Thor Industries Stock Analysis

Over the past months I have received more than 10 emails from various investors about how Thor Industries is a great, cheap, value investment.

1 stock price tho

Source: CNN Money – THO

The first emails started coming in when the stock price fell from above $150 to around $120. Since then, the stock fell another 50% to the current $60. Ouch.

In this article I want to talk about this because it is an excellent example of how many value investors get trapped.

How value investors get trapped?

We have:

  • An extremely cyclical industry that makes the fundamentals look amazing at cycle peak

You would look and see amazing growth selling for a PE ratio of just 15 or lower as it was the case during 2018 when the earnings were $8.14 and the stock price was between $150 and $100.

2 thor fundamentals

Source: Morningstar

However, then reality struck. Earnings halved, revenues declined and the company took a lot of debt to buy an European RV produces at cycle peak.

They did make $1.6 billion in operating cash flows in the last 10 years, but they also spent $927 billion on acquisitions not including the last acquisition.

cash flows

The acquisition and positive RV environment in the US allowed for nice growth. Investors usually look at the past and think the same story will continue, but it doesn’t have to be so. In a highly cyclical industry things change fast. The company’s last quarter shows a loss and if there are more troubles or costs from the recent acquisition, the decline in sales continues, we could see negative earnings for 2019 which would not make this look like a bargain anymore.

3 second quarter

I think the same story happened with TATA Motors, when many saw it as cheap with a PE ratio of 7 and a high dividend yield.

4 tata motorst stock

The long term chart of TATA is similar to Thor’s. The only difference is that the exuberance with THO was much shorter.

5 thor stock price

On the chart, many just look at the drop from $150 to $60 and invest on the hope it will go back there. If you look at a chart when you invest, please also look that the stock was trading around $50 from 2014 to 2016 which doesn’t make it look like a bargain. I get probably 10 emails per week about how this stock is cheap because it fell 50%, nobody sees that it went up 200% prior to that. Another trap unexperienced value investors fall into.

Is Thor a good investment now?

I recently listened to an interview with Howard Marks and he put is very simply. When investing you have to look at where we are in the cycle now. Nobody can predict the future but you can see where we are now.

The first thing is to look at inventories, and those are high with dealers.

6 inventory correction

Let’s take a look at the industry.

8 industry

Even if there is no sign of a recession, just the small increase in interest rates will lower sales by 20%. If there is an economic slowdown or if interest rates increase further, I would expect sales to drop another 20% per year for a few years. Interest rates increased from 4% to 5% and already sales dropped.

7 interest rates

Source: FRED

Plus, an RV is really a luxury purchase, one that can be postponed easily and when the market contracts there is also a lot of inventory to be dealt with. RV dealers go bust, fire sales can make the environment very tough. From 2006 to 2009 sales dropped 60% for the industry. I think we are now in 2007 for the RV cycle, the peak has passed and the growth turned into a decline. Those who wanted an RV, probably bought one in the last 5 years as the conditions were perfect, long lasting economic growth, low interest rates on investments, high stock levels, a lot of money etc. It is really a discretionary purchase.

Then, they made a big acquisition in Europe at cycle peak too. The environment isn’t growing, there is a lot of competition from glamping or from mobile homes crated by the camping sites and I don’t see a positive for RV in Europe in the long term.

9 europe

For example, German tourists used to buy an RV and go to Croatia for the summer. However, now, RV space is replaced with small homes already there. It is more convenient, similar experience and you don’t have to do a thing.

10 camps

On the bigger picture you can see how more than half of the camping site has been closed with these kind of homes.

11 camsp

So, we are in a place where the trends in the industry in the US are negative but probably still above cycle average. The average in the US will be around 300k units sold, still 40% down from where we are now.

In Europe the average will be 160k and declining but we are now at 200k. Forget about growth in Europe.

In the US, the management discusses 77 million households camping and how they should all buy an RV.

12 promise

But they forget that 500k units per year sold quickly brings you to 5 million that saturates the market soon as not all campers want to own an RV.

