David Tepper And The Coming 'Cash On The Sidelines' [View article]
It's funny how some of the great fund managers are on opposite ends of the fence on this. Tepper is ultra-bullish because of deficits and Fed policy. Seth Klarman at Baupost, on the other hand, has become very conservative. Certainly a lot of diversity of opinion.
I tend to be more in Klarman's camp. Tepper is right that these large deficits are being financed by the Fed and flowing into corporate earnings, which is pumping up the stock market. But I'm not so sure that it has to continue like this for the next few years.
Take a look at what's happening politically right now, and we're implementing a lot of tax increases. I've argued for awhile that the Affordable Care Act is a huge stealth tax increase (and in a sense, stealth austerity). Valuations are getting somewhat expensive and corporate profit margins are at historically high levels. The housing market is certainly coming back, but that's a mixed blessing, because it's likely to drive interest rates higher and result in more pressure for the Fed to tighten policy.
We're playing another big game of musical chairs. The music has to end sometime, even if we don't know when. I can't see the future, but there's no reason it couldn't happen in 2014 or 2015. It did happen in 2008, after all, after a similar cycle of easy money.
Banco Santander Chile's Recent Sell Down Represents A Buying Opportunity For Investors [View article]
Great article, Caiman.
My biggest concern would be the macro picture in Chile. Chile's economy is heavily dependent upon copper mining. That one industry accounts of 20% of Chile's GDP and 60% of its exports.
This is particularly troubling since the copper exports are largely driven by China's real estate bubble. If that bubble crashes, copper prices plunge, and Chile's copper industry suffers.
I also question whether BSAC is cheap at a P/B ratio of 2.65x. (And I'm assuming the P/TCE ratio is higher.)
I think Chile has some of the best economic policies in the world that will lead it to greater long-term prosperity, but short-term, I worry about the Chilean economy taking a hit as copper prices fall. I'd wager to guess that there might be an adjustment period of a few years where the copper industry contracts and leads to recession or sub-par growth.
How that affects the Chilean banks --- I'm not really sure.
Berkshire Hathaway Intrinsic Value Pie Chart [View article]
Excellent article! Great analysis on how to understand Berkshire Hathaway.
Though, I have to wonder if being a conglomerate weakens the market value for Berkshire. It's basically a giant mutual fund at this point and the market has tended to undervalue large conglomerates over the long-term. See Loews (L), which has also shifted into the "perpetually undervalued" state. The fact that Berkshire refuses to pay out dividends probably doesn't help.
I can understand buying in, since BRK has an excellent investment-oriented culture, and a solid operating history at nearly all of its companies, and looks undervalued --- but I have to wonder if the undervaluation is semi-permanent in the absence of a dividend or selling off some of its properties over time (more like a PE fund).
Banking On Kenyan Banks - Conservative Ratios And Stellar Growth [View article]
Jan,
Thanks for the article.
I researched the Kenyan banks back in 2011 when I interviewed for a job with an asset management firm that specialized in international investments. They wanted me to write a research report on an international investment, and I decided on the Kenyan banks, with an emphasis on Kenya Commercial Bank. I came away with a very favorable view and viewed many of them as having significant growth prospects.
It's sort of nice to see Seeking Alpha posting articles on the Kenyan banks here in 2013. They've gotten much more expensive since 2011, but I still like to follow what's going on in the East African banking world.
McMarket Share: How The Golden Arches Could Benefit From Obamacare [View article]
Ducaticorse,
Thanks for the question.
If you are referring to the stat on "salaries as a % of revenue", that only looks at the wages and revenues for company-owned stores. For this reason, it should be a reasonably accurate gauge of average wage costs for the actual restaurants.
The # of employees stat is a bit trickier. In most cases, that figure includes corporate staff, which can distort things a bit. That said, the number of people working in the stores is dramatically higher at almost all of these companies, and all have similar models (franchisor that runs a handful of company-owned stores), so the numbers end up being somewhat comparable. I actually eliminated a few companies in the comparables because their models were too far off to be comparable (e.g. too few company-owned stores relative to franchised stores).
McMarket Share: How The Golden Arches Could Benefit From Obamacare [View article]
Richard,
Thanks for the comment.
I am speaking of rental costs in an economic sense. To my understanding, McDonald's Corporation owns most of the real estate for its franchised stores, which makes the issue of how much "rent" the franchisees pay irrelevant since McDonald's collects the proceeds. In reality, McDonald's "rent" is a combination of rent and a stealth royalty.
