Whatsup! The secondary offering is not out of treasury - just a sale of shares of insiders to the public (change of ownership). No additional dilution.
IMO the real questions to ask Stock Gamer about the article (which is a good one by the way) are whether (i) KORS' growth is sustainable, (ii) COH's loss of market share is permanent and (iii) whether or not the stocks are mispriced. I wouldn't look to the stock market's reaction (stock price) to answer the first two questions, only the third. KORS management's sale of stock also helped me to formulate my view.
Based on consensus estimates (Capital IQ), $KORS is trading at 26x NTM P/E and $COH 12.3x NTM P/E. After answering the questions above I came to a different conclusion than the author and am long COH in my Value Fund and managed accounts.
Joy Global: When Will We See The $1 Billion Write-Down? [View article]
Yesterday's Wall Street Journal article should put this issue to rest:
MILWAUKEE—Joy Global Inc.'s JOY +0.21% chief executive officer, Michael Sutherlin, said the maker of mining equipment hasn't found any accounting problems at the Chinese company it acquired 14 months ago, unlike rival Caterpillar Inc., CAT -0.48% which recently had to write down the value of a Chinese investment by $580 million after finding what it called accounting "misconduct." ...
Joy Global: When Will We See The $1 Billion Write-Down? [View article]
Xuhua Zhou,
Your research skills are impressive and I enjoyed reading your article. You mention that you are short the stock so I should also disclose at the outset that I am long JOY. Your article made me do some additional analysis and I am interested in your view on the following.
Let’s assume that your theory is correct and the vendors of IMM manipulated the financial statements prior to Joy’s acquisition in late 2011. Based on Joy Global’s Q4 results, IMM had sales of $219 million and adjusted Operating Profits of $36.8 million in F2012. This represents 3.9% of the company’s sales for the year and 3.1% of its operating profits. Neither of these figures is financially material. Let’s assume further that IMM is worth nothing. Joy Global would need to take a charge to write off the $1.4 billion that they paid for the business and still carry on their balance sheet. The bulk of the write off would be non-cash as the company booked $1.15 billion of the purchase price as goodwill at the time of purchase. I believe that Joy Global overpaid for the business even if the IMM’s financial statements were properly presented. Writing it off entirely would merely confirm that fact and lead me to further conclude that management was sloppy in its due diligence on the acquisition.
For fiscal 2013 the company expects sales of $4.9-$5.2 billion and EPS (ex-restructuring charges) of $5.75-$6.35. At the midpoint of this guidance, this suggests that the stock (currently trading at ~$68) is trading at a P/E of ~11.2x. Fiscal 2013 EPS is likely depressed given the difficult operating environment for coal producers, particularly in the U.S . I agree with you that a $1.4 billion write down would be material relative to the company’s market cap, but I don’t believe that IMM contributes materially to Joy Global’s earnings power or cash flow at present.
Joy Global’s balance sheet is in good shape and there is no issue with the debt covenants. I don’t know if the write off would be included in the covenant calculations but even if it were, I suspect that a waiver (for a fee) would be forthcoming.
My question: what am I missing? Perhaps the market would react negatively to the news and take the stock lower like it seems to be doing this morning (-1.9%). However, it is equally plausible that people would come to the conclusion that I did (assuming that my analysis is correct). I don’t understand the short-thesis for Joy Global based on the Caterpillar (NYSE:CAT) news.
That said, posts such as yours are the reason that I like Seeking Alpha. Quality analysis and honest debate. I look forward to your reply.
That's a great question minor. It seems to me that management was slow to respond. The Arizona settlement forced them to drop two of their major agent networks in Mexico (OV and Vigo) but that shouldn't have come as a surprise to them. Hopefully they are on top of it now and Monday's $8 pricing announcement in that corridor and the departure of the President of the global C2C business suggests that they are.
This is a great business. Warren Buffett famously joked that a "ham sandwich" could run Coca Cola and I think that the same could be said for Western Union. Stick to your core business, cut pricing when necessary and drive volume. Take the enormous free cash flow that the business generates and invest in marketing and your systems (it doesn't take much) and use the rest to return it to shareholders. When the stock is cheap (like now), buy it back and when it isn't, do so through dividends. It's that simple.
