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  • El Pollo Loco: PE 'Bust-Out', 20+ Years Of Failed Domestic Expansion, Pre-IPO Window Dressing Make An Ideal Short [View article]
    I was re-reading their amended S-1. It does appear that they breakout their sales comp by average check and traffic and it is driven mostly by increases in average check. They do not break it out further into "mix shift" or "trade up" vs. price increase. But you don't need to guess what it is, it is stated in the SEC filings. So the increase has been about 13% due to price/mix shift vs. 6.7% due to traffic or 2-1.

    Page 84 out of 288

    1. Comparable sales for 13 weeks ending March, 2014 was an increase of 5.4%. The increase was due to an increase in avg check size of 4.0% and increase in traffic of 1.4%

    2. For 2013, comparable sales increased 5.3%. 2.7% from average check size and 2.7% from traffic.

    3. For 2012, comparable sales increased 8.6%. 6.0% was average check and 2.6% from traffic.

    What is interesting is that even with these increases in average check, the "per person spend" is only $5.83. BKW is $6.11 "per transaction".

    Anytime a restaurant stock more than doubles from its IPO price in a few days, the bigger the chance that it is extremely over priced. A $1B market cap for this company does seems more than excessive, but the fact that it is apparently impossible to borrow and has such a high rebate shows that, it is obvious to a lot of folks (but not the current holders who need to sell to drive the price down). Eventually they will stumble and the valuation will contract, just like all the others have done at some point in their corporate life (including CMG, which will eventually see their multiple contract again as well which is not a stunning original insight on my part). That is the nature of growth restaurant investing.

    I am amazed anyone compares this company to CMG. The only similarity is they sell some version of Mexican food. LOCO is typical QSR with large drive through business and $6 check. CMG focuses on organic food (COGS % one of the highest in the industry) and limited menu, has much smaller drive through business, but focuses on line speed (one of the lowest labor % of sales in industry) and a $9 average check.

    No position, no other opinion, but did want to add some additional info on two of your main points.

    BTW User 20920471, this report was also published in SumZero the same day.
    Aug 21 02:41 PM | Likes Like |Link to Comment
  • Dorman Products: 70% Downside As Cyclical Headwinds Pick Up & Aggressive Accounting Unwinds [View article]
    Another interesting way to look at DORM sales. There are really two components of sales and sales growth. 1) the underlying base business growth 2) the new products growth

    The company gives enough information in 2013 10K to get a sense for the split.

    In 10K the company says that 20% of 2013 sales are from products introduced in last two years. So multiplying 2013 sales by 20% gives you the incremental sales since 2011 accounted for by new products.

    2013 sales $664M
    X 20%
    = $132M

    Sales in 2011 where $513M

    So you can calculate base sales growth from 2011 to 2013 of about 5% total ($664M-$132M= $532M) $532M/$513M= 4.8%

    2.5% CAGR would seem to be below both the industry growth and its main customers' sale growth rate (would think store growth alone would be that high).

    So in order to maintain the recent sales growth rate, the company has to keep introducing new products at a rapid rate.
    Jun 3 12:44 PM | 3 Likes Like |Link to Comment
  • Dorman Products: 70% Downside As Cyclical Headwinds Pick Up & Aggressive Accounting Unwinds [View article]
    grant's wrote it up in Jan of this year

    Dorman Products
    DORM@US Jan. 10, 2014 Collision course

    On the authority of the retiring chairman of the Federal Reserve Board, things are looking up in America. If he's right, woe betide the high-flying shares of a certain replacement-parts vendor. Then again, now that we've analyzed the situation, woe betide them anyway.
    Jun 2 02:49 PM | Likes Like |Link to Comment
  • Dorman Products: 70% Downside As Cyclical Headwinds Pick Up & Aggressive Accounting Unwinds [View article]
    I have no position long or short and have no intention of taking a position long or short.

    A couple of observations from someone that wrote short selling research for 10 years.

    1. Your insinuation that they are subject to potential patent litigation seems way off the mark. In their risk section in the 10K they say a risk is increased patent FILING, not litigation, which seems to mean that they are designing or acquiring products that are not patented. There is also no additional disclosure of ongoing litigation other than boiler plate language to indicate they are being sued much anyway. They give numerous examples in their 10K of products they designed and why and how they are used. Considering their main customers are AZO, AAP, NAPA and ORLY would also indicate they are not distributing "gray market products." I do not think that should be your lead argument, unless you have stronger evidence that they are really at risk because they are selling things investors do not realize they are selling. If you do, I would make it an even bigger deal.

