Category: Columns

Earnings Check-Up $ABM

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In my prior ABM post on June 2nd, I made the call the ABM was sandbagging guidance and they would likely beat and raise. Part of that thesis was (i) the company’s sales were still down, but likely going to improve significantly and (ii) its margins would be much higher than they forecasted and (iii) since we already had Q1, it gave us lots of clues for the rest of the year.

Lo and Behold:

Per the conference call:

Enhanced Clean, our proprietary and trusted protocol for cleaning and disinfecting spaces was an important contributor to our second quarter results as well.

…our clients in both the office and manufacturing markets indicate they plan to continue to incorporate disinfection into their cleaning protocols as they prepare for the return of staff and workers to their offices and industrial facilities. In fact, given the heightened concerns around pandemic risk and greater awareness of public health issues in general, we expect these specialized services to remain in demand and to become part of our client contracts.

….school districts have accelerated the return to in-person learning. Our conversations with school district professionals and educational institutions indicate that with the full-time return to school expected this fall, cleaning and disinfecting will be a priority throughout the school year

Recall, this is high margin work for ABM. I don’t think it will last forever, but like my previous posts on Dollar General and Big Lots, ABM has more cash than ever. Typically they redeploy that cash in acquisitions. So we now have a free option. Oh yeah, they also straight up alluded to that in the call:

Additionally, we continue to explore acquisition opportunities where as a strategic buyer, we would be able to drive meaningful revenue and operating synergies.

Last thing I’ll say on the margin front is to call out their Technical Solutions segment. This is their highest margin segment and guess what?

And then the last thing, and you mentioned it is, technical solutions, we have a backlog of over $250 million in business, our strongest ever.

…And so we’re excited about that to actually turn the work.

So I think you’re going to see revenues go up in the second half. You’re going to see disinfection strong. You’ll see, again, the mitigation on the labor side, but you’re also going to see ATFs sure enough as well. So I think we feel really good about that. And we’ll see where it goes into ’22 as we get closer to that. And again, November 1 starts our ’22. And I think that’s still going to be at the time where people are returning to work. And so I think we’ll have a good start to ’22 as well

Sounds to me like everything is going well.

Bottom line: I think there’s even more upside to the EPS guide, frankly. There are some puts and takes, but I continue to like the outlook.

Again, a lot of my commentary was on mgmt sandbagging, but at $50, we have a ~10% FCF yield stock, ex cash, for something that isn’t overly levered and a relatively good business.

Earnings Check-Ups $BIG

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Big Lots reported a monster quarter. It’s been awhile since I wrote about it back in December, and the stock is up nicely, so I wanted to quickly review the quarter and talk about the thing I think is most important for Big Lots going forward.

Comps were +11.3% vs. consensus +6.7%, margins beat on both gross margins and operating margins… and EPS beat coming in at $2.62 vs. consensus at $1.72. Q2 guidance was also ahead of consensus.

So, not much to be upset about. Here are some other tidbits from the press release:

  • Furniture business, which I highlighted as a killer move (almost prescient coming into COVID), is “continuing its rapid progress toward becoming an established $1 billion brand”
    • Broyhill brand drove $225MM in sales alone this Q – not bad for an asset they paid $15.8MM for!
    • Seasonal category also comped +51%, driven by outdoor furniture
  • Food & consumables comped down hard, at -15%, but that’s expected as we lap the COVID stock-piling bump from last year
  • They now have 21 million rewards members, adding 2 million in Q1.
    • This goes back to my point when I wrote up BIG – the market is implying BIG will give back all of its gained customers, but at the time was saying software was going to retain all of its customers and not slow down in growth.
    • Is that really fair? Sure, retail isn’t that sticky, but all of the customers gone?
  • Next Q, they think Y/Y comps will be down low double-digits, but that’s +20% on a two-year stack
  • Share count is down 8% Y/Y as the Big Lots has been buying back stock
  • BIG now has $613MM in cash and $32MM in debt

So here’s what I still like about Big Lots: That cash opens significant optionality. If the reason why you didn’t own retail before is that they couldn’t keep up with Amazon, does this huge cash influx not help narrow the gap? Do you ignore that they are clearly pivoting the stores to be anchored by things like branded furniture, which historically customers want to touch and feel? Do you ignore that they are expanded same-day delivery or buy online, pick up in store?