I am counting on management to execute and to stick to their knitting. The acquisitions of the B2B businesseswere distracting and value-destroying in my opinion. Time will tell if management has learned any lessons.
There is no easy way to figure it out other than by following Buffett over the years and understanding his style. Your article is very useful and I came to the same conclusion as frankhkii - the new additions were made by Weschler, Combs and/or Jain with the exception of $WFC and $IBM. The size of the purchases is a clue as is the free cash flow of the non-financial companies and the amount of debt that they use. I would argue that Buffett's style would not lead him to invest in many of these new additions. That's not to say that they are "wrong", just a different style.
Please keep your quarterly updates on their holdings coming!
Thank you Jeffrey. If you are interested, you can "follow" me on Seeking Alpha to receive future posts. Alternatively, you can subscribe on my website (http://www.gkam.ca) to be notified of a broader range of posts. I write a quarterly newsletter (The Scorecard), a monthly article for Canada's Globe & Mail and also post videos of my TV appearances on BNN (Canada's version of CNBC). Confidentiality is assured and your contact information will never be used for any other reason.
Tempur-Pedic's Purchase Disturbs My Restful Slumber [View article]
Interesting perspective Valueplay98. The challenge in my opinion is that the lower end segment is a commodity business. Simmons and Serta also play there and I don't see any pricing power. If all three (SSS) refrained from competing on price then your scenario could come to pass. The reality is that when business is slow they all discount and price is likely the deciding factor for the consumer in that segment. Product differentiation is very difficult IMO.
Thanks for the reply and good luck finding a new name to trade.
Tempur-Pedic Is Severely Undervalued [View article]
I own two TPX beds and bought the stock at $21.97. Agree 100% with your investment thesis. The "sleeping hot" issue was disproved by TPX's research but the reality is that if customers perceive it to be true, then the research doesn't matter. TPX responded with a new product intro to address the issue.
Like you, I believe that TPX will grow sales again Alex. Provided that they protect their "premium" brand in the marketplace they should be fine. They may face some permanent margin compression given the increased competition, but even so I believe that the stock is severely mispriced at these levels. Value investing 101.
FYI - I spoke about the company on BNN (Canada's version of CNBC) last month. Your could have written my speaking notes. Good article Alex. http://bit.ly/SAoatK
lhoggan436 - With some of the widest margins in the business, I suspect that management can provide additional incentives to retailers and retail sales associates. Some margin compression is likely but I believe that there is still significant brand equity and pricing power in TPX. I am long the stock in my Value Fund. Purchase price: $21.97.
Why A No Growth Stock Can Trade At 16 Times Earnings [View article]
Makes perfect sense to me. Consistent with my rationale for purchasing CSCO in my Value Fund. CEO Chambers seems to be moving in this direction. Hopefully he will stop overpaying for acquisitions and then it will play out as you suggest. Earnings multiple for CSCO is actually lower when you consider their significant net cash. Good article Philip.
I always appreciate a good debate. Perhaps my article's title could have been better selected and my examples more clear. To clarify my thinking on the issue:
Too many investors blindly focus on yield without understanding the underlying business and its ability to continue to pay (and hopefully increase) dividends in the future.
If a management team can redeploy the capital internally in a great business (high ROIC, ROE) I prefer that they do so rather than pay it out in dividends. This strategy will create more value for investors over time as the market will eventually recognize it. If they can't redeploy it in the core business, they should pay it out via dividends or share repurchases if their stock is undervalued.
Eventually, all great businesses will become so large that they cannot redeploy their capital in their core business. That is why most of the companies that I invest in actually do pay dividends. But I would not rule out an investment in a great business solely due to the fact that they did not pay a dividend at the time (e.g. Starbucks in 2008) or if the yield was very low (e.g. Home Capital today).
I don't just write about my winners although the article did focus on a few of them. In my latest quarterly newsletter (available on my website - http://www.gkam.ca), I focused on the one stock in my portfolio that is actually down since I purchased it (GMP Capital).
The article was meant to challenge investors to think about these dynamics rather than blindly chasing yield. Dividends do matter to overall returns but I would suggest that investors should understand the underlying business and its free cash flows, its ability to sustain the dividend and make it grow.