Deteriorating Franchisee ROE: Why I'm Short On Sonic, Part 3 [View article]
TKEFrost,
Thanks for the response.
ROI is not dramatically different from ROE for the franchisees. In fact, the two measures should be very close. ROI looks at "gains" minus "costs" divided by the initial cost. ROE looks at profit divided by shareholders equity, which is effectively the "initial cost" in this case.
You're correct about the low-cost land. I thought about making a graphic showing about 6 major metropolitan areas, and how Sonic Drive-Ins are almost always in the "lower-rent" areas, implying that the stores have a difficult time surviving unless land costs are very low. This also seems like a limits on Sonic's long-term growth.
The ascending royalty rate is a head-scratcher for me. It's sort of like an option ARM loan. It looks OK at first, but gets more difficult to service as "the interest rate rises" (so to speak). It's theoretically great for Sonic Corporation, but it's bad for the franchisees. And if it gets bad enough for a particular franchisee, they may be forced to close stores --- at that point, it's bad for Sonic Corporation, too.
Don't disagree that Sonic is stable. That's the problem. It's priced for growth. If it were priced for "stability", it would sell closer to $6 - $9 per share, rather than $13+.
I don't expect a dramatic number of store closings in the next few years. But I also don't expect a lot of growth. That would be fine if the stock sold at $5 or $7, but at $13 ... it seems pricey given the macro headwinds expected in 2014.
I'm in agreement with you, Chris. BP is actually my favorite stock right now. Most of the rest of the market has had a sizable run-up, but BP's stock is still stuck in neutral, in spite of a large dividend, and improving fundamentals.
Carhops, Coneys, And Healthcare: Why I'm Short Sonic Drive-Ins, Part I [View article]
Thanks Tom.
I had basically the same experience as you. The commercials intrigue you, and the concept is appealing, but the food is meh. Even for the price, there's much better fast food out there.
Silver Bay Realty Trust - A Business Model Doomed To Fail [View article]
I'd strongly contest #1, #2, and #5.
No reason why finding the "ideal tenant" for a SFH is any different than finding one for an apartment complex. Also, some houses are better suited to be rentals.
There are some very cheap houses down the street from me (I live in Atlanta) and it's because they are on a busy road. No one wants to buy those houses to live in, but they could probably be rented out to college students or someone else at a reasonable rate --- but no one is going to spend their savings on them.
Also, don't see the market as "too crowded" at all, or homes wouldn't be selling at price to rent ratios below 10x in some of these markets.
I agree with #6 and #4 and believe those are the biggest issues. Not clear what the economies of scale here are with such decentralized properties, but it's at least feasible that it could work. At the very least, even if it's far from ideal, I'm not sure why a large company doing it would be less efficient than small landlords doing it. We'll have to see it play out.
But I see the "all cash" idea as a huge loser. There's absolutely no way for this idea to work over the long-term without leverage. In the short-term, it can pay off, based on a bounce back in housing prices, but in the long-term, you're basically seeing 2% - 3% appreciation per year. It doesn't work without some leverage and I think 3-to-1 leverage is a minimum requirement, with somewhere between 4-to-1 to 6-to-1 being more ideal.
Carhops, Coneys, And Healthcare: Why I'm Short Sonic Drive-Ins, Part I [View article]
Tim,
Thanks for your comments. I appreciate your analysis. I disagree with much of it, however.
I'll preface by saying, I'm not a sector analyst, and have no ambitions to be one. I'm a top-down investor and I search for broad themes in the market, particularly ones that go against conventional wisdom. Once I identify a theme, then I find the best companies in a sector to go long and short.
As to your issues:
1. Sonic's labor model is more like Waffle House than McDonald's. In your own description, you say it takes them a few minutes to deliver the food to you; which is actually a lot of labor compared to most fast-food restaurants. Sonic is a hybrid model, but more "fast food quality". You pay higher prices for lower-quality food, but you get better service.
2. I stated this in the article. The profit plunge is the bigger issue and it's the result of margin deterioration; an issue I explore in Part II.
3. A multiple is simply an inverse of a discount rate. I am estimating the value of the FCFs, then subtracting net debt. In other words, this is a very simplified DCF model. I do this is a bit of an untraditional way by creating a "market value balance sheet". It may be a bit imprecise to say I'm "valuing operating assets" in this particular case, because I'm actually valuing operating assets, as well as intangible assets.
