 from Steven Roth, the Chairman’s letter of real estate investment trust Vornado Realty. Here are his comments:

Disruption in retail is the topic du jour, the eye of the storm so to speak (both retail tenants’ and retail landlords’ stocks have been battered), so it is appropriate that we get into a fulsome discussion of retail this year.

In the be-careful-what-you-wish-for department, we made the prescient call four years ago that retail was in secular decline and acted on that by selling our malls,(17) spinning our strips into Urban Edge Properties, while retaining and even growing our flagship street retail in Manhattan.

So what’s wrong with retail:(18)
·
The U.S. is grossly over-stored. ICSC publishes 24 square feet of shopping center space per capita.(19)
·
The struggles and failure (or near failure) of many household names in the anchor and chain store business.
·
Traffic in shopping centers, while difficult to measure, is clearly declining and has been for years and so that makes a trend.
·
Shopping preferences and how we shop have changed, especially among millennials.
·
Most brands have become ubiquitous and, therefore, less differentiated and important.
·
Price and on sale is the only strategy which seems to work.
·
And then, of course, there is Amazon and the Internet.

I do not believe we can grow our way out of this mess. I believe the only fix for brick and mortar retailing is rightsizing by the closing and evaporation of, you pick the number, 10%, 20%, 30% of the weakest space.  This very painful process will surely take more than five years.  It will also create enormous opportunity for those with the capital and management platforms to feed on the carnage.

So if we were so prescient as to predict the secular decline in retail, and sell our malls, and spin our strips, why did we keep our Manhattan flagship street retail?  We believe Upper Fifth Avenue is enduring (read forever).  We believe Times Square is enduring and unique. We believe in the handful of world cities.  And, we believe the quality and scale of our Manhattan flagship portfolio is unique, irreplaceable and commands a premium.

Of course, even we are not immune.  It’s only to be expected when a tenant’s basic business model is being threatened that they hunker down rather than step up. For flagship retail (and for A+ malls), this is a pause, a cyclical bump. For everybody else, it is secular disruption.  Interestingly, several fast fashion retailers have told me that their 10-year plan is for smaller fleets (fewer stores), but with more and larger flagships.  That strategy makes eminent sense to me.

_______________
17
We sold the malls (into a very strong market) and spun off the strips in half measure anticipating secular decline (note the current softness in retail) and recognizing that with only a handful of malls, we were in no man’s land, and in half measure to de-conglomerate i.e., there is no real benefit in having $50 million shopping centers in New Jersey, no matter how great they may be, together with million square foot office towers in Manhattan.  I believe the decision to exit the mall business will look better and better as each year goes by.
18
Retailing stinks, right? Well, maybe not… note that the richest people in Europe are all retailers, the founders of: Zara, H&M, Ikea, LVMH and that the richest in the US is a retailer, if you aggregate the wealth of Sam Walton’s heirs.
19
The next highest country is Canada with 17 square feet per capita, Norway is next with 10 square feet, all the mature European countries are in single digits.
Further, the 24 per square foot number is not credible. There are 17.7 billion square feet of total retail establishments (both in and out of shopping centers) versus a population of 323 million or a startling 54.9 square feet per capita.  Granted this larger number now includes car dealerships and the like, but it also includes all the freestanding Walmarts, Costcos, etc.

Major Causes of Failed Acquisitions and How to Avoid Them

This sheet of paper was provided at of the Ben Graham Centre’s 2017 Value Investing Conference that I attended last week. Tony Fell, the retired Chairman of RBC Capital Markets & Former CEO, used it during his speech. He was with RBC Capital Markets and its predecessor for 48 years. We often hear and see that M&A is not as successful as it should. We hear that’s it’s the culture or this or that for the main cause of failure. The list below is brief and useful. Here are the major causes of failed acquisitions and how to avoid them. I particularly like point #3 and #12.