Home Capital Group - The Case For A Misunderstood Lender [View article]
Streetflame,
A great question. CMHC is a Crown corporation and our mortgage market and the Canadian banking sector (including the major banks) are reliant on CMHC's securitization programs. The Canadian taxpayer is on the hook as per the following from CMHC: "CMHC’S DEBT OBLIGATIONS CARRY THE FULL FAITH AND CREDIT OF CANADA, AND CONSTITUTE DIRECT, UNCONDITIONAL OBLIGATIONS OF AND BY CANADA.". The other mortgage lenders are also indirectly backed by the Canadian government although only to the extent that (a) they fail to fulfill their obligations first and then (b) only to 90%. This is a historical anomaly as the Canadian government wanted to create some competition in the mortgage insurance sector. If you have concerns about the Canadian government's ability to step in then you should definitely stay away but I don't lose any sleep over this issue.
Home Capital Group - The Case For A Misunderstood Lender [View article]
Nick_Henri,
I always appreciate being challenged as I want to make sure that my analysis and investment thesis are correct. I am certainly not infallible. However I respectfully disagree with your concluding statement.
Home Capital’s traditional (uninsured mortgages) have a maximum LTV of 80% at origination. You are correct that the overall LTV on the traditional portfolio is 70% (Table 34 – 2011 Annual Report). The denominator of this calculation is based on the value of the property at the time of the loan is made and assumes no change since that date. In a rising real estate market like the one we have had, the LTV actually comes down due to home price appreciation (the denominator increases) and mortgage amortization as borrowers make their monthly payments (the numerator decreases). The latter item is taken into account in the stated LTV figures but the former is not. For the past two years the LTV on origination for the traditional portfolio were 69.6% and 68.9% respectively. Also, the overall portfolio including higher LTV insured mortgages was 70% (page 46 of 2011 Annual Report).
Yes some of the traditional mortgages in the portfolio will have an LTV that is slightly higher than 70% and some will be lower. At the end of the day it doesn’t change my conclusion or reflect a flaw in my analysis. A major real estate pullback (e.g. 50%) would likely cost them 3 or 4 quarters of earnings. My analysis is at the lower end and management’s (using slightly different assumptions) is at the higher end. I know that I used default rates that are multiples of historical rates and extreme severity of loss assumptions. I even looked at what those stats looked like for US lenders related to the US housing crash to make sure that I was being punitive enough on Home Capital. I suspect that management did as well.
At the end of the day I am comfortable that my downside scenario is not the more probable outcome but if it does come to pass, Home Capital will live to fight another day.
Microsoft, The Boring Returns Killer [View article]
An excellent articulation of both the pros and cons of MSFT so thanks to you both for a civil and rational debate. While I agree with many of Tradevestor's comments, I am with Skyler and am long MSFT in my fund. Yes MSFT management has done a terrible job of capital allocation and has not introduced any innovative products in many years. But the reality is that their core products still dominate. Yes Vista was a disaster. So what happened? As Tradevestor correctly states: "It was such a disaster that people longed for Windows XP, a product that was launched in 2001". In other words, MSFT still won but took a few years longer to monetize. The radical changes that will come with Windows 8 will annoy many users. But what choice do they have? What's the alternative? I suspect that MSFT will continue to dominate PC operating systems and Windows 8 gives them a chance to make a move into tablets and smartphones. But at current levels you don't need any success on those two fronts to get a much higher target price than where MSFT currently trades. You can read my take on MSFT that I wrote in April at the following link: http://bit.ly/Tbns93
Michael Kors Or Coach? [View article]
IMO the real questions to ask Stock Gamer about the article (which is a good one by the way) are whether (i) KORS' growth is sustainable, (ii) COH's loss of market share is permanent and (iii) whether or not the stocks are mispriced. I wouldn't look to the stock market's reaction (stock price) to answer the first two questions, only the third. KORS management's sale of stock also helped me to formulate my view.
Based on consensus estimates (Capital IQ), $KORS is trading at 26x NTM P/E and $COH 12.3x NTM P/E. After answering the questions above I came to a different conclusion than the author and am long COH in my Value Fund and managed accounts.
