Michael L. Boyer

Long only, long-term horizon
Michael L. Boyer
Long only, long-term horizon
Contributor since: 2011
Cramer nails the Denny's story (word is out now).. and the remodel ambience premium... says he think it is early in the turn (around). Also, cites management, buy backs, increased guidance, low oil price play.
And everyone has probably heard of the very high end, well appointed Denny's in Manhattan:
Author (Cooper) here asks if people are crazy--paying up to $300 for a meal at Denny's:
The answer: yes, they are irrational. Predictably so.
(Still Long DENN, since 2-3 bucks)
And Coke again into Keurig (build-a-beverage, Ikea effect??). . .
Like the remodel theme (see my Instablog on Predictably Irrational and ambience premium); this should continue a few more years as a top priority; the 18 million share repurchased to date is a good use of free cash; they have some good explanations on the revenue; the market seems to like the picture this AM. As they shore up the existing locations (remodel/upgraded) and boost their stock price and earnings, expanding into more key areas could be the focus (campus, highways/truck stops/travel center, new cities, etc)
And MCD harnessing power of "free" with their coffee, one of the most powerful (and often expensive--for customers) pricing promotions...
And cnbc follows the new MCD move to "build a burger" here:
Both the build a burger and build a bear models tap customization without meaningful labor (other than mental choice) infused.
That said, adding condiments or pushing buttons may be getting close; next research for Ariely: how much labor is required to get Ikea Effect (steps, effort, minutes, etc).
This thesis still appears valid in the auto context with Tesla Model S getting top CR rating and a concomitant stock boost.
Lots about the remodel. I like this in terms of customer satisfaction, brand building, loyalty and--a key we sometimes forget--the experience. Food and service are key, but drab carpet, early 90's decor, shaky booths, funny smells, peeling paint, scary restrooms--all can downgrade even the best food or service. It is a key part of the product/service; the place in the marketing mix.
When you think about Schultz's (3rd place mantra for SBUX), I can't help thinking Denny's was the original 3rd place--decades before Chuck even happened upon the Mermaid in Seattle.
And, we probably have much more in common with Hemingway's classic portrayal of a place people can go--between home and work and escape both practical and existential problems--a clean, well lighted place.
Hi Notagamble, Josh, etc: examine the series of spin-offs of this former strong brand owner in food/coffee. No more food/coffee for PG.
PG went for higher margins in personal/household care (maybe less raw ingredient volatility with coffee, especially). Their core competency is under your bathroom and kitchen sink....
On "how" to "create value note my links above that explain their recent tax free exchange (too complex to detail in comments. PG returned shares of Smucker (that have soared) to PG shareholders in that exhange.
Look at the PG portfolio for possibilities: http://bit.ly/1dE9cmv
I am not a strategy consultant or speculating--but I don't use pet food in personal or household care. Of course, the real gold may be batteries. I'd like them to keep it, but when I saw how much Pringles was worth--the sky is the limit on a Duracell (though, again, I'd like to see them keep it for now--unless I get shares in the new spin-off tax free)...
My main point is FCF is one good metric and there is an interesting point here--but the brand strength is an offsetting factor PG has used creatively to shareholders benefit in other forms of dividends.
Telling graphs and nice piece...
A couple of aspects that interest me: (1) new leadership and potential stronger FCF; (2) brand/franchise value and history of creative transactions to spin off brands to return value to shareholders.
1) Leadership was a frequently cited drag and that headwind may be changing.
2) Examine how PG spin-offs can literally create company brand portfolios (see JM Smucker and its former PG food/coffee brands).
We have a couple of dozen very strong brands here, any one of which could be spun off to could give the company cash to return to shareholders for the foreseeable future and beyond (see Folgers, e.g.).
Granted, some of these may not be cash per se but creative trust transactions giving shareholders stock in other entities. But I'd take my dividend in a Smucker-like stock any day (See, generally, http://reut.rs/1dgm9A0)
Saw this stock mentioned in a financial magazine/paper at library (read them all--for free!)--can't recall which one. So I looked it up...