Plus, consumer confidence is usually at its peak in the late part of the cycle. When it declines, RV sales erode.

13 consumer confidence

When RV sales erode you need to have strong financials and no debt. THO didn’t have any up till the Hymer acquisition.

14 debt

Now the company has about $3 billion in debt which should cost them $150 million in interest per year. If I take 2015 as the average cycle year, the cash flows have been $200 million which makes it just $50 million now.

15 average cycle

Conclusion

I don’t see growth in Europe as the market is changing fast. Trust me, Europe is not the place to go around with large RVs and travel.

The debt is a certainty, there is high risk of firing back and then things get ugly as those are getting now.

What would be an average cycle price value? Let’s say $3 to $5 per share in free cash flows leading to a valuation between $30 and $50 from a value perspective. Want to buy it with a margin of safety? Then we are looking at a price below $20. Am I crazy? It was trading there in 2011, 2009 and 2003.

The conclusion – look at the long term average in the cycle for the company, this will give you a good indication o the value and the investment potential with a margin of safety. Remember, where are we in the cycle now?

Receive a weekly overview of published articles, videos and research reports straight to your inbox for boring long-term investing knowledge!

Michael Burry’s Stock – CorePoint Lodging REIT Stock Analysis

Introduction.

CorePoint Lodging – Business analysis

Cash flow calculations

Selling properties to unlock value

Stock catalysts already there

The risks

Investment strategy

Introduction

The CorePoint Lodging REIT (CPLG) is a company that got the eye of the public when dr. Michael Burry, famous for being one of the big shorts in the movie The Big Short disclosed CPLG as his largest position.

1 michael burry

CPLG is a real estate investment trust owning hotels that belong to the La Quinta brand. It is a spin-off from the La Quinta company and the stock hasn’t been doing well since then.

2 cplg stock price

Source: CNN Money CPLG

I have been reading a bit about the company because I find it interesting to dig into the reasons of why a person like Michael Burry would invest in a company like this. Since his exposure got disclosed the stock went up from the low teens to the mid teens but after the last earnings report it tumbled again.

3 cplg 6 months chart

Let’s see whether there is value and a good investing opportunity or at least why would Michael own it.

CorePoint Lodging – Business analysis

The hospitality industry is a complex one where it all goes around room values, revenue per available room (REVpar), occupancy etc. But at the end, for investors, it all boils down to cash flows, like with everything else.

CPLG has 40,115 rooms, a market capitalization of $665 million and debt of $1 billion. When we add everything up and divide by the number of rooms the value per room is $41,505 including the debt and market capitalization. ADR is $90 and REVpar is $59 due to the occupancy of 66%.

4 revpar

Source: CPLG

On the other hand, Chatham Lodging Trust (NYSE: CLDT) has a market cap of $900 million with $585 million in debt. RevPar $134, so double CPLG’s but it has only 6000 rooms.

5 chaltam

So, the value per room is $250k for Chatham.

Apple Hospitality REIT (APLE) has a market cap of $3.65 billion, debt of $1.4 billion and 30,000 rooms. The value of a room is $166k and RevPar is $105.

6 aple

Source: APLE

However, it all boils down to times funds from operations, Apple’s is $400 million, Chatham $130 million with a bit more of debt, so the $900 million market cap.

$165 million for CPLG where the market cap is $665 million. So, it is cheap from this perspective.

The point is that it will not go bust as interest costs are $50 million, it will hardly go lower but the upside is high, plus you are buying a hotel room for $40k.

In private hands, with RevPar of $59, should give $21k in revenue per room per year. $40k for Apple and $50 for Chatham. This means CPLG has room for improvement and higher margins or the margins are much lower.

7 portfolio segmentation

The core part of their business brings 94% of the EBITDA while 24% of the hotels bring in the rest. By disposing or changing the non-core hotels, CPLG can improve its ratios and make itself look better. Plus get some money to do buybacks or to pay down debt.

