Medley #5
It's not you,
it's me.
By Manuel Maurício
March 11, 2022
One of the subscribers recently mentioned that he (or she – it was an anonymous comment) wished there was less time between the release of the chapters of my deep dive to Altri (and GreenVolt). I agree.
The thing is, GreenVolt is in a completely new industry to me. And from my experience with new industries (uranium, discount retailers, etc), I need, at least, an entire week completely focused on the research or else I’ll be feeling like I’m not doing my best.
I was going to write about GreenVolt (Altri’s spinoff) last week, but the fact that I’ve been recording the videos for the upcoming All in Stocks Investing Course made me rethink my strategy. I’ll be finishing the videos in the coming week and only then will I get deep into the weeds of a new industry.
Now, I was looking at the list of companies that I follow on a semi-regular basis and figured I should be updating some of them. The following notes are intended to be high-level overviews of each business. I’m sure I’ll be missing a lot of the details, but I’m going for the broad picture.
O'Reilly
O’Reily is probably my favorite company of all. Simple business, scale advantages, amazing economics, superb execution, excellent capital allocation.
Why I have never bought the stock still puzzles me.
The company posted results recently and they were f a n t a s t i c. Revenue grew by 15%…
…driven mostly by a spectacular Same-Store-Sales growth.
And the Earnings-Per-Share grew 32%!
All of this, together with flawless capital deployment, led to 64% return on invested capital. By the way, AutoZone is still getting higher Return on Invested Capital 😡.
One of the many positive points from the recent earnings call was the disclosure of a tweak to the strategy. O’Reilly is lowering prices to gain market share in the Do-it-For-Me market (the mechanics).
O’Reilly doesn’t usually compete on price but on service and inventory availability so the analysts on the call were a bit nervous thinking that they might be witnessing something that hasn’t happened before in the auto-parts industry – a price war. Fortunately, all of the big players have remained very rational over the years.
The management was quick to appease the analysts’ fears by clarifying that the discounts will be limited to specific products so that the professional customers don’t need to call other suppliers to get a second or third part at a lower price.
But the really interesting thing coming from the call was the acknowledgment from the CEO that they’re going after their weakest competitors, “Those that have struggled over the last couple of years“. Capitalism at its best: wait for a crisis that will leave many competitors in bad shape and apply the final blow.
Let’s update my conservative estimates for the next 5 years – which have been completely shattered so far: Growth of 8% going forward (4% store count + 4% Same Store Sales), net margin at 15%, and 6% share count reduction per year.
This would lead to Earnings-per-Share of $57. If we apply the historical multiple of 19x, that would mean a share price of $1.092 or a compounded annual rate of return of 10.3%. Seems pretty good, but I’m still not buying.
Five Below
Five Below is a low cost retailer with great unit economics. I wrote about it back in April of 2020 in the depths of the COVID-19 crash when the stock price was $84. It currently trades for $160.
The Same-Store-Sales growth suffered during 2020, but it surged to an amazing 30% in 2021…
… which, together with revenue coming from new stores, led to a record revenue of $2.8 billion.
At 44%, the company’s Return on Invested Capital is still magnificent.
From what I’ve heard on the recent earnings call, the management seems to think in the right way about capital allocation, mentioning that they want to reinvest the cash back into the business, but that all the tools of a good capital allocator – share buybacks included – are available to them.
The stock is currently trading at 32x earnings. As with many other great companies, this might prove to be cheap in hindsight, but I demand a higher margin of safety. As with O’Reilly, I would like to buy Five Below when something un-related to the business (or immaterial to the business prospects) scares investors, leading the stock price to plummet. When that will be, I have no idea.
Miquel Y Costas
Miquel y Costas is a gem from Spain. I wrote about it back in June 2020 when it was trading for €11.9. The current share price is €12.08, but in the meantime the company did a special stock distribution (similar to a stock split), so I don’t know how comparable these numbers are. On top of that, there were dividends.
The management has been making progress pivoting away from the tobacco paper into the industrial segment where it manufactures paper for car batteries, packaging solutions for the food industry, bibles, etc. It’s clear that the world is trying to reduce its dependency on single use plastics and shifting to paper. I like it that Miquel Y Costas is at the forefront of this effort.
But this was a question mark for me when I first wrote about the company. Would the industrial segment be as good as the tobacco business?
It turns out that, for now, the company has been able to scale this segment quite nicely…
… and the operating leverage is showing.
I’m surprised that they keep increasing their revenue coming from the tobacco segment, especially so because it has been driven by higher volumes. This suggests that the company is gaining market share in a dying industry. I like that.
All this excellence translates into a fairly good Return on Invested Capital.
Which, at a Price/Earnings ratio of 9x, combined which share buybacks, should lead to great returns for investors. I don’t even need to grab my calculator to understand that this stock is attractive.
Regarding the near term outlook though, the company has started feeling the impact of higher energy and pulp costs.
Given the fact that the company manufactures high value products (instead of regular paper) I expect it to be able to pass those higher costs to its customers. We can’t say for sure because the company doesn’t mention its cost-pass-through policy. Either way, I wouldn’t be surprised to see some margin pressure in the short term.
Although I recognize the quality of the business, the quality of the management team, the quality of the capital allocation strategy, and the attractiveness of the valuation, I’m not convinced yet. Don’t get me wrong, I believe that Miquel Y Costas has all the requirements for a good long-term investment. But I’m still not there yet. I guess this is a “it’s not you, it’s me” thing.
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