How do you feel about the fact that the P/E multiple is approximately the same as Dollar General and Family Dollar? It seems like it least from my perspective the market should be giving a higher multiple relative to its peers given its better growth prospects. Dollar Tree has less stores and more room to grow. Additionally, Dollar Tree and its single store format seems to be more attractive to me than its peers and has allowed Dollar Tree to generate higher margins, which are consistently going higher unlike their peers.
I am curious as to your take on this issue. It just seems like the multiple is a bit low to me. The only rational I can think of is the last couple of quarters have not been the strongest from a comp perspective, but Dollar Tree still leveraged the comps unlike their peers and I can see the comps improving.
1) I knew that Dollar Tree has the Dollar Giant in Canada, which management says has the potential for over 1000 stores. There is also the Deals chain, which is growing. It is much smaller than the peers as you mentioned and provided that the comps are solid I see no reason why Dollar Tree cannot keep expanding at a brisk clip. 2) The quantified income number is helpful. 3) Q1 was a tough quarter for most retailers and the comparison was off a 5.6 comp last year, so the 2 year stack was a 7.7 which is not horrible given the conditions. The commentary on the call indicated an acceleration of sales trends at the end of the quarter and the back half of the year has easier comparisons, so hopefully the company can generate a 3 or better comp. It just seems difficult for Dollar Tree to consistently generate meaningful margin expansion if they are producing 2 comps, but I agree with you that it seems likely that they will return to the 3 plus range.
Thanks for the informative article on Dollar Tree. I have a number of questions.
What gives you confidence that they can open up over 10,000 stores?
Do you have any income statistics on average income of a Dollar Tree shopper? I have tried to look for it and have not found it, but I am pretty sure it is higher than Dollar General and Family Dollar.
The ability for Dollar Tree to leverage SG&A in the last quarter with a 2.1 comp was impressive and generate 70 basis point of EBIT margin expansion. Do you feel that Dollar Tree could could consistently generate margin expansion if comps remain below 3?
Can Autozone Keep Growing Its EPS 20% Every Year? [View article]
Aristofanis Papadatos,
I respect your report, but I politefully disagree with some of your statements. The 2.5 Debt/Ebidtar ratio is not something that just management repeats. This is a credit rating agency metric and this is a consistent target. The 2.5 ratio has stayed about the same for years. The credit cris occured in 2008 and interest rates spiked and they had no problem raising debt. Now if this rose to about 3.2 then this would be a problem. Management targets the ratio and what the credit rating agencies seek. Autozone has not deviated from it. The interest coverage ratios are quite strong. The cash flow is more than enough to pay the interest expense. Advanced Auto Parts also cites their Debt/Ebidtar ratios.
Their peers also have a high portion of current liabilities to current assets. It is common in this business to target a high AP/inventory ratio to generate a large amount of cash flow and Autozone is one of the best and maximizing this metrics. They have a high level degree of liquidity and an immense amount of free cash flow. I have not seen a credit report that has ever mentioned an issue with liquidity. Companies with a BBB with a positive outlook with a stable credit profile in a healthy industry are generally not high bankruptcy risk companies.
As to their ability to grow 20% EPS annually every year I would say that is impossible. That would be hard for any company to do and Autozone is no exception. Autozone's sales were soft in Q1 and with weaker same store comps it is more likely that 15% EPS is possible. Achieving that on an annual basis is still difficult and is impressive. 20% EPS growth occurred in part due to macro tailwinds, which management acknowledged is in the past. The free cash flow yield is still quite high and they still have room to buy back about 8% of the float while keeping the Debt/Ebidtar at 2.5.
Continental Resources: Upside Outweighs The Risks [View article]
Marine 85
You are right that CLR has been on a hot streak. You might get a pullback because who knows with the markets, but even with the run up the stock does not look particularly expensive. The trailing P/E was 22.1 yesterday with the forward being roughly 14, and CLR has the potential to grow their EPS in the mid 30 range for the next 5 years. CLR also had a very solid fourth quarter.