    2. O'Glove and Tice would be pleased with your focus on the working capital changes, but your categorization that it is masking a deterioration in their business might be a bit strong at this point. Revenue growth is still almost 20% a quarter. While some of that may be driven by extending payment terms, not sure is it driving the 20% gain last quarter. I guess I could calculate what it would be if DSOs were flat with two years ago to get a sense for what sales growth might be. I do think their customer concentration is a risk and that they can continue to be squeezed. Cash from operations as a % of sales was 7% in 2009 and was 10% in 2013. So even with the increase in DSOs, CFO has increased as a percentage of sales. If things were about to go sideways, I would expect that percentage to be declining because the increase in inventory and receivables would be negatively impacting CFO. So more analysis of this would be interesting.

    3. The customer credit % seems to be what it is. Couldn't find the breakout in the 10K (good job reading it better than I did), but I did see that their estimates and actual experience of returns and credits were in line. So until they start to diverge, not sure it is a given that it will happen in the next 18 months as you think it might.

    4. Glad to see some focus on something other than just the macro. The best shorts are company specific problems that don't need the macro to appear. Macro helping is always a bonus. The best shorts are slow growth companies masking as high growth companies and using financing and other things to prolong the growth. This company seems to be exhibiting some of those characteristics.

    5. The company seems to be successful in arbitraging the scarcity of replacement parts from OEMs (keeping them at dealerships only to drive customers to the dealerships even after warranty expires) by designing or sourcing high quality replacement parts. Not reselling OEM parts or acquiring gray market parts from rogue manufacturers. This has helped them boost margins as their products are clearly in demand and provide an alternative to OEM parts. They have also increased their SKUs substantially so that is driving incremental new sales. They even say in the 10K that is the key to their business. The key is how that trend slows/reverses. Less older cars on an absolute basis would certainly help that because as long as a car is under warranty there is no incentive for car owners to get car repaired anywhere else. A narrowing in the types of things they can sell is another. I see they are expanding into trucks and other vehicles. That might prolong the sales growth. Reading the 10K, it seems some of their value to say AZO is that they have designed or acquired parts that can be used in many different manufacturers cars. So instead of having to have 10 of 10 different widgets in stock because they service 10 different manufacturers, they can carry say 20 of just 1 or 2 widgets that can be used on multiple cars. They mention a Xenon headlight that can now go on 6 models vs. just one.

    There has been a mix shift to more Power-train and Automotive Body parts (66% vs. 61% two years ago) and perhaps those items are higher priced and higher margin items? Hardware has dropped 300bps as a percentage of sales and I would think 1 power-train item sells for a lot more than a hardware item (although volume is a factor).

    6. There is a longstanding joke that you short a company when it starts a SAP or ERP upgrade and buy it when it is done. The number of companies that stumble with upgrades is certainly very large.

    7. I commend you for making a bold estimate of sales in 2015 of $700M vs. the Street at $820M-$850M. If you are close to correct, the stock will certainly be much lower.

    8. There is also no doubt that since 2009 when the company earned $0.74 per share and had a net margin of 7% and a PE of about 10X growth and operational improvement has been impressive. Revenue has doubled, earnings have tripled to $2.65 in 2014, the net margin has doubled to nearly 14% and the PE has gone from 10 to 23. Companies that go from stable slow growth companies to superstars always should attract scrutiny. I am not sure the accounting issues and the macro can account for all of that improvement, but this article is a reasonable starting point for further investigation of the transformation of the company. The revenue growth rate seems unsustainable in the long run, which means the 17-20X EPS multiple is also most likely unsustainable. it is unclear what drives the margins back down, but it is most likely going to be that revenue growth and/or gross margin is slower/lower than the growth in SG&A and R&D. Classic case of management building the infrastructure to maintain a sales growth rate that is not sustainable. And then when they miss and get hammered, the "cost cutting" announcements take place. As is usually the case with short ideas, timing is the hardest thing to guess right on.

    9. Has any of your points about consolidation been brought up on conference calls? it would seem like something that would be an obvious concern. If not then I guess it all comes down to "it doesn't matter until it matters."

    10. I see most of the shareholder base is growthy and momentum investors. That is always good to see as a short seller. Contrary to popular belief, stocks don't go down because short sellers are selling more and that is driving down the price due to increased supply, it is the long incremental buyer that has turned into a seller and the lack of new buyers that sends a stock down. Outside of T Rowe Price, most of the other holders are index funds (dumb buyers) are small cap growth funds. The absence of Royce (only owns 300K shares), Heartland, Keeley, Gabelli, Baron, Ariel and other "value guys that also buy some growthy small cap stuff" shows that the incremental price setter here is not that sensitive to valuation or the long term business model potential.