This article is far better and tells the larger story. Looks like the market has taken a similar stance on this company (based on price).
Really does look like the story is: if you think the smaller Pamida/Shopko can stand up to WMT, TGT, AMZN,COST, (and dollar stores, Mom & Pops etc)...then consider it...a treat..
If not so sure, stay away (more trick)..
FYI: my local boyhood Pamida in small town Wyoming went under long ago and last I saw land/building was bought cheap by school district (maybe donated?) for vocational/alternative education center.
Wal Mart is in town going strong last I drove through. Tells me all I need to know.
Would only consider this firm if trading for value of land/structure (although really have to scrape some of these buildings from 20-30 years out). Leases of company trying to compete with Wal Mart/Costco etc risky and could get ground up in wheel of retail--into dust literally (vacant sq ft retail in rural NE anyone?)
The Harley brand is as much lifestyle as transportation.
So you need large amounts of disposable income (as you mention) and also a psychographic that may or may not exist to the same extent in emerging markets.
People tattoo the Harley logo on their bodies in some of the developed markets--so you have a brand loyalty that is unique.
The affiliation (owners groups), rallies, and lifestyle (or aspirations towards that lifestyle) seem to drive sales as much as the need for transportation.
I would guess practical, economical transportation will take precedence over lifestyle or status motorcycles for some time.
If the television show "Sons of Anarchy" become number one in India, you will be looking at a ripe market for sales... Hard to be like them on a Japanese moped....
How do you like the picture for SWY with the announced sale of the Canadian stores and use of the proceeds to pay down debt and buy back shares?
This topic is hot in the financial news. Diana Olick for CNBC just out
Article notes the market is "frothy", firms cutting back on buying, rents down in some market (oversupplying in some areas?), high vacancy for institution owned rentals. But over 1/2 have 5-10 timeline....Extending opportunity costs to a decade...
My thought--maybe look to buy in fire sale 2018-2020 from distressed, pressured institutions that locked into illiquid assets for a decade of drippy faucets and trash-outs.
Blue bloods may think twice about investment requiring blue collar work...
Morgan Brennan has an in depth piece in the June 24th 2013 issue of Forbes on the topic:
Some good facts and information. Some firms have 10,000 even 20,000+ homes... But also armies of employees to handle the scale.
One figure cited is 6% return when all is said and done....
But may be on the optimistic side. And still seems paltry with inherent risks (interest rate, rental rate risk, vacancies, liability, local property market risks, liquidity risks, opportunity costs of missing run up in market, an uptrend that has coincided with many of these investments)...
Look what market has told us about the publicly traded firm(s) doing this--no real return expected. The comments about packaging the residential properties into complex securities or publicly traded firms also hints of some desperation and investors looking for exit strategies (another risk--how do you sell 10K homes? Lots of signs and closings?... and how do you do it without impacting the market??)
Maybe the last act of this play is entitled "No Exit"
Interesting piece out today on institutional investors actually fueling the price gains they are seeking. Are they putting in a floor or pumping up a mini-bubble?
And who needs monthly cash-flow when engineering mass buying can pump up prices.
Private equity still looking at significant transaction costs in quick sales (tax, commission, fix up, vacancy, marketing)..
Suppliers of the enterprise have been the winners...
Balanced look at the management of units in the SacBee today and
both sides of the coin on policy:
Hard to say where the market would be without some of those inputs.
I love the rational, data based "Stocks For the Long Run" (Siegel's great book) ideas.... Great thesis and case for stocks (over the very long term)...
But where you get in the game and out of the game (your life cycle relative to the bull/bear market cycle) is also key.
We also have the "Madness of Crowds" and general animal spirits driving much of investing short term.
Hard to ask people who lost much of their savings (be it 1929, dot.com crash, or more recent financial crisis) to be rational and look at long term stock data and re-enter the market. Too much emotion, too much pain, etc.