5. An issue which will be explored in the next two articles.
6. Also, an issue that gets explored in the next article. There's a lot of info here and I'd rather spread it out into multiple articles, rather than write one epic 6,000 word article.
7. Not unusual at all. Most restaurant stocks got obliterated in the last recession. DRI actually fared better than most. Obviously, some of this has to do with market panic, but it also has a lot to do with leverage, particularly in the case of DIN. If I had taken 10 more restaurant stocks, I'm willing to wager that at least 7 of them (and probably more) would have been down more than 50%.
8. There's a minimal amount of labor that Sonic needs to keep the stores open. They can't have one person operating as carhop, cook, and manager. While restaurant labor is largely variable, there are economies of scale involved. Sonic's labor is more difficult to vary or replace with technology than McDonald's or Burger King.
Imagine a scenario where the Feds raise the minimum wage for all employees to $15 per hour. Who do you think more's likely to eliminate labor hours and lower costs: McDonald's or Sonic? Sonic's drive-in model boxes it in a bit, whereas McDonald's may be able to automate and combine some functions.
For instance, maybe McDonald's could introduce touch-screen ordering and simply have one cook who hands food off to customers. Sonic wouldn't be able to do this without completely abandoning the drive-in model. Another example is how many fast food chains have self-serve beverages, because the cost is lower than having employees refill the drinks.
I understand your explanations for the higher labor costs, but I'd also consider this the 'corporate justification' explanation. Companies that are doing poorly often have great reasons. But it's difficult to deny that Sonic's labor costs as a % of revenue have been creeping upwards for the past decade. It's not a one-off thing. It's a result of a lower volume of sales, which leaves less revenues to be spread out over fixed costs. I explore this issue a bit more in Part 2, which I'll probably put out either tomorrow or Thursday.
Even if I disagree, I do appreciate your thoughts and insight.
The other thing here is that even though a minimum wage increase would impact McDonald's, it would also impact every other restaurant. And it just so happens that McDonald's is in better shape to absorb the impact than almost every other restaurant. That's likely why McDonald's benefited from it the last time --- they were simply stealing market share from companies that it hurt more.
Is Southern Copper An Overvalued Copper Play? [View article]
The reason people care about inside ownership is because it can show an alignment of interests between management, corporate officers, and shareholders. The fact that another miner has a majority ownership stake in Southern Copper does not really show an alignment of interests with shareholders.
I'm not suggesting that Grupo Mexico's incentives are necessarily mis-aligned; just that pointing to "insider ownership" via a majority-stake of another corporation isn't all that meaningful.
David Tepper And The Coming 'Cash On The Sidelines' [View article]
I tend to be more in Klarman's camp. Tepper is right that these large deficits are being financed by the Fed and flowing into corporate earnings, which is pumping up the stock market. But I'm not so sure that it has to continue like this for the next few years.
Take a look at what's happening politically right now, and we're implementing a lot of tax increases. I've argued for awhile that the Affordable Care Act is a huge stealth tax increase (and in a sense, stealth austerity). Valuations are getting somewhat expensive and corporate profit margins are at historically high levels. The housing market is certainly coming back, but that's a mixed blessing, because it's likely to drive interest rates higher and result in more pressure for the Fed to tighten policy.
We're playing another big game of musical chairs. The music has to end sometime, even if we don't know when. I can't see the future, but there's no reason it couldn't happen in 2014 or 2015. It did happen in 2008, after all, after a similar cycle of easy money.
Banco Santander Chile's Recent Sell Down Represents A Buying Opportunity For Investors [View article]
My biggest concern would be the macro picture in Chile. Chile's economy is heavily dependent upon copper mining. That one industry accounts of 20% of Chile's GDP and 60% of its exports.
http://econ.st/YUsw8U
This is particularly troubling since the copper exports are largely driven by China's real estate bubble. If that bubble crashes, copper prices plunge, and Chile's copper industry suffers.
I also question whether BSAC is cheap at a P/B ratio of 2.65x. (And I'm assuming the P/TCE ratio is higher.)
I think Chile has some of the best economic policies in the world that will lead it to greater long-term prosperity, but short-term, I worry about the Chilean economy taking a hit as copper prices fall. I'd wager to guess that there might be an adjustment period of a few years where the copper industry contracts and leads to recession or sub-par growth.
How that affects the Chilean banks --- I'm not really sure.