    Thanks for the article.
    May 30 06:14 PM | 10 Likes Like |Link to Comment
  • Why Should A Long-Term Investor Listen To Company Conference Calls? [View article]
    CA,

    We were hoping that readers would pick up on the name representing kind of a higher level of thinking college course title. Thanks for getting it.
    May 27 08:58 PM | Likes Like |Link to Comment
  • Why Should A Long-Term Investor Listen To Company Conference Calls? [View article]
    Casual Analyst,

    Thanks for the mention in your article. We generally agree with the premise of your article. We may also listen to a couple of calls in a quarter if there are some things going on that seem to be outside the realm of our expectations. In turnaround situations (especially smaller companies) management's competence and strategy are definitely keys to success. We will most likely listen to one call before we invest to see if they pass the "smell test." We rarely invest in early stage technology companies, so the dynamics of most of our companies are much slower. But it can be worthwhile to spend an couple of hours on specific calls.

    As an aside, we have probably listened to more company presentations than conference calls. We do find those more helpful in understanding how a business model works and how a company's management believes a company should be run. We are looking to avoid those situations where their plans seem either too ambitious for their time frame or to aggressive for how the company has operated in the past.

    We also like one on ones so we can ask very specific questions that we feel are important to our understanding of a business and not what analysts ask in general. It also gives you a chance to look someone in the eye to see how they answer a question.
    May 26 09:58 PM | Likes Like |Link to Comment
  • The Greatest Farce On Wall Street [View article]
    Thank you for the mention in your article. We completely agree that the earnings game is a farce and choose not to participate in it either. We encourage investors to start with a "blank sheet of paper" when trying to guess (yes it is really a guess) what a company might be able to earn in the future. Don't start with WS concensus and then try and make your model give you the "right" answer of consensus. Sometimes your numbers will be similar and sometimes they will be different. Doing the work and understanding the difference is more important than the ending number. There is no way to do that without spending a great deal of time looking at the company's (and competitors') business model from the ground up. Too many investors start with a stock price and a story. But the stock represents ownership in a real business and long term value is created by earnings.

    1. Start with historical numbers and try to understand how the business works to understand which aspects of sales and costs are the most variable and why.

    2. Coming to a single point earnings estimate is ridiculous. We do many "what if" scenarios to assess what we consider to be a "reasonable" range of outcomes. Sometimes range is very very wide, but that is what it is. We are not worrying about making our numbers look like consensus, which is a huge pressure on WS analysts. Sometimes our numbers do fall into consensus and that is fine. Too often analysts "begin with the end in mind" and start with consensus earnings estimates and work backward to make the numbers fit. With our independent research product (shameless plug!!) we have talked to management to learn more about a company and have been asked "will your estimates be included in consensus estimates?" That is a good example of the game the author speaks of. Stepping outside of a small range is discouraged by company management as well and WS research directors.

    3. We do look at WS estimates and are looking for estimates where the estimates looks reasonable, but range of outcomes is much wider that it would seem. For example, there is a company we follow that has earnings estimates for 2014 of $0.40 per share and 2015 of $0.57 per share. However, the low estimate for 2014 is $0.30 and the high estimate for 2015 is for $0.75. In 2014 alone the range is $0.30-$0.60 and we are half way through the year!!!! Talk about "uncertainty"!!! That indicates a significant divergence of opinion on the earnings power of this company. This is where we find potential opportunity if we can gain a better understanding of the company's prospect. Although, our edge usually comes from getting it more "right and wrong" two or more years out. Compare that estimate range to something more mundane like MCD where the range for 2015 is just $6.05 to $6.55 with the average being $6.25. Look at AMZN's earnings estimates where the average for 2015 is $3.30, but the range is $0.93 to $6.92!!!!!

    4. When looking for short ideas, the opposite can work. If all the estimates are in a tight range, there is strong consensus on earnings and the multiple mostly likely reflects that "confidence". It is much easier to have a negative earnings "surprise" when consensus among analysts and investors is high and tight. Sometimes the company's model is fairly predictable and a narrow range is expected (think utilities or staples), but other times it seems like complacently has set it. 

    5. We actually like to see WS models on companies we are analyzing. We can usually spot where we think analysts are being "aggressive" or shockingly "conservative" in the assumptions. This is where we start are focus to see if we have a differentiated view of the company's ability to earn net income.