Cash flow calculations

This is the guidance for 2019:

9 ebitdare 2019

– 8% to 9% of revenue goes for capital expenditures,

– 2.5% + Libor = 5.5% interest rate = $60 million in interest payments.

$180 million in EBITDA minus $77 million in capex for 2019, minus $60 million in interest rates should give me cash flows of $43 million that on a market cap of $700 million is a return of 6.1% which is in line with the dividend yield, or just below it. The buybacks of another $50 million make this look attractive but this is not a business yielding 15% as the company without asset sales will not have an extra $50 million to do buybacks. However, value can be unlocked by selling the properties.

Selling properties to unlock value

The asset value is supposed to be $2.4 billion according to HVS. This is also what is on the books. Given the current market capitalization, there you have already a 50% discount. You are practically buying hotels across America with a 50% discount. Book value of assets $2.4 billion, debt $1 billion, value = $1.4 billion. Market cap is $700 million.

10 asset value

Source: CPLG – prospectus

I went to look at the list of what they could sell and found the following.

11 hotels

Source: CPLG

On top of the discount of 50% there might be more hidden value. For example, their hotel in Sheboygan is valued at $828k and was build in 1975, refurbished in 2004. However, with 73 rooms with a starting price of $75 I find it hard to believe the value of it is only $800k. That would be $11k per room. So, there might be a few tens of millions in hidden assets lying around in these properties, probably just the land will be worth as much.

12 sheboygan

Source: Google

Or, if I go to Salt Lake City, they own 3 hotels where the book value goes from $2.5 million to $8.4 million on a similar room number (100 to 122) and the price of the rooms is also close.

6 la quinta

One of the hotels was built in 1997 while the other two are 20 years older, therefore the higher value. We must also not forget that many hotels were refurbished in the last two years that should also increase the book value.

The point is that if the management manages to unlock value, transform the potentially good properties and get rid of the bad for a good price, one could expect nice things to come from CPLG. If someone pays $2.4 billion for all the portfolio, that is a market cap of $1.4 billion or double the current level.

However, without going into a detailed value analysis of all the hotels, there are some potential catalysts lying in plain sight.

Stock catalysts already there

Since the La Quinta merger with Wyndham, the customer loyalty base will expand fourfold which could increase revenue and occupancy.

13 improvements

So, if CPLG improves revenues or EBITDA by just $20 million, those $20 million would improve cash flows from $43 million to $63 million, allow for a higher dividend or buybacks and therefore for a much higher stock price. Given the book value, there is a margin of safety with high upside situation here. That is in my opinion what dr. Burry has been buying.

15 customer base

Plus, it is a spin-off and if not performing immediately well, most previous owners ditch it. Only one analyst has been at the last conference call, so nobody is following what is going on which might make it go under the radar. If and when cash flows improve, it will get recognized.

The risks

The main risk for CPLG is an economic slowdown. Less travel, less business would lead to lower revenue and lower cash flows. However, higher margins offer some kind of resilience in case of a recession.

14 margins

But, CPLG should get rid of the low margin hotels as those would produce losses in case of a slowdown.

I managed to find LaQuinta’s annual report and in their risk description they tell how revenues declined 17% in 2009 and EBITDA 30%.

16 la quinta

As CPLG is a different business, a decline of 17% in revenue should hit it hard as the EBITDA would be gone practically.

Something that the investing community might have missed is the government shutdown that will certainly impact hotel revenue when those disclose them in Q1 2019.

However, as long as the situation with the economy remains as is, we can expect stability and slow managerial improvements for CPLG. The question is what will come first, recession or value unlocking?

The debt is always a risk but you never know how will the current leveraged situation unfold over the long term. The FED has paused with interest rate hikes, we might see cuts which makes it impossible to predict. It is unlikely the government will let half of America go bust. Too big to fail all over again…

Investment strategy

I am not going to invest in CPLG now as I look for a 15% return and CPLG offers a 7% return from the cash flows. When they improve their business, the cash flow yield might go to 10%, which would probably double the stock price, but stock price moves, especially short-term ones are not what I invest in.

