Stock Cat

Value, growth at reasonable price, medium-term horizon, small-cap
Stock Cat
Value, growth at reasonable price, medium-term horizon, small-cap
Contributor since: 2013
A very clear and compelling thesis - thanks for the write-up.
I have done some due diligence and it would be awesome to hear the authors views on the following:
1. Store roll out - the company doubled its store numbers over the last five years, but has since put its roll out program on hold. When would you expect to see this resume again? Given hhgregg's relatively low penetration, new stores could present substantial upside.
2. CFO - the CFO resigned on 26 December last year. Would you read much into this? The company didn't provide many details, citing that the CFO left to pursue a similar opportunity.
3. Electronics retail - if this space remains competitive, can hhgregg operate a sustainable business? Have any comparable brick-and-morter retailers been successful in this more competitive environment?
Thanks, and keep writing
Hi V Investor,
That's a good question. There are a couple of schools of thought on the downside potential for Titan.
The first is that there is limited downside - Titan is already priced at a multiple which implies low expectations of the company. At ~7.5x forward earnings (around half the market), there isn't much room for multiple contraction. Titan is also priced below most of the compcos listed in my article despite it (1) growing faster (2) being one of the few resource service companies that isn't exposed to a commodity that is falling in price.
The second school of thought is never underestimate the market's ability to punish a small-cap resource company! Ausdrill is a perfect example of this as the company is trading at a 3.0x (trailing) P/E and 0.3x book value. However, unlike Titan, Ausdrill is facing some governance issues, downgraded its earnings forecast by ~50%, and is more heavily geared than Titan. Also, on a forward basis Ausdrill is trading close to a 7.5x P/E (nearly the same as Titan).
So, if an Ausdrill case plays out, it could challenge my short-term thesis. However, note the differences between Titan and Ausdrill listed above, and also take comfort that these is a robust long-term story which should act as a safety net if there are short-term challenges.
I hope this is helpful. All the best for your investing.
Thanks for the well-researched article.
I always pay attention to young fast food chains that are growing rapidly. If the company only has a presence in a handful of states, then there is plenty of head room for growth. What's more, this copy-paste approach to growth can be low risk, as what works in one state often works in another (in contrast to international expansion, launching a new product line, acquiring a competitor, or many other growth strategies.)
Just a couple of questions, that it would be great to hear the authors thoughts on:
1. Why is FRGI so determined to expand via company-owned stores rather than via franchising? You're model implies ~5 franchised stores p.a. compared to ~20 company-owned. Also, the investor presentation shows ~17% of stores are franchised and 83% owned. Franchising facilitates rapid growth, and the lower capital outlay de-risks much of this growth. It was a strategy commonly employed by many of the fast food titans, such as McDonalds
2. Is 'fast casual' dining a growing trend? I'm interested to hear more about it, and whether fast casual is likely to be the next big trend in fast food.
Thanks for reading my article and doing your own due diligence.
I agree there are material risks around Titan. Like any investment, I weigh these risks against company's valuation, growth opportunities and track record. For me personally, Titan more than stacks up.
I think the risks that you outline are fair. But here's a Titan-bull's perspective!
- Weather: agree that this can affect FY14 earnings, though I note there is an adverse weather allowance factored into FY14 guidance. Also, projects delayed due to bad weather, generally go online in the next FY, so it's more a timing issue than a structural issue
- Business: agree that service offering is relatively commoditized. However, the management team is strong for a company of Titan's size, it's developing a good track record of winning contracts, and growth is possible without having to claw any market share (as the CSG market is growing fast)
- Director selling: I don't weight director selling as heavily as I do buying. There are many reasons a director would sell - taking profit, liquidity, re-balancing their portfolio - and only one reason a director would buy - they expect the price to go up. I note that directors were selling around the $3.00 to $3.50 mark. I.e. after Titan was a three-bagger for the calendar year. So perhaps it was just a bit of profit taking?
Excellent article! I really appreciated the concise overview of CPA's growth opportunities.
It would be great to hear your views on the recent share price performance. The company lost 13.7% over the last month, and I am struggling to fathom why.
It may well be. It's outside the scope of my article, as I wanted to take a quantitative / mean-reversion perspective. But this appears to support your thesis:
Yes, you could certainly infer that from the analysis. Though my inclination as an investor is to stay away from bubbles (the 3 /15 times) as they can burst at any moment, so there is no robust way to time your exit. Therefore, for my purposes, I exclude bubble events, which makes the odds look less favorable.