The GreensKeeper
Joy Global: When Will We See The $1 Billion Write-Down? [View article]
MILWAUKEE—Joy Global Inc.'s JOY +0.21% chief executive officer, Michael Sutherlin, said the maker of mining equipment hasn't found any accounting problems at the Chinese company it acquired 14 months ago, unlike rival Caterpillar Inc., CAT -0.48% which recently had to write down the value of a Chinese investment by $580 million after finding what it called accounting "misconduct." ...
Joy Global: When Will We See The $1 Billion Write-Down? [View article]
Your research skills are impressive and I enjoyed reading your article. You mention that you are short the stock so I should also disclose at the outset that I am long JOY. Your article made me do some additional analysis and I am interested in your view on the following.
Let’s assume that your theory is correct and the vendors of IMM manipulated the financial statements prior to Joy’s acquisition in late 2011. Based on Joy Global’s Q4 results, IMM had sales of $219 million and adjusted Operating Profits of $36.8 million in F2012. This represents 3.9% of the company’s sales for the year and 3.1% of its operating profits. Neither of these figures is financially material. Let’s assume further that IMM is worth nothing. Joy Global would need to take a charge to write off the $1.4 billion that they paid for the business and still carry on their balance sheet. The bulk of the write off would be non-cash as the company booked $1.15 billion of the purchase price as goodwill at the time of purchase. I believe that Joy Global overpaid for the business even if the IMM’s financial statements were properly presented. Writing it off entirely would merely confirm that fact and lead me to further conclude that management was sloppy in its due diligence on the acquisition.
For fiscal 2013 the company expects sales of $4.9-$5.2 billion and EPS (ex-restructuring charges) of $5.75-$6.35. At the midpoint of this guidance, this suggests that the stock (currently trading at ~$68) is trading at a P/E of ~11.2x. Fiscal 2013 EPS is likely depressed given the difficult operating environment for coal producers, particularly in the U.S . I agree with you that a $1.4 billion write down would be material relative to the company’s market cap, but I don’t believe that IMM contributes materially to Joy Global’s earnings power or cash flow at present.
Joy Global’s balance sheet is in good shape and there is no issue with the debt covenants. I don’t know if the write off would be included in the covenant calculations but even if it were, I suspect that a waiver (for a fee) would be forthcoming.
My question: what am I missing? Perhaps the market would react negatively to the news and take the stock lower like it seems to be doing this morning (-1.9%). However, it is equally plausible that people would come to the conclusion that I did (assuming that my analysis is correct). I don’t understand the short-thesis for Joy Global based on the Caterpillar (NYSE:CAT) news.
That said, posts such as yours are the reason that I like Seeking Alpha. Quality analysis and honest debate. I look forward to your reply.
Best regards,
The GreensKeeper
Moving Money Into Western Union [View article]
This is a great business. Warren Buffett famously joked that a "ham sandwich" could run Coca Cola and I think that the same could be said for Western Union. Stick to your core business, cut pricing when necessary and drive volume. Take the enormous free cash flow that the business generates and invest in marketing and your systems (it doesn't take much) and use the rest to return it to shareholders. When the stock is cheap (like now), buy it back and when it isn't, do so through dividends. It's that simple.
I am counting on management to execute and to stick to their knitting. The acquisitions of the B2B businesseswere distracting and value-destroying in my opinion. Time will tell if management has learned any lessons.
Tracking Warren Buffett's Berkshire Hathaway Portfolio - Q3 2012 Update [View article]
There is no easy way to figure it out other than by following Buffett over the years and understanding his style. Your article is very useful and I came to the same conclusion as frankhkii - the new additions were made by Weschler, Combs and/or Jain with the exception of $WFC and $IBM. The size of the purchases is a clue as is the free cash flow of the non-financial companies and the amount of debt that they use. I would argue that Buffett's style would not lead him to invest in many of these new additions. That's not to say that they are "wrong", just a different style.
Please keep your quarterly updates on their holdings coming!
Best regards,
The GreensKeeper
Do Dividends Matter? [View article]
The Greenskeeper.
Add Some Joy To Your Portfolio [View article]
Best regards,
Michael (aka The GreensKeeper).
Tempur-Pedic's Purchase Disturbs My Restful Slumber [View article]
Thanks for the reply and good luck finding a new name to trade.