Fastenal: A Great Success Story, But Should You Buy It Now? [View article]
Jamie Ward
I appreciate the thought and rigor in your analysis. You seem to have a keen insight on the business, so I wanted to get your take on margins. The pathway to profit has been a remarkable success and operating margins have really soared as you mentioned in your article. You seem to imply that Fastenal will have limited room to improve these operating margins in the future. Do you believe that 23% is a peak operating margin and that Fastenal has already created all the efficiencies in the business? Are do you feel there is any upside potential on the margin front?
Fastenal: A Great Success Story, But Should You Buy It Now? [View article]
What is your take on the sales slowdown in the back half of 2012? It really slowed down in April. Do you believe that is entirely macro driven. Do you think that a weaker macro will reduce Fastenal's top line potential in 2013 and longer term?
Continental Resources: Upside Outweighs The Risks [View article]
talljrt
According to the third quarter conference call, 6 operating rigs are in the SCOOP play and 19 are in the Bakken. Continental Resources had 721 employees at the end of the third quarter.
Continental Resources: Upside Outweighs The Risks [View article]
ChuckXX
I think your point about Harold Hamm,CEO, owning a large equity stake is a very good one. He owns about 70% of the shares and I view this as a positive for the company, since it aligns management's and shareholders' interests quite well.
How long can they continue this strong growth trajectory will largely determine the success of this stock. The pieces seem to be in place for CLR to generate solid growth for years to come.
Strong Capital Allocation Makes AutoZone A Buy [View article]
Prescient Investment Analysis
You are correct in that Autozone does have stores in Mexico whereas AAP and ORLY do not. 321 of their 5006 total stores are in Mexico at the end of the last fiscal year and it is a growing segment. Autozone added 42 stores in fiscal 2012 which is an increase of 15% annually.
Union Pacific Can Still Significantly Decrease The Operating Ratio [View article]
False Prophets
You make an interesting point regarding natural gas. Low natural gas prices has been a challenge to coal this year, but the shale play has been a big lift for UP and has helped mitigate the loss in coal volumes in 2012. The shale play presents volume opportunities for UP in the future.
Advance Auto Parts, 14% Moves And Weak Market Conditions [View article]
When I mentioned infrastructure I was not really talking about distribution centers as how SG&A spend is more or less the lifeblood of a retailer. A retailer can vary SG&A to an extent depending on sales, but it must keep up with its peers or its stores risk not having the advertising,renovation... staffing it needs to support healthy sales growth. Look at what happened to Sears.
I understand your skepticism with Advanced Auto Parts excuse of weather as the source of poor performance. However,weather is the key to the weakness for all of the auto parts retailers this year. The unusually warm winter has created a strange cycle that is expected to normalize next year, so the comps industry wide should pick up a bit next year.
It is true that the SG&A expense reduction for Advanced Auto Parts was not dramatic in absolute terms. However, the increase in SG&A expense for Advanced Auto Parts has trailed Autozone and O'Reily considerably in the last two years. Advanced Auto Parts SG&A expense increased 1.1% in 2011 compared to an increase of 9.7% for Auotozone. In the first 3 quarter of fiscal 2012 Advanced Auto Parts SG&A expense increased 1.3% compared to an increase of 6.8% for Autozone for their full year fiscal 2012. It is hard to compete with your peers when they are outspending you dramatically.
I am not sure that the SG&A expense is the only source of Advanced Auto Parts problems. However, I do think that when your competitors are sharply outspending you it becomes harder to compete. That is why Autozone always talks about not cutting any SG&A spend that affects the customer. O'Reily has also commented that their is only so much more SG&A that they can effectively cut and they are far outspending Advanced Auto Parts.
Advance Auto Parts, 14% Moves And Weak Market Conditions [View article]
Intangible Valuation
I do not think that geographical differences can fully explain the performance gap between Autozone and Advanced Auto Parts. Advanced Auto Parts has been reducing its costs to try to close the gap between its EBIT and its peers. Its EBIT was 9.9% in 2010 compared to 17.7% for Autozone. When Advanced Auto Parts curtailed its SG&A spending dramatically to its peers it risked top line growth. Autozone same store comp was 6.3% gain compared to a 1.9% gain for Advanced Auto Parts in fiscal 2011. Autozone also generated a 2.1% comp in their later quarter compared to a negative 1.8% for Advanced Auto Parts in their latest quarter. There has remained a substantial performance gap between Advanced Auto Parts and their peers as they have not spent as heavily in their store infrastructure as their competitors.