Behavioral economics, group psychology, generational trends, etc. may tell us much about the next market. Alarming numbers of baby boomers have inadequate retirement savings (will they invest in stocks like mad and let it ride on the market or look for stronger government funding for entitlements)....
Nice look at issue(s) in above comment from an article I came across today-- on market events and their potential impacts on a generations' asset allocation:
I see this theme more and more--looking at real savings patterns, life expectancies, even normal human behavior (like who really invests like clockwork without fail a set % from 20 to 65)... Also, considering human capital is key.
We may even see generational trends and biases towards asset classes (or lack thereof).
An example, I recall is inheriting some EE Bonds from a greatest generation era grandparent in 1999 ( a life time US bond & CD) investor. Of course, I was thinking at that time--as a Gen X equity-o-phile- how I wish the grandparent had discovered stocks. Oh the riches and lost opportunities.
Then I found myself holding those double EE's quite dearly in the dot.com collapse.
Yes, grandparent had been alive and old enough to understand the market crash of 1929 and seen its impacts. So we may even have to begin looking at market history and the interplay with human psychology, too...
It is a very complex and nuanced issue--much more than just stocks versus bonds in a race over the last 100 years.
Agree--top leadership could still be an open question short term.
Longer term the organization seems to produce and attract top talent. Ideally, it can self correct to keep high standards.
I like the "keep the eyes on the fries" types up from the ranks/ lifetime employees who flipped the burgers and ran operations for decades.
The long term folks can get some more bang for the drip bucks with dips.
I'll take mine on a tax deferred/free bun with extra DRIP.....
Nice stock for us since early 2000's. Now fun to watch the dividends reinvest and buy more.
They adapt the menu well to new market, as proven in many countries.
Very well written, detailed analysis.
Some relevant updates that caught my eye:
Brief CNBC report that foreclosure values are drying up; relevant because it could bad for those still trying to buy (little/no discount to market) and flip; but it may be positive for first movers--those who bought bulk foreclosures a couple of years ago. Also, even without discount, they could pencil out as rentals, according to report.
James K. Glassman points out some similar housing plays (for home improvement) in the December Kiplinger's:
Some relevant picks in the same vein as above are Lennox Int (LII) for heating and A/C; Mohawk (MHK) for floors; and A.O. Smith (AOS) for water heaters.
This "flipping" of houses is generally associated with a very short term transaction where a buyer quickly buys the house (often making cosmetic improvements) and then attempting to sell it quickly for a profit. You can find definitions, websites, and even past television shows on the concept online.
This was very popular during the housing boom with quickly appreciating property values.
In this context, some comments point to private equity attempting to do this "flipping" as opposed to buying the properties longer term and renting them out.
The keys being buying at a favorable price, not spending too much in repairs/improvements and--of course-- selling quickly.
Neat points, Wooster.
Sounds like you are following some firms that are using a strategy to quickly flip the homes or to exchange them in tax deferred ways.
The flipping strategy could depend more on buying at the right price, keeping improvement costs in line, and quickly finding bulk buyers (and keeping transaction costs in line).
Of course, they'd miss out on longer term price appreciation--but you don't have to operate the single family homes. There is a neat Reuters article in the comments about a private equity firm selling homes and now expecting lower returns on the venture.
It would be interesting to find out if the flipping is the plan "b" after seeing the issues with the management of the properties and low cash flow as rentals. Or maybe it is market dependent, with buyers emerging and sales possible.
Just like individual investors, the main fly in the flipping ointment is finding a quick buyer. And what you do in the interim...
Nice article. Good thesis.
Could be a better location for low cost manufacturing than China and India....A well educated workforce, low costs, westernized culture, most people speak perfect US-style English, friendlier government...
It was 2000, and I am riding in a pick up listening to George Strait... Could've been in Texas, but it was Baguio in the Northern PI. Everyone loved country music!
