Michael Loeb

Michael Loeb
Contributor since: 2012
ROA and Financial Leverage drive ROE, and over the last decade AerCap's ROA has been 2-3%. The company has guided to 3.5x leverage in the future. At this future date, a 3% ROA levered 3.5x leaves you with 10.5% ROE.
Why are ROE's sustainably 15%+?
In what ways? Can you provide some context?
I would recommend looking at which divisions were the source of impairments before drawing the conclusion that the company overpaid. If I remember correctly, 2014 included an impairment in Post's cereal business, which was the existing business before current management took over. In 2011, the business was also mostly Post cereals, so that goodwill impairment was likely the cereal segment as well.
Can you explain the benefits of scale for AerCap here?
When I researched this company in the spring, I came to the opposite conclusion; i.e. that scale was a marginal benefit in normal environments, and potentially a huge issue if aircraft demand faltered temporarily.
I also think it's disingenuous to compare AerCap's ability to earn a positive return on aircraft trading when it was a much smaller company to what it can do in this regard going forward. Given AerCap's market share in aircraft leasing, owning AerCap is like owning an index fund on the aircraft leasing market, so it will be very hard to do better than average going forward.
I used a limit at or just above the market price.
Why not leverage the trade if risk is so low?
If you look back at ROP during 2008, it did sell for a 10% FCF yield, which is unseen in almost any business today, especially one of such high quality.
The company authorized a 1 million share repurchase authorization in February 2009. So, a pretty opportunistic authorization. However, they only repurchased 60k shares for $200K in 2009, and 2.3K shares in 2010. So, their bark is worse than their bite.
I've been long AFL since mid-2012, seeing a PE in the 7 or 8 range. I am having an increasing level of difficulty understanding how AFL can continue to grow while its main market shrinks by the day. In addition to that, Japan has decided to inflate its way out of its unsustainable debt problem, hurting the value of the yen. Mgmt likes to point out its constant currency revenues but if the yen's most likely path continues to be devaluation, that is a real impact on AFL earnings power. I am considering selling out as I think I was wrong on this one.
The saving grace would be if the US turns into Japan because of Obamacare and Aflac increases penetration in the US to supplement healthcare plans that don't offer as much coverage as they used to. They are doing things to take advantage of this opportunity, but it will take years, not months or quarters to play out.
Additionally, Dan Amos has shifted the organizational structure to give headquarters more control over its sales force by making regional directors company-salaried employees rather than commission-based contractors. This should be positive for the ability of the organization to act cohesively.
Its investment team which has been built out over the last few years has been a disappointment in my view, as they have not really dramatically shifted the asset allocation and have increased overhead. I'm much more worried about these Wall Street types now inhabiting the investment office trying to do something "smart" and shooting the company in the foot.
Aflac has a good business, but its business results over the last few years suggest it is only a middling performer in the future.
If all you care about is Aflac's ability to pay its dividends and share buybacks without exchanging its currency, then yes, focus on the US numbers. That will give you a very limited picture of the company, as nearly 80% of revenues originate in Japan, and by extension, so do their investments.
This is one point of tension for me as I think about Aflac. A significant portion of my wealth is in Aflac for many of the reasons you cited, but I have a difficult time believing the "currency doesn't matter" as an investor. Dan Amos cites it in his numbers every quarter, and it's a valuable measure for tracking whether the business is actually growing or not.
But, investing is about maintaining purchasing power. As Buffett might say, if I can buy 10 hamburgers today, I want my investments to allow me to AT LEAST buy 10 hamburgers in the future.
So, let's take the "currency doesn't matter" argument to an extreme and say the yen continues to slide against the dollar, to say 200 Yen/ 1 US Dollar. But Aflac still grows operating earnings 7% a year in constant currency terms. The folks at Aflac may still not convert yen into dollars, but your purchasing power has still been impacted, and perhaps permanently in this extreme case.
So, I think the currency value is vitally important. This does not mean I think the yen will continue to weaken, but I think the currency value absolutely needs consideration.
TiVo has been losing money for years on its DVR products. What makes their current growth profitable?
I can buy 10 Cokes at $1.00 from the vending machine and sell them for $0.80 today, and do the same with 20 Cokes tomorrow. It's 100% revenue growth, but who wants that kind of growth?
I've been looking recently at this stock knowing that pet products do tend to be recession-resistant as you pointed out. A big plus for this company in my eyes has been its capital allocation, through a combination of investing in new stores, creating new store formats, paying dividends, buying back shares, and paying down debt. Any additionaly insight from your research on these topics I would find interesting.
Hi Chris,
Great article, and don't disagree with any of the facts you laid out. Any idea what TiVo's underlying earnings/cash flow are? The litigation payments are great, but TiVo doesn't seem to make any money or even positive CFO when excluding litigation payments.
It's absolutely insane this company trades at $1.5BN when it has $1BN of cash and $700M NOL's. At first glance, its absolutely screaming to be bought out.
At what price does Kors get too expensive? Do you see multiples expanding further along with the expected increases in earnings?
While you are generally correct that Depreciation and CapEx should move closely together, it does depend very much on the industry. More stable industries such as cereal should probably have lower CapEx than coal or oil and gas. Look to Warren Buffett's example of See's Candies for confirmation.
Also, refer to the end of Berkshire Hathaway's 1986 annual report for a discussion of owner's earnings and why all depreciation should not be treated the same. In the report, Mr. Buffett shows how a company he bought at over book value needs to reflect a depreciation charge to get rid of the premium over book value. To him, the assets still generate the same level of income, so they should not be depreciated any more heavily than before the acquisition.
There are definitely some points to be argued here, especially on the point that book value for an asset bought a long time ago is not necessarily indicative of replacement value today, but I believe Mr. Buffett's point on owner earnings applies well to Post.