Berkshire Hathaway Intrinsic Value Pie Chart [View article]
Though, I have to wonder if being a conglomerate weakens the market value for Berkshire. It's basically a giant mutual fund at this point and the market has tended to undervalue large conglomerates over the long-term. See Loews (L), which has also shifted into the "perpetually undervalued" state. The fact that Berkshire refuses to pay out dividends probably doesn't help.
I can understand buying in, since BRK has an excellent investment-oriented culture, and a solid operating history at nearly all of its companies, and looks undervalued --- but I have to wonder if the undervaluation is semi-permanent in the absence of a dividend or selling off some of its properties over time (more like a PE fund).
Banking On Kenyan Banks - Conservative Ratios And Stellar Growth [View article]
Thanks for the article.
I researched the Kenyan banks back in 2011 when I interviewed for a job with an asset management firm that specialized in international investments. They wanted me to write a research report on an international investment, and I decided on the Kenyan banks, with an emphasis on Kenya Commercial Bank. I came away with a very favorable view and viewed many of them as having significant growth prospects.
It's sort of nice to see Seeking Alpha posting articles on the Kenyan banks here in 2013. They've gotten much more expensive since 2011, but I still like to follow what's going on in the East African banking world.
McMarket Share: How The Golden Arches Could Benefit From Obamacare [View article]
Thanks for the question.
If you are referring to the stat on "salaries as a % of revenue", that only looks at the wages and revenues for company-owned stores. For this reason, it should be a reasonably accurate gauge of average wage costs for the actual restaurants.
The # of employees stat is a bit trickier. In most cases, that figure includes corporate staff, which can distort things a bit. That said, the number of people working in the stores is dramatically higher at almost all of these companies, and all have similar models (franchisor that runs a handful of company-owned stores), so the numbers end up being somewhat comparable. I actually eliminated a few companies in the comparables because their models were too far off to be comparable (e.g. too few company-owned stores relative to franchised stores).
McMarket Share: How The Golden Arches Could Benefit From Obamacare [View article]
Thanks for the comment.
I am speaking of rental costs in an economic sense. To my understanding, McDonald's Corporation owns most of the real estate for its franchised stores, which makes the issue of how much "rent" the franchisees pay irrelevant since McDonald's collects the proceeds. In reality, McDonald's "rent" is a combination of rent and a stealth royalty.
See here: http://bit.ly/15Q80sF
Deteriorating Franchisee ROE: Why I'm Short On Sonic, Part 3 [View article]
Thanks for the response.
ROI is not dramatically different from ROE for the franchisees. In fact, the two measures should be very close. ROI looks at "gains" minus "costs" divided by the initial cost. ROE looks at profit divided by shareholders equity, which is effectively the "initial cost" in this case.
You're correct about the low-cost land. I thought about making a graphic showing about 6 major metropolitan areas, and how Sonic Drive-Ins are almost always in the "lower-rent" areas, implying that the stores have a difficult time surviving unless land costs are very low. This also seems like a limits on Sonic's long-term growth.
The ascending royalty rate is a head-scratcher for me. It's sort of like an option ARM loan. It looks OK at first, but gets more difficult to service as "the interest rate rises" (so to speak). It's theoretically great for Sonic Corporation, but it's bad for the franchisees. And if it gets bad enough for a particular franchisee, they may be forced to close stores --- at that point, it's bad for Sonic Corporation, too.
Don't disagree that Sonic is stable. That's the problem. It's priced for growth. If it were priced for "stability", it would sell closer to $6 - $9 per share, rather than $13+.
I don't expect a dramatic number of store closings in the next few years. But I also don't expect a lot of growth. That would be fine if the stock sold at $5 or $7, but at $13 ... it seems pricey given the macro headwinds expected in 2014.
5 Reason BP Is Still A Buy [View article]
Laws Of Cap Rate Compression And Several REITs With Mispriced Risk [View article]
Carhops, Coneys, And Healthcare: Why I'm Short Sonic Drive-Ins, Part I [View article]
I had basically the same experience as you. The commercials intrigue you, and the concept is appealing, but the food is meh. Even for the price, there's much better fast food out there.
Silver Bay Realty Trust - A Business Model Doomed To Fail [View article]
No reason why finding the "ideal tenant" for a SFH is any different than finding one for an apartment complex. Also, some houses are better suited to be rentals.