From a dr. Burry perspective, this will probably not go bust, in case of a recession it will survive where the dividend will probably be cut and that is it. The value is there and over the next decade it will be unlocked given the management’s focus and freedom to do whatever after the spinoff. It is a value investment where over the long term you will hardly lose money, you are exposed to the American economy and if the value unlocking happens fast, you might also see higher stock prices in the next 12 months giving you great returns. If not, you still get the 6 or 7% yield.

To conclude, CPLG is a good investment offering value and a margin of safety with potential upside. It is a dull business so a perfect fit for value investors. See how it fits your portfolio, I am going to put it on my watch list to see where it goes and compare to other investments out there. If it goes to $20 during this year, well good for dr. Burry.

Receive a weekly overview of published articles, videos and research reports straight to your inbox for boring long-term investing knowledge!

Alacer Gold Stock Analysis – Why I bought and why I sold

 

  • I sold Alacer because it is not a value play anymore, it is more of an exploration play now.
  • What the market didn’t see last year was positive growth, what the market is missing now, might be a negative in the form of lower future ore grades.
  • However, there are still 3 catalysts that could push the stock price higher; a dividend, more exploration success at Aldrich and, as always, higher gold prices.

In 2018 I did a comprehensive analysis of gold miners, I spent more than a month on them and deeply researched about 40. I wasn’t pleased with what I found but Alacer Gold (ALIAF) (ALACF) looked good. We can say it was my favorite gold miner in 2018 as it was not just a bet on gold, but a value play with a nice business proposition thanks to the Copler sulfide project.

Since then things have changed, most significantly the stock price increased as the market noticed what ALIAF has been doing.

alacer.PNG
As the exploration results led to a new resource that will feed the old oxide plant, the management increased guidance and said ALIAF could become a 300k to 400k ounces producer.

alacer management

Source: SA Transcript

However, the path towards such high production levels is long and the ore grades of the sulfide ore aren’t really indicative of higher, sustainable future production. But this doesn’t mean there are no catalysts for ALIAF or that it now is a bad investment. The catalysts that could push it higher in 2019 are a dividend or buybacks, new successful exploration results and higher gold prices.

For me, when the stock price increases and reaches my intrinsic value, the risks are higher and the rewards lower so I prefer to find other, less risky value investments with a margin of safety.

You can hear more about why I sold in my video discussion.

0:43 My Alacer Ownership

1:57 Why did I buy Alacer

3:35 Sum of parts value

4:28 What changed recently for ASR

5:28 Stockpile and ore grade difference

6:33 Ardich expansion and exploration

7:30 Cash flow model

7:58 3 future catalysts

Receive a weekly overview of published articles, videos and research reports straight to your inbox for boring long-term investing knowledge!

ADM – A dividend stock to own for the long term

Contents

ADM company overview

Investment strategy

A few notes from the last conference call

My personal opinion

I analysed Bunge, as it seems like the cheaper stock between the two, but ADM looks like a better business.

ADM company overview

pastedGraphic.png

Source: ADM investor presentation

Unlike Bunge, they grow by acquiring smaller players and including them into their business model and possibly scaling the smaller acquisition.

pastedGraphic_1.png

Source: ADM investor presentation

Operating profits are stable.

pastedGraphic_2.png

Source: ADM investor presentation

And earnings per share too.

pastedGraphic_3.png

Source: ADM investor presentation

The return on capital is 300 basis points (3%) higher than Bunge’s and 200 basis points above their cost of capital.

pastedGraphic_4.png

Source: ADM investor presentation

They plan to increase the dividend pay-out ratio by 30% in the medium-term range.

pastedGraphic_5.png

Source: ADM investor presentation

The increased dividend payout should lead to constantly higher dividend yields. Thus, what is now 3.24%, could quickly become 5%. 

pastedGraphic_6.png

Source: ADM investor presentation

The last dividend is their 349th consecutive quarterly payment and an uninterrupted record of 87 years.