    Finally, pay little attention to price targets. Not only are they based on the flawed analysis as the author points out, they can also be driven by WS agendas. For example, a couple of years ago there was a company our firm was long and two major firms (Goldman and JPM) had coverage on it. As is typical, Goldman was bearish and JPM was bullish. Goldman had a sell and JPM had a buy. Goldman's price target was something like 15% below JPM's. But what was interesting was that their earnings estimates for the next two years were virtually identical. So what was going on? JPM was putting a higher multiple on the out year's earnings estimate and Goldman was putting a lower multiple on current year's estimates. 14 X $1.00 in EPS vs. 16X $1.10 is the difference between a $14 and an $18 price target!!! So even though they basically agreed with each other on the near term earnings power of the company, they came to significantly different "ratings" on the company.

    Do your own work. Take the time to learn about the company from your own analysis and as the author suggests, ignore the noise and the "beat or miss" chatter in the media and you will be a better investor.
    May 23 12:57 PM | 2 Likes Like |Link to Comment
  • If You Are A Long-Term Investor, Why Are You Listening To Earnings Conference Calls In Real Time? [View article]
    Thanks everyone for contributing to the discussion. We agree that there are times when listening to a call can add value. We will occasionally go back a listen to a call or part of a call if something doesn't seem to make sense in the transcript or if we have lots of down time while traveling or at a conference and there seemed to be a lot of attention on a particular call. Since management usually has a bigger impact on smaller companies, trying to assess their management skill by listening to a call probably makes more sense than listening to a large cap company's call. But again, we find that stopping down everything we are doing to listen to a call in real time just isn't helpful to us most of the time.

    It is important for each investor to tailor their investment process to what works for them. Our current series of "thought pieces" is meant to give other investors a perspective from long time professionals on practical analytical topics that aren't normally discussed on SA. While our point of view is what works in our process, others may not find it works for them. But we hope that these articles at least help investors develop and improve their own process that leads to success.

    Thanks again for your comments and feedback.
    May 23 12:11 PM | 1 Like Like |Link to Comment
  • If You Are A Long-Term Investor, Why Are You Listening To Earnings Conference Calls In Real Time? [View article]
    I'll correct that. Thanks for catching it
    May 22 07:53 PM | Likes Like |Link to Comment
  • If You Are A Long-Term Investor, Why Are You Listening To Earnings Conference Calls In Real Time? [View article]
    Ahh yep. 20% on 10% is 2%.. I should stop doing math in my head at midnight when I write this stuff.
    May 22 07:50 PM | 2 Likes Like |Link to Comment
  • Virgin America and Southwest Airlines wait for decision out of Dallas [View news story]
    It was reported on WFAA Channel 8 in Dallas last night that Virgin would be awarded the two gates.
    May 9 10:46 AM | Likes Like |Link to Comment
  • Incorporating Right-Brain Thinking Into Your Investment Process [View article]
    Thank you for your compliments. We have the same goal that you do.

    Here was an earlier article also meant to help investors improve their process.

    http://seekingalpha.co...
    May 7 03:16 PM | Likes Like |Link to Comment
  • The Illusion Of Control [View article]
    Thank you all for your comments and compliments. We want to do a series of articles about subjects like this. We are glad that everyone found it thought provoking and inspiring. BTW we love the irony sentence too!!!!
    May 3 10:14 AM | 5 Likes Like |Link to Comment
  • The Illusion Of Control [View article]
    I have thought about this for a while. Since most value benchmarks are skewed towards financials 20-25% of weighting, I have not been a big fan of most funds in that space. While others claim to be successful at analyzing large complex balance sheets of banks and other financial institutions, Gregg and I have always passed on that. I think someone that runs a concentrated large cap value fund has a better chance than a broad based fund. The upside of large cap value is that usually the bad news is much more widely distributed by the media (BP or HPQ or AAPL) that may drive the valuations to such prices that attractive returns are very likely. Very few problems at large companies are life threatening and they have the financial ability to withstand what it takes to turn it around. I low PE or a high FCF yield is probably a good enough starting point. The analysis may be as simple as "things will eventually get better in the future".. Usually after major bear market selloffs is when large cap value becomes a viable strategy because everything in every index is going down, but companies are all different.
    May 2 12:13 PM | 3 Likes Like |Link to Comment
  • The Illusion Of Control [View article]
    thank you for your comments. I haven't watched CNBC or any other business TV show in over 15 years and don't even have a TV in my office.
    May 2 11:58 AM | 5 Likes Like |Link to Comment
COMMENTS STATS
103 Comments
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