Tempur-Pedic Is Severely Undervalued [View article]
Like you, I believe that TPX will grow sales again Alex. Provided that they protect their "premium" brand in the marketplace they should be fine. They may face some permanent margin compression given the increased competition, but even so I believe that the stock is severely mispriced at these levels. Value investing 101.
FYI - I spoke about the company on BNN (Canada's version of CNBC) last month. Your could have written my speaking notes. Good article Alex. http://bit.ly/SAoatK
Tempur-Pedic: Buy Growth [View article]
http://seekingalpha.co...
Why A No Growth Stock Can Trade At 16 Times Earnings [View article]
Do Dividends Matter? [View article]
Too many investors blindly focus on yield without understanding the underlying business and its ability to continue to pay (and hopefully increase) dividends in the future.
If a management team can redeploy the capital internally in a great business (high ROIC, ROE) I prefer that they do so rather than pay it out in dividends. This strategy will create more value for investors over time as the market will eventually recognize it. If they can't redeploy it in the core business, they should pay it out via dividends or share repurchases if their stock is undervalued.
Eventually, all great businesses will become so large that they cannot redeploy their capital in their core business. That is why most of the companies that I invest in actually do pay dividends. But I would not rule out an investment in a great business solely due to the fact that they did not pay a dividend at the time (e.g. Starbucks in 2008) or if the yield was very low (e.g. Home Capital today).
I don't just write about my winners although the article did focus on a few of them. In my latest quarterly newsletter (available on my website - http://www.gkam.ca), I focused on the one stock in my portfolio that is actually down since I purchased it (GMP Capital).
The article was meant to challenge investors to think about these dynamics rather than blindly chasing yield. Dividends do matter to overall returns but I would suggest that investors should understand the underlying business and its free cash flows, its ability to sustain the dividend and make it grow.
Home Capital Group - The Case For A Misunderstood Lender [View article]
A great question. CMHC is a Crown corporation and our mortgage market and the Canadian banking sector (including the major banks) are reliant on CMHC's securitization programs. The Canadian taxpayer is on the hook as per the following from CMHC: "CMHC’S DEBT OBLIGATIONS CARRY THE FULL FAITH AND CREDIT OF CANADA, AND CONSTITUTE DIRECT, UNCONDITIONAL OBLIGATIONS OF AND BY CANADA.". The other mortgage lenders are also indirectly backed by the Canadian government although only to the extent that (a) they fail to fulfill their obligations first and then (b) only to 90%. This is a historical anomaly as the Canadian government wanted to create some competition in the mortgage insurance sector. If you have concerns about the Canadian government's ability to step in then you should definitely stay away but I don't lose any sleep over this issue.
Home Capital Group - The Case For A Misunderstood Lender [View article]
I always appreciate being challenged as I want to make sure that my analysis and investment thesis are correct. I am certainly not infallible. However I respectfully disagree with your concluding statement.
Home Capital’s traditional (uninsured mortgages) have a maximum LTV of 80% at origination. You are correct that the overall LTV on the traditional portfolio is 70% (Table 34 – 2011 Annual Report). The denominator of this calculation is based on the value of the property at the time of the loan is made and assumes no change since that date. In a rising real estate market like the one we have had, the LTV actually comes down due to home price appreciation (the denominator increases) and mortgage amortization as borrowers make their monthly payments (the numerator decreases). The latter item is taken into account in the stated LTV figures but the former is not. For the past two years the LTV on origination for the traditional portfolio were 69.6% and 68.9% respectively. Also, the overall portfolio including higher LTV insured mortgages was 70% (page 46 of 2011 Annual Report).
Yes some of the traditional mortgages in the portfolio will have an LTV that is slightly higher than 70% and some will be lower. At the end of the day it doesn’t change my conclusion or reflect a flaw in my analysis. A major real estate pullback (e.g. 50%) would likely cost them 3 or 4 quarters of earnings. My analysis is at the lower end and management’s (using slightly different assumptions) is at the higher end. I know that I used default rates that are multiples of historical rates and extreme severity of loss assumptions. I even looked at what those stats looked like for US lenders related to the US housing crash to make sure that I was being punitive enough on Home Capital. I suspect that management did as well.
At the end of the day I am comfortable that my downside scenario is not the more probable outcome but if it does come to pass, Home Capital will live to fight another day.
Microsoft, The Boring Returns Killer [View article]