Net debt is smaller than Bunge’s and the available liquidity allows for flexibility. 

pastedGraphic_7.png

Source: ADM investor presentation

Investment strategy

If ADM continues to grow as it did in the past given that it has the foundations to do so, plus the acquisition potential, I would assume its operating profits could reach $5 billion per year over the next 10 years.

pastedGraphic_8.png

Source: ADM investor presentation

This also means that distributions to shareholders would be 50% higher than in the last 10 years where the dividends paid out were $5.5 billion and buybacks $6.1 billion. Thus, over the next 10 years, allowing for the normal cyclicality in the food sector, I would say ADM could return at least $15 billion to shareholders. That implies a 6.5% dividend and buyback yield. 

Also, if profits increase 50%, we could estimate the stock price to increase accordingly. So, in 10 years the stock price will probably reach $60 at some point. This adds another 4.1% yearly yield and makes ADM a probably double digit investment over the long term. 

If food prices increase significantly, processing margins improve, there could be exuberant periods like it was the case in 2007, 2014 and 2018.

pastedGraphic_9.png

The total shareholders equity is $18 billion on a $23 billion market cap giving some margin of safety, but the accumulated depreciation is $15 billion. We could assume that some things can still be used even if the accounting value is zero. The replacing value could be much higher than the $10 billion carried on the balance sheet. 

pastedGraphic_10.png

Source: ADM Morningstar

There is also the 24.9% stake in Wilmar, a $15 billion company traded in Singapore. The value there is $3.75 billion. 

A few notes from the last conference call

The plan is to save $1 billion from efficiency improvements and digitalization. I remember when I worked for Dow Chemical, there were all these little projects and I can tell you those improved small efficiencies cumulate over time. I see Dow did manage to improve margins over the last decade, the plan is that ADM could save $1 billion.

They expect higher interest payments as they are investing now for the long term, something Bunge can’t do as it has to deal with its issues which makes it another advantage for ADM.

In 2019 they will complete the acquisition of a French animal feed business, Neovia for $1.8 billion in cash. Neovia’s target was to reach $230 million of EBITDA by 2025, perhaps they will reach it sooner now.

ADM is a growth story with more than $7 billion in growth investments over the last five years including key investment like WILD for Taste ($3 billion), Biopolis for Health & Wellness, Neovia for Animal Nutrition, Algar in South America and Chamtor in Western Europe as well as other bolt-on additions and organic investments

My personal opinion

I target an investing business return of 15%. ADM’s average earnings and cash flows point to a 10% investing return so I have to be patient and put this on the watch list. You never know what can happen, but around $30, this might be a very interesting investment. For now, it looks like a good one. 

Also, as ADM’s CEO said, low interest rates allow for high investments that leads to high competition and food oversupply, consequently leading to low margins for processors. ADM is doing fine in this environment, if the environment changes over the next 10 years, ADM might do even better so something to keep in mind. We have been having 5 years now of bumper crops thanks to good weather globally. 

On $3.4 billion in operating profits, $1 billion in capex and about $350 million in interest expense I get to cash flows of around $2 billion. On a $23 billion market cap, that is a 9% return. Given the possible future growth of 4% per year as demand for food grows, I would look at this and compare to my other holdings at 12%. So, ADM’s market cap should be around $16.5 billion for me. That is another 30% down to $30 for the stock price. It is highly unlikely that it ever gets that low, but you never know. Let’s put this on the watch list. If you are happy with the exposure to food, like 10% per year, ADM looks like a stable and shareholder rewarding option. 

Less aggressive investors could wait for opportunities below $40 but anything below $45 seems like a good buy for 98% of investors. 

pastedGraphic_11.png

Source: ADM investor presentation

Earnings per share are $3.19, we can assume growth of 4% over the long term and a terminal value at a PE ratio of 12.