Double-Digit Returns For Dick's Sporting Goods [View article]
This is an interesting article. I like that you modeled your projections. Where do you see same store comps going in the next two years? It seems like a lot of the margin improvement can be attributable to very strong comps. There was a bit of comp deceleration in the latest quarter although you can't judge everything from 1 quarter. I am just curious as to how you see this playing out in the future.
Dollars Can Grow On Trees [View article]
I am curious as to your take on this issue. It just seems like the multiple is a bit low to me. The only rational I can think of is the last couple of quarters have not been the strongest from a comp perspective, but Dollar Tree still leveraged the comps unlike their peers and I can see the comps improving.
Dollars Can Grow On Trees [View article]
Thanks for providing the details.
1) I knew that Dollar Tree has the Dollar Giant in Canada, which management says has the potential for over 1000 stores. There is also the Deals chain, which is growing. It is much smaller than the peers as you mentioned and provided that the comps are solid I see no reason why Dollar Tree cannot keep expanding at a brisk clip.
2) The quantified income number is helpful.
3) Q1 was a tough quarter for most retailers and the comparison was off a 5.6 comp last year, so the 2 year stack was a 7.7 which is not horrible given the conditions. The commentary on the call indicated an acceleration of sales trends at the end of the quarter and the back half of the year has easier comparisons, so hopefully the company can generate a 3 or better comp. It just seems difficult for Dollar Tree to consistently generate meaningful margin expansion if they are producing 2 comps, but I agree with you that it seems likely that they will return to the 3 plus range.
Dollars Can Grow On Trees [View article]
Thanks for the informative article on Dollar Tree. I have a number of questions.
What gives you confidence that they can open up over 10,000 stores?
Do you have any income statistics on average income of a Dollar Tree shopper? I have tried to look for it and have not found it, but I am pretty sure it is higher than Dollar General and Family Dollar.
The ability for Dollar Tree to leverage SG&A in the last quarter with a 2.1 comp was impressive and generate 70 basis point of EBIT margin expansion. Do you feel that Dollar Tree could could consistently generate margin expansion if comps remain below 3?
I appreciate any insights you may have.
Can Autozone Keep Growing Its EPS 20% Every Year? [View article]
I respect your report, but I politefully disagree with some of your statements. The 2.5 Debt/Ebidtar ratio is not something that just management repeats. This is a credit rating agency metric and this is a consistent target. The 2.5 ratio has stayed about the same for years. The credit cris occured in 2008 and interest rates spiked and they had no problem raising debt. Now if this rose to about 3.2 then this would be a problem. Management targets the ratio and what the credit rating agencies seek. Autozone has not deviated from it. The interest coverage ratios are quite strong. The cash flow is more than enough to pay the interest expense. Advanced Auto Parts also cites their Debt/Ebidtar ratios.
Their peers also have a high portion of current liabilities to current assets. It is common in this business to target a high AP/inventory ratio to generate a large amount of cash flow and Autozone is one of the best and maximizing this metrics. They have a high level degree of liquidity and an immense amount of free cash flow. I have not seen a credit report that has ever mentioned an issue with liquidity. Companies with a BBB with a positive outlook with a stable credit profile in a healthy industry are generally not high bankruptcy risk companies.
As to their ability to grow 20% EPS annually every year I would say that is impossible. That would be hard for any company to do and Autozone is no exception. Autozone's sales were soft in Q1 and with weaker same store comps it is more likely that 15% EPS is possible. Achieving that on an annual basis is still difficult and is impressive. 20% EPS growth occurred in part due to macro tailwinds, which management acknowledged is in the past. The free cash flow yield is still quite high and they still have room to buy back about 8% of the float while keeping the Debt/Ebidtar at 2.5.
Continental Resources: Upside Outweighs The Risks [View article]
You are right that CLR has been on a hot streak. You might get a pullback because who knows with the markets, but even with the run up the stock does not look particularly expensive. The trailing P/E was 22.1 yesterday with the forward being roughly 14, and CLR has the potential to grow their EPS in the mid 30 range for the next 5 years. CLR also had a very solid fourth quarter.