How are you calculating Invested Capital? I didn't do the calculation, but it seems P&G continues to invest in its business over the last 6 years. Its CapEx from 2008 to 2013 was (3,046), (3,328), (3,3067), (3,306), (3,964), (4,008). Asset sales meanwhile were 928, 1087, 3068, 225, 2893, and 584 over the same period. It seems like they are still investing, although this is obviously just a regurgitation of their Annual Reports. What numbers are you seeing?
How do you come up with estimates for RNR if its earnings are dependent on low frequency, high cost events not happening? How many points on their combines ratio will they lose as the result of the increasing prevalence of ILSs?
I'm taking Operating Cash Flows and subtracting capital expenditures (or purchase of PPE on ADVFN). I don't know where ADVFN calculates its FCF from, but I don't think thats right. Can you show me how they got to the numbers above with other figures from the website?
How are you calculating free cash flow and what is your source? P&G most-recent 10-K says free cash flow has been about $10B, arrived at by the $14BN in operating CF's minus capital expenditures of $4BN. Am I missing something?
How do you think the consolidation of the airline industry will affect the prices sites like Priceline and others will be able to offer?
I think a half position might make sense, although I'm biased as an AFL owner. With regard to the 5 year timeframe, I think any consideration of PE should be adjusted. The last 5 years have been extraordinary in the markets, so while AFL may not be a 15 PE company in the future (I still think it could be), a reasonably safe assumption could be a middle ground of say 12. Using that multiple, you have a company trading at a good discount.
Any worries about the decrease in JGB prices to me are overblown, as AFL holds those securities to maturity. I am not too familiar with the SMR ratio, a Japanese insurance liquidity measure, but the concern with any investment losses, even on paper, would be that the SMR ratio could be impacted. All these things considered, AFL has grown tremendously in a country that has been in a Depression since 1990 selling a product that is "supplementary".
There may be short term pain as the Yen/dollar exchange rate reverts back to a historically normal level, but waiting for those risk factors to clear up is not prudent for any value investor.
What dividend companies are you investing in, and what are their valuations? Aflac looks quite undervalued to me, and you can refer to the F.A.S.T. graphs article on Aflac to see by how much. Aflac is being offered at a historically high dividend yield, and is valued at only 66% of its 10 year average P/E of ~15.
There are no other insurance companies out there that make as much money as Aflac does. Buy good companies at a discount.
This is a very interesting article, and in my opinion very ably captures the comparisons of companies against which Amazon competes.
Good job, and thank you for putting words to my gut feeling that Amazon is not worth what it's currently selling for.
Did you know that in KORS' most recent 10-Q, they have 237 full price stores with 485,250 sq ft, and 115 outlet stores with 339,177sq ft?
Did you know that in FNP' most recent 10-Q, they have 107 full price stores and 48 outlet stores?
I searched Google for Fifth and Pacific, Kate Spade's parent company. Fifth and Pacific used to be named....you guessed it, Liz Claiborne, before the company sold the Claiborne brand to J.C. Penney. If there is anything to be said for qualitative factors, this fact is a negative for those who have faith in Kate Spade management to offer a sustainable long-term brand.
Coach by comparison has 350 and 198 full price and retail stores , respectively, per their 10-Q.
A company of Aflac's profitability should have tremendous float. The problem is most of the float comes from Japan, and repatriating earnings is not a good idea, so Aflac has chosen to keep its investments in yen, and the Nikkei has not exactly been doing well since 1990.
Aflac might consider repatriating some of its earnings to earn a higher return in other markets, but I trust management has looked at this option extensively and made the decision to earn a low return and at worst defer repatriation taxes than earn a higher return on a much lower post-tax sum of money.
For the most part these will be paper losses. Aflac holds the majority of its bonds to maturity. Could present another buying opportunity in the future.
A big reason Aflac has such a big presence in Japan is due to strict historical regulations against Japanese companies offering supplemental insurance. An American company, Aflac, was able to come in and have a near monopoly. Those regulations were loosened in 2000, so more insurers can offer supplemental insurance now, and Aflac does not have the near-monopoly it used to. It still is one of the best run insurers in Japan and maybe anywhere, but now has more competition.
I'm interested to see if the Japan Post deal significantly adds to AFL's revenue.
Long AFL
There are a lot of moving pieces and its tough to see how it will work out. While the central bank can print money and create inflation, they cannot force employers to raise wages, which Abe is currently struggling with. If Japanese employers refused to raise wages along with the inflation created by the central bank, that could seriously reduce Japanese purchasing power at home. I generally agree that Japan will find a way to reform, but there are some serious cultural changes that need to take place, such as labor force mobility and immigration reform to allow the population to continue to grow and increase the tax base. These are just two issues facing the Japanese economy, and unfortunately they seem to be deeply ingrained within the Japanese psyche.
Shinzo Abe is doing a decent job pushing these reforms as well as gradual sales tax increases, but if conditions turn worse before they turn better, his considerable charisma and political capital could erode rather quickly.
Those are my fears with this investment, and I'm long AFL
Are you including taxes in that calculation, retailinvestor? The benefits of deferred taxes can have terrific benefits over the course of the time frame referenced in the article.
Hey Mike, good to see some of your comments on here. Hope you're doing well.
I think reinvesting dividends makes sense for many people for a lot of reasons.
Even if "tactically" reinvesting dividends during pullbacks and taking cash dividends during overvaluation periods generates higher returns, it is often much easier psychologically to just pick good companies and reinvest the dividends.
Who is going to really jump to reinvest dividends during a 20% market correction? The best do, but the rest of us should KISS, Keep it simple stupid.