  1. Start off by reminding yourself that fully 2/3 of acquisitions do not work out and actually destroy shareholder value. The odds are two-thirds stacked against you from the get go.
  2. Always remember – the best deal you do in your career is often the one you don’t do.
  3. Always remember the buyer needs a thousand eyes – the seller only needs one.
  4. Beware so-called major transformational mergers or acquisitions – they usually blow up and many have been catastrophic.
  5. In any takeover usually best to be the seller and get a good premium.
  6. Synergies are often significantly over-estimated and take longer to achieve than forecast.
  7. Beware of the auction process – and don’t bid against yourself
  8. Hold your ego in check, don’t get caught up in the euphoria of an acquisition and pay too much. When you pay too much, your returns may be terrible and your may be faced with substantial write-offs.
  9. Beware poor, or incomplete acquisition due diligence. Nothing worse than major operational or financial surprises after you buy a company.
  10. Calculate earnings accretion or dilution based on constant leverage ratio. Accretion due to increased leverage is not accretion.
  11. Beware of potential clashes in corporate culture of two merging companies.
  12. Remember that the vision of the acquisition is great but execution is where it’s at. It’s one thing to acquire a company, it’s quite another to integrate it into your own business and run it. Vision without execution is hallucination.
  13. No acquisition is make or break. There is always another train.
  14. On any acquisition don’t increase leverage beyond a very prudent level. Finance with equity.
  15. Beware international acquisitions. Foreign markets are often more competitive than Canadian markets with lower margins. Don’t expand beyond your ability to manage tightly.
  16. Notwithstanding the above perhaps 10%-20% of acquisitions are outstanding successes.
  17. Good Luck.

Major Causes of Failed Acquisitions And How To Avoid Them

Altria Group Inc. – One Of The Best-Performing Stocks Ever

This is my latest piece on multi-baggers. Altria Group, also referred to as Philip Morris, has been one of best performing stock ever in the last 100 years. Tobacco itself was the best performing industry from 1900 to 2000. It wasn’t oil, technology, or IT. No it was tobacco. Here’s an industry that didn’t require any innovation or massive technology breakthrough. It’s just tobacco and it has crushed any other industry. Thanks in part to its addictive nature.

Shares of Philip Morris were publicly available from 1919 but data is hard to come by. Most public website, such as Yahoo! Finance, has data going back to the 1970s. I spoke with investor relations but they couldn’t help either. So I had to calculate my performance from 1970. That’s reasonable holding period. It also represent a working lifetime.

The cost of one share on November 23, 1970 would have been $46.12. Since then there have been many splits. My one share would have turned into 96 shares. There was a 2 for 1 split in 1974, 1979, and 1986, a 4 for 1 split in 1989, a 3 for 1 split in 1997.

It’s possible there were splits before the 1970s but the data are extremely difficult to come by. My single $46.12 share would have turned into 96 shares worth $6,145.92. This represents a 57466% change, or a 574.6-bagger in Peter Lynch’s parlance. A $1,000 investment (2081.30 shares split adjusted) would have been worth $575,666.84. The yearly dividend payment would have been 5,077$, five time my original investment. Investing in Atria may not have been the most ethical choice but it would have been a financially sound decision, and more.

The full article is on Seeking Alpha and is free to read. They have the rights to it so I can’t post the full piece. One of the best part are the comments. I love reading stories on how certain people have been holding to certain shares for more than 30 years and saw their investment compounded many fold. One commentator said that his shares of Altria has been in the family for almost 100 years!


Altria Group Inc. – One Of The Best-Performing Stocks Ever

By Brian Langis

Summary

  • The full corporate story of Philip Morris is complex but the outstanding performance of its stock makes it worth looking into.
  • Investing in Atria may not have been the most ethical choice but it would have been a financially sound decision.
  • How much your investment in Philip Morris Companies would be worth today is very complicated due to the number of spinoffs, mergers, splits, and IPOs.
  • One share of Philip Morris in 1970 is equal to 96 shares today!
  • $1,000 invested in 1970 would give you $5,077 in dividend payment today!

Marlboro Man, Hollywood California. Source: Arthur Grace, photographer.

I’m a big fan of history and business. I’ve been researching multibaggers and along the way, I’ve decided to write some articles. So far, the feedback has been amazing. Here are my first two articles in the multibagger series.

The best part about writing these articles are the comments. I love reading people’s stories. In my previous article, one commentator suggested I write an article on Philip Morris Companies Inc., better known as Altria Group Inc. (NYSE:MO) since 2003. At first, even though I knew the tobacco industry was a money-printing machine, we don’t talk about Philip Morris in the same conversation as the Facebook (NASDAQ:FB) and Netflix (NASDAQ:NFLX) of this world. That is, companies that made people very rich.