So it could be a better cultural and even economic fit for manufacturing. We already see the edge for call centers and customer service centers. If the infrastructure improves, it could be a good site for some kinds of manufacturing, too.
Nice article--very well written.
What else is in the EPHE (other 34%)? I may check and see if I can find the the complete listing.
Also, there may be some plays in the call centers and maybe remittances in some other publicly traded firms, but you outline the pure PI plays well.
For those down on the low lands, maybe try Baguio.
Brilliant point and addition to the article! Great article. I had not come across this early mover in the market making an exit.
I have been drafting this idea for many months, especially when working to convert a rental to sale all summer (still on the market), thinking "how are the funds going to do this x 1,000 profitably"). So it looks like this piece supports the thesis of the article; however, Och Ziff may get out "ok" with the price appreciation in that particular area as the article mentioned by ntalebfan notes:
"But the New York-based hedge fund is looking to sell now because the returns it is generating from rental income are less than expected and it is looking to take advantage of a recent rebound in home prices in northern California, the sources said. It's not clear what kind of return Och-Ziff had expected to earn from renting out homes.
The average cost of renting a home nationally grew at 0.9 percent in the third quarter from the previous three-month period. That growth rate is down from 1.3 percent in the second quarter, according to Reis Inc., a commercial real estate research firm.
Meanwhile, the median price paid for all new and resale houses and condos in the San Francisco Bay Area in August was $410,000 -- up 10.8 percent from $370,000 in August 2011, according to DataQuick.
Och-Ziff's move could indicate that institutional investors may have to dial back their expectations, especially with regards to rental income.
"It's not surprising that some investors may have overestimated rental returns," said Rick Sharga, executive vice president with Carrington Mortgage Holdings, a division of Carrington Capital, which has been buying and renting foreclosed homes since 2007. "If you are an investor getting into this cold you were probably making assumptions based on models rather than experience"
Very interesting close up look of private equity property management pigdog67(or maybe mismanagement).
It highlights so many questions. The two insurance companies I use for rental won't allow a long list with certain breeds of dogs (including the one you mentioned). And they visit the place before writing the policy.
So you can see private equity could lose coverage and face direct liability. Dog bites are top reason for claims--just one of the hundreds of pitfalls in their new venture as landlords. And I am sure a dog bite in a single family home (rented out) or apt could find its way back to the property owner and/or their coverage.
Some of these larger firms may even be self insuring rather than pay the landlord policies (not sure if an insurance firm would write a blanket policy for a few hundred or even a thousand dispersed homes in bulk; so they'd have to be individually done; the costs could be substantial). This is just a narrow probe on one of a hundred issues the scale creates for oversight, tenant screening, insurance coverage, safety issues, etc.
More great comments that add to the discussion...
Benny is right on track with the notion that capital appreciation can bail out the strategy--if it comes soon and is strong. Of course, they'll need appreciation to cover rehab and transaction costs plus cost of capital (and soon).
And he also notes these firms, through collective buying with billions of dollars, could even impact supply and hence pricing in some markets where they are concentrated. And he also notes private equity could even be middlemen to emerging (see Silver Bay above) single family REITS or existing REITS that seek to get involved in the single family market at scale right away (i.e. need to buy hundreds or thousands of homes); they'd be almost like bulk flippers selling the homes in bulk after a short time to another institutional buyer. Good ideas/exits strategies.
The apartment complex comments is interesting and may be a better fit for scale for private equity; they'd be able to outsource to existing management firms--more proven and certain cash flows.
And on the income point. Yes, median income, the job market and lots of economic factors can impact housing prices. Interestingly, this sage comment notes these numbers don't look favorable and flat rents and home prices could be a real problem for this strategy, sticking private equity with real cash flow problems and not many profitable ways out ...
Thanks for the great comments!
I think this may be a situation where the hedge fund whiz kids and high profile private equity pro's left out a key person from the table: the regular, experienced landlord in overalls.
Yet that person and that skill set may be as important to the success of this strategy as almost any other factor.