There are some very cheap houses down the street from me (I live in Atlanta) and it's because they are on a busy road. No one wants to buy those houses to live in, but they could probably be rented out to college students or someone else at a reasonable rate --- but no one is going to spend their savings on them.
Also, don't see the market as "too crowded" at all, or homes wouldn't be selling at price to rent ratios below 10x in some of these markets.
I agree with #6 and #4 and believe those are the biggest issues. Not clear what the economies of scale here are with such decentralized properties, but it's at least feasible that it could work. At the very least, even if it's far from ideal, I'm not sure why a large company doing it would be less efficient than small landlords doing it. We'll have to see it play out.
But I see the "all cash" idea as a huge loser. There's absolutely no way for this idea to work over the long-term without leverage. In the short-term, it can pay off, based on a bounce back in housing prices, but in the long-term, you're basically seeing 2% - 3% appreciation per year. It doesn't work without some leverage and I think 3-to-1 leverage is a minimum requirement, with somewhere between 4-to-1 to 6-to-1 being more ideal.
Carhops, Coneys, And Healthcare: Why I'm Short Sonic Drive-Ins, Part I [View article]
Thanks for your comments. I appreciate your analysis. I disagree with much of it, however.
I'll preface by saying, I'm not a sector analyst, and have no ambitions to be one. I'm a top-down investor and I search for broad themes in the market, particularly ones that go against conventional wisdom. Once I identify a theme, then I find the best companies in a sector to go long and short.
As to your issues:
1. Sonic's labor model is more like Waffle House than McDonald's. In your own description, you say it takes them a few minutes to deliver the food to you; which is actually a lot of labor compared to most fast-food restaurants. Sonic is a hybrid model, but more "fast food quality". You pay higher prices for lower-quality food, but you get better service.
2. I stated this in the article. The profit plunge is the bigger issue and it's the result of margin deterioration; an issue I explore in Part II.
3. A multiple is simply an inverse of a discount rate. I am estimating the value of the FCFs, then subtracting net debt. In other words, this is a very simplified DCF model. I do this is a bit of an untraditional way by creating a "market value balance sheet". It may be a bit imprecise to say I'm "valuing operating assets" in this particular case, because I'm actually valuing operating assets, as well as intangible assets.
5. An issue which will be explored in the next two articles.
6. Also, an issue that gets explored in the next article. There's a lot of info here and I'd rather spread it out into multiple articles, rather than write one epic 6,000 word article.
7. Not unusual at all. Most restaurant stocks got obliterated in the last recession. DRI actually fared better than most. Obviously, some of this has to do with market panic, but it also has a lot to do with leverage, particularly in the case of DIN. If I had taken 10 more restaurant stocks, I'm willing to wager that at least 7 of them (and probably more) would have been down more than 50%.
8. There's a minimal amount of labor that Sonic needs to keep the stores open. They can't have one person operating as carhop, cook, and manager. While restaurant labor is largely variable, there are economies of scale involved. Sonic's labor is more difficult to vary or replace with technology than McDonald's or Burger King.
Imagine a scenario where the Feds raise the minimum wage for all employees to $15 per hour. Who do you think more's likely to eliminate labor hours and lower costs: McDonald's or Sonic? Sonic's drive-in model boxes it in a bit, whereas McDonald's may be able to automate and combine some functions.
For instance, maybe McDonald's could introduce touch-screen ordering and simply have one cook who hands food off to customers. Sonic wouldn't be able to do this without completely abandoning the drive-in model. Another example is how many fast food chains have self-serve beverages, because the cost is lower than having employees refill the drinks.
I understand your explanations for the higher labor costs, but I'd also consider this the 'corporate justification' explanation. Companies that are doing poorly often have great reasons. But it's difficult to deny that Sonic's labor costs as a % of revenue have been creeping upwards for the past decade. It's not a one-off thing. It's a result of a lower volume of sales, which leaves less revenues to be spread out over fixed costs. I explore this issue a bit more in Part 2, which I'll probably put out either tomorrow or Thursday.
Even if I disagree, I do appreciate your thoughts and insight.
McDonald's Is Under Attack [View article]
How And Why Zero Interest Rates Ended Last Time [View article]
Excellent article, Daniel. Thanks for this.
Is Southern Copper An Overvalued Copper Play? [View article]
I'm not suggesting that Grupo Mexico's incentives are necessarily mis-aligned; just that pointing to "insider ownership" via a majority-stake of another corporation isn't all that meaningful.