On the flip-side of this 8 / 15, not a terrible case for remaining invested, is the 7 / 15 times were returns were negative over the next two years. So it's almost a coin toss - I try to stack the odds more in my favor when investing
Good question, and thanks for reading my article in depth.
I should have clarified that I measured returns from where they peaked, after crossing the 40% mark, to where they bottomed out in the next two years.
So there were times in the two years following a market peak where returns landed in the 17% to 40% range, but they never bottomed out here.
I hope this helps
Thank you all for the kind comments. I am glad you enjoyed the article, and please don't hesitate to share ;)
Well written, and a robust investment thesis. I'm surprised this didn't make Alpha-Rich.
Do you know of any other low-cost producers with no debt, that have more than one producing mine? I'm keen to accumulate a few gold mining stocks that meet this criteria.
Excellent article, many thanks.
The company has been increasing its dividend as follows, which reinforces your view:
May 2009: $0.37 / share
May 2010: $1.09
May 2011: $1.64
May 2012: $2.10
Dec 2012: $2.25
What is the political environment like in Latin America? Does this pose any risks?
Thanks Tim, good article.
You talk about the PE reverting to its historic levels, and how this may be a key driver of return. I quite agree. Given that the stock is on a 5.9x PE, it would be crazy to assume it stays this low forever. Though I suspect the only catalyst for BP reverting to a 10-12x PE would be increased certainty about the magnitude of its claims liability.
It may also be worth adding some context around the dividend. Before the oil spill, the BP ADR was paying $0.84 / quarter. The dividend was suspended after the spill, and in Feb '11 was reinstated to $0.42 / quarter (half the historic level).
Since Feb '11, the dividend has increased twice, and is now $0.54 / quarter. At today's price, BP is on a 5.1% yield, despite only paying out 30.1% of its earnings. Put another way, if BP paid out 100% of earnings it would earn a yield of 16.5% - a feat that not many other stocks can claim.
If the dividend reverted to $0.84 (perhaps, once again, the catalyst would be increased visibility over its claims liability) the yield would be 8.1%, despite only paying out only 48% of its earnings.
Excellent article. Keep writing
Hi ValueTech,
I agree there is very little visibility beyond 2-3 years, which is why I gave my model a 2.5 year horizon.
Between FY08 and FY12, AAPL has had a trailing PE on its core business ranging from 10.5x to 16.1x. This is seriously low for a company growing net revenue at 42.9% p.a. over the same period! Many market commentators attribute this low PE to AAPL's constant need to innovate to maintain its earnings stream. This seems to be consistent with your view about little visibility beyond a 2-3 year horizon
Thanks rmanore. I appreciate the extra discussion on each scenario, and you taking the analysis a bit further using weightings.
Agree with your weightings on the new product scenario. I would be stunned if a company with a >$3bn p.a. R&D budget, and such a strong track record of innovation, came up with nothing revolutionary. Also, rumors of new products seem to be mounting. I talked about the iTV in my article, but there certainly has been talk of other promising innovations in the pipeline. For example:
The author believes AAPL will focus on complimentary products, rather than ones that cannibalize other products (like the iPod), which would be an interesting development.
I would probably assign a higher weighting to the obsolete scenario to recognize how quickly things can change in the technology sector. I don't think many people foresaw Blackberry or Nokia's fates, so there is still that residual uncertainty.
Thanks for your comment Michael.
I attempted to incorporate a Blackberry (or left 'tail risk') outcome with the 'obsolete scenario' This scenario assumes 25% p.a. declines in revenue in FY14 and FY15. It also assumes gross margins contract to 32.0% (from 43.9% in FY12) over the forecast period.
How do these rates compare to Blackberry's decline? Feel free to download the model and adjust the scenario inputs if you would like to make it more bearish.
I kept my scenarios at a high level, and appreciate you supplementing my analysis with specific details about how a left tail scenario may play out.
Agree that single digit share prices could be possible for AAPL in the longer term. In the short / medium term, I suggest investors take some comfort from AAPL's $154 cash per share. Also, its 2.7% yield and $60bn repurchase program should provide some support at the current pricing.