Fastenal: A Great Success Story, But Should You Buy It Now? [View article]
I appreciate the thought and rigor in your analysis. You seem to have a keen insight on the business, so I wanted to get your take on margins. The pathway to profit has been a remarkable success and operating margins have really soared as you mentioned in your article. You seem to imply that Fastenal will have limited room to improve these operating margins in the future. Do you believe that 23% is a peak operating margin and that Fastenal has already created all the efficiencies in the business? Are do you feel there is any upside potential on the margin front?
Fastenal: A Great Success Story, But Should You Buy It Now? [View article]
Continental Resources: Upside Outweighs The Risks [View article]
According to the third quarter conference call, 6 operating rigs are in the SCOOP play and 19 are in the Bakken. Continental Resources had 721 employees at the end of the third quarter.
Continental Resources: Upside Outweighs The Risks [View article]
I think your point about Harold Hamm,CEO, owning a large equity stake is a very good one. He owns about 70% of the shares and I view this as a positive for the company, since it aligns management's and shareholders' interests quite well.
How long can they continue this strong growth trajectory will largely determine the success of this stock. The pieces seem to be in place for CLR to generate solid growth for years to come.
A Look At Union Pacific And Our $129 Valuation [View article]
Strong Capital Allocation Makes AutoZone A Buy [View article]
You are correct in that Autozone does have stores in Mexico whereas AAP and ORLY do not. 321 of their 5006 total stores are in Mexico at the end of the last fiscal year and it is a growing segment. Autozone added 42 stores in fiscal 2012 which is an increase of 15% annually.
Union Pacific Can Still Significantly Decrease The Operating Ratio [View article]
You make an interesting point regarding natural gas. Low natural gas prices has been a challenge to coal this year, but the shale play has been a big lift for UP and has helped mitigate the loss in coal volumes in 2012. The shale play presents volume opportunities for UP in the future.
Advance Auto Parts, 14% Moves And Weak Market Conditions [View article]
I understand your skepticism with Advanced Auto Parts excuse of weather as the source of poor performance. However,weather is the key to the weakness for all of the auto parts retailers this year. The unusually warm winter has created a strange cycle that is expected to normalize next year, so the comps industry wide should pick up a bit next year.
It is true that the SG&A expense reduction for Advanced Auto Parts was not dramatic in absolute terms. However, the increase in SG&A expense for Advanced Auto Parts has trailed Autozone and O'Reily considerably in the last two years. Advanced Auto Parts SG&A expense increased 1.1% in 2011 compared to an increase of 9.7% for Auotozone. In the first 3 quarter of fiscal 2012 Advanced Auto Parts SG&A expense increased 1.3% compared to an increase of 6.8% for Autozone for their full year fiscal 2012. It is hard to compete with your peers when they are outspending you dramatically.
I am not sure that the SG&A expense is the only source of Advanced Auto Parts problems. However, I do think that when your competitors are sharply outspending you it becomes harder to compete. That is why Autozone always talks about not cutting any SG&A spend that affects the customer. O'Reily has also commented that their is only so much more SG&A that they can effectively cut and they are far outspending Advanced Auto Parts.
Advance Auto Parts, 14% Moves And Weak Market Conditions [View article]
I do not think that geographical differences can fully explain the performance gap between Autozone and Advanced Auto Parts. Advanced Auto Parts has been reducing its costs to try to close the gap between its EBIT and its peers. Its EBIT was 9.9% in 2010 compared to 17.7% for Autozone. When Advanced Auto Parts curtailed its SG&A spending dramatically to its peers it risked top line growth. Autozone same store comp was 6.3% gain compared to a 1.9% gain for Advanced Auto Parts in fiscal 2011. Autozone also generated a 2.1% comp in their later quarter compared to a negative 1.8% for Advanced Auto Parts in their latest quarter. There has remained a substantial performance gap between Advanced Auto Parts and their peers as they have not spent as heavily in their store infrastructure as their competitors.
Double-Digit Returns For Dick's Sporting Goods [View article]