My first two articles were about two high-tech stocks that changed people’s lives for the better – Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). Philip Morris’ products are not known to make life better. I see a couple of reasons why the Altria Group is not lumped with the “cool” high return companies. The first reason is that the tobacco industry is boring. Second, when you think of Philip Morris, you think of big fat reliable slowly growing dividends, not an innovative company with amazing growth prospect. The suggestion to write about Philip Morris led me to research it and I liked what I saw.

Today Altria Group is a $122b market cap company with approximately $19b in revenues. The cigarette manufacturer distributes annualized dividend of $2.44 per share that provides a yield of 3.9%. The Altria Group owns 100% of Philip Morris USA, John Middleton (machine-made cigars), Philip Morris Capital Corporation (leveraged leases), U.S. Smokeless Tobacco Company, and the Ste. Michelle Wine Estates. Altria also owns 9.6% of Anheuser-Busch InBev. It’s a pretty diversified group but it’s mostly known for its cigarettes and its Marlboro brand.

Source: Altria Group

I bring up the dividends early on because it has been such an important contributor to its performance. Altria has increased its dividend 51 times in 48 years. Altria targets a dividend payout ratio of approximately 80% of adjusted earnings per share. The dividends have turned Altria into a dominant investment. It has been a favorite of dividend investors for a long time, as the company has consistently made healthy payouts to its shareholders. The company has provided the killer combo: the income they need and the capital appreciation they want.

Altria recently revised its guidance for 2016 full-year adjusted EPS from a range of $3.01 to $3.07 to a range of $2.98 to $3.04, representing a growth rate of 6.5% to 8.5% from a 2015 adjusted EPS base of $2.80. Altria aims to maintain its long-term financial goals of growing adjusted diluted EPS at an average annual rate of 7% to 9% and a target dividend payout ratio of approximately 80% of adjusted EPS.

Source: New-York Times, May 23, 1919

Performance

The full corporate story of Philip Morris is complex but the outstanding performance of its stock makes it worth looking into. Determining what your initial investment in the original companies that formed the Altria Group/Philip Morris Companies would be worth today is very complicated due to the number of spinoffs, mergers, splits, and IPOs. There’s a reason why it was called Philip Morris Companies Inc. In addition to the U.S. and international tobacco business, Philip Morris owned Kraft Foods and still owns its original stake in the Miller Brewing company that became SABMiller, and now Anheuser Bush Inbev SA (NYSE:BUD).

There are many layers to this. For an idea of the complexity, just take Kraft for an example. After Philip Morris bought Nabisco Holdings, it combined General Foods, Kraft, and Nabisco Holdings into one company called Kraft Food. Then there was the IPO of Kraft in 2001, its spin-off in 2007 and a split in two companies in 2012 with the other half becoming Mondelez International. At the time, the value of the spun-off Kraft shares was almost 24% of Altria’s total value prior to the spinoff, leaving Altria subsequently about three-quarters as large as it had been.

Then in 2015 Kraft was acquired by Heinz. Then I have to calculate the appropriate cash dividend from all the subsidiaries because Philip Morris International was spun off too and in this case Altria was the much smaller company. This can be a messy exercise. What’s clear is that long-term shareholders of the Altria Group have been very well rewarded. Even though that over time, Kraft and Philip Morris have rewarded their shareholders in their own unique ways, for simplicity’s sake, I focused solely on the Altria Group even though the “full complete” investment performance would be much higher.

Today you can follow many of Philip Morris’ companies:

  • Altria Group Inc. is the original company and subject of this article. It’s the U.S. tobacco business and many other companies mentioned at the beginning of the article.
  • In 2008, Altria Group spun off its non-US tobacco business, Philip Morris International (NYSE:PM) to its shareholders. Altria investors received Philip Morris shares on a 1-for-1 basis. Philip Morris was actually the much larger offshoot, with Altria representing barely 30% of the value of the two companies. The reason for the split was to set free the faster-growing overseas operations while the U.S. business was entangled in smoker lawsuits. It markets and sells its products in approximately 180 countries.
  • Kraft Food is now The Kraft Heinz Company (NASDAQ:KHC). Mondelez International (MDLZ) is still a standalone company. The IPO was in 2001 and was the spin-off in 2007.
  • The Miller Brewing Company became SABMiller and is now Anheuser-Busch InBev SA/NV (NYSE:BUD). Altria owns almost 10% of the newly merged company.

Unfortunately, when it came to calculating its performance, I couldn’t go back all the way to 1919 when it was first publicly available to the public and was majority owned by the Tobacco Products Corporation. I spoke with investor relations and they didn’t know what their investment return was since 1919. However, they did refer me to a paid service that might find out for me but I refused to pay $25. So I had to use the data available to me.

The earliest I could go back is November 23, 1970. That’s as far as Altria would go. However, historical closing prices and dividend payments for Altria dating back to the early 1970s are available on Yahoo Finance. That’s fine since we can reasonably assume that a long-term shareholder wouldn’t have acquired his shares in 1919. That’s also essentially a working lifetime. However, it’s reasonable to assume that one could have held shares for twenty or thirty years.

Source: Buy Out British Interests; Tobacco Products Get Control of Philip Morris & Co. of New York. New York Times, February 14, 1919

You can read the full article here on Seeking Alpha.

Continue reading “Altria Group Inc. – One Of The Best-Performing Stocks Ever”

MTY Food Group Just Doubled In Size With Latest Acquisition

It has been a while since I’ve written anything on Seeking Alpha. The acquisition of Kahala Brands by MTY Food Group (MTY) got me out of my writing break. This is an interesting acquisition since it doubles the size of MTY and it also establish a base in the U.S., a market that MTY wanted to penetrate for a long time.

This article is free for 30 days on Seeking Alpha. Below is a preview and if you want to read the whole article you must go Seeking Alpha since they own the rights to the article.

Reposted from Seeking Alpha
By Brian Langis

Summary

  • MTY effectively double in size with the latest acquisition of Kalaha Brands.
  • MTY finally has a solid platform to grow in the U.S.
  • The acquisition is not without risk. Kalaha has been shrinking and contains a lot dull brands.
  • The article also focus on the latest AGM and the USA strategy.

TSX: MTY

U.S.: OTC:MTYFF

MTY Food Group Inc. is primarily traded on the Toronto Stock Exchange under the sticker MTY.

Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.32 Price of 1 USD in CAD as of July 26, 2016.

This is a follow up on MTY Food Group Inc., a company that I have provided research on in the past. Feel free to read the in-depth research to have a better understanding of this update and MTY.

MTY Food Group Inc. – A Restaurant Stock For The Wallet, published in December 2013. MTY Food Group Inc. – Another Restaurant Stock For Your Portfolio, published in September 2015.

MTY Food Group is a Canadian company that operates a collection of brands. MTY is a franchisor and operator of 2,688 restaurants (pre-Kahala Brands acquisition), operating mainly in Canada and in 14 other countries around the world. Among MTY’s 40 banners are Thai Express, Jugo Juice, and Mucho Burrito. This is a big year for MTY. In 2015 MTY pass the $1 billion system wide sales threshold for the first time. But the even bigger news is the acquisition of Kahala Brands Ltd. ( OTCPK:KAHL). The deal is transformative and will effectively double the size of MTY.

On May 24 2016, MTY announced a deal valued at more than US$300million to acquire Arizona-based Kahala Brands and its approximately 2,800 locations in 25 countries. The purchase of Kahala Brands is by far its largest purchase to date. The Kahala’s portfolio of brands includes 18 names such as TacoTime, Cold Stone Creamery, Pinkberry and Blimpie among others. I will get into the details of this game changing acquisition for MTY below. Before I get into the acquisition, I also wanted to go over a few other things such as the AGM, the U.S. strategy and the case for investing in MTY.

What’s makes MTY an interesting investment?

MTY has a great business model. 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. The math is simple; more franchises => more sales =>more royalties. Because of this successful recipe, MTY receives recurring revenues. Over time MTY builds a war chest and puts that money to work through acquisitions.

MTY is a serial acquirer and a compounder of shareholder value. When we talk about compounders, we are typically talking about companies that can earn a ROE that is consistently higher than its cost of equity. Companies that achieve returns on equity greater than their cost of equity are adding value for the investor, and this is reflected in steadily rising share prices. MTY’s franchise business had very high returns on invested capital with the ability to reinvest incremental capital at similar high rates. MTY had 15 years of 20%+ ROE! If you like this kind of company I would recommend that you read this interesting article, MTY Food Group – A Case Study of a 100-Bagger by Chip Maloney at MicroCapClub. According to the author, $1 invested in MTY stock in 2003 would go on to be worth $100 by 2013, so much more today at the current trading price of ~$44. The chart below shows MTY’s share price over the last ten years.

Full article here.