On that note, management said on the call: “Our recent omnichannel initiatives to remove purchase and fulfillment friction such as buy online, pick up in store, curbside pickup, ship from store and same-day delivery with Instacart and pickup have been very successful and drove around 60% of our demand fulfillment.”

They have 27% of their market cap in cash, almost no debt, and as a reminder from my original post, a lot of store leases expirations coming up which can allow them to pivot locations if they wanted. 

As a reminder, BIG typically has $50MM of cash on hand, so they now have over 10x that amount…

With BIG trading around ~$65/share, you’re buying the company for 7.6x earnings, ex-cash. Not bad for one that actually earns a decent return on capital / equity.

Earnings Check-Ups $SKY $CVCO $ITRN

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Q1 2021 earnings are about wrapped up so I wanted to check in on a couple names. Funny enough, the stocks that have performed the worst are the ones you’re most keen on seeing results from. Probably stems from the feeling of “what does everyone know that I don’t?” which is, in my view, always the wrong instinct. As a reminder, you can check on the performance of the names I write up vs. the Russell 3000 here

Anyway, three names I’ve written on in the past and have underperformed deserve some commentary, Ituran, Skyline Champion and Cavco (with the latter two being related in the same industry). Cavco reports tomorrow, May 27th, but based on Skyline’s results, I also expect a really strong result there and wanted to get this note out ahead of time. 

Ituran

Ituran posted good results with EBITDA +12% Y/Y and ahead of estimates. They are still being impacted by the OEM segment, but the decline is starting to level out as OEM sales in South America start to recover (reminder to go back to my original post – new sales of autos in Brazil were down 99% during COVID. That hurts OEM sales for Ituran obviously…).

The real outperformer was after-market, the bread and butter of Ituran. They gained 25k subscribers, more than the 15-20k they guide to and accelerated from the +21k adds they did in Q4. A recovery here is helping Ituran get almost back to peak subscribers pre-COVID. After-market is also higher margin business.  

The moral of the story is that results were good and the stock is still cheap. You can sort of see why I like the business – It is really high margin and will likely continue to churn out cash (management continues to paydown debt, but even so, you’re buying an 8%-10% FCF yield (using conservative estimates) business at net debt zero).

Couple other things to call out:

  • They called out growing more after-market in the US, which was never part of my base case but like to hear it. They have a nice call out in their call about putting profits over no / negative margin growth, which is actually a good snapshot of management’s style.
  • Israel had highest car sales ever, Brazil is still recovering but they are gaining share and it’ll come back
  • They took out some incremental costs during COVID they don’t plan on bringing back – so check out the EBITDA margins the past 2 quarters compared to Q1’20 – its about 300bps higher.
  • They are entering Mexico with a bit more gusto now, positive for the growth story

Skyline & Cavco

Ok Ituran had a nice Q – Skyline had a monster quarter. Please see the original write-up here. EBITDA for the manufactured housing player increased 155% to $51.2MM vs. $33MM estimate from consensus. There was an extra week, but still, sales were up 49% Y/Y. Margins expanded 470bps, likely from fixed cost absorption, in a period of time when investors were (overly) focused on input inflation. This type of margin expansion is insane when you think PY margins were 6.7% of sales…

They acquired ScotBilt homes, but even so, their backlog is ginormous, as I tweeted below. This points to continued fixed cost absorption and pricing power. 

Recall, one thing I really like about manufactured housing is earnings growth can increase a lot with very limited capital. In this case, EBITDA for the the full fiscal year 2020 (ends 3/31) increased to $135MM from $114MM, but capex was down to $8MM from $15MM.

On the inflation comment, management had an interesting comment about how they can take advantage of supply and supply chain issues in housing:

“Inflationary and interest rate pressures will only hasten the transition away from antiquated site-built methods currently performed today to more modern production practices. Therefore, we are focused on expanding our capacity and investing in automation to enhance our processes.”

Skyline now has $263MM in cash, debt of about $40MM. Lots of flexibility left for this name.

Anyway, Cavco is tomorrow – look forward to that!

I was a Guest on a Podcast: We Discuss Levered Equities, $CVEO, Housing ($SKY and $CVCO), and More!

Reading Time: < 1 minuteI had the pleasure of joining my good friend, Ben, on his podcast. This was the third time I’ve joined him, but this conversation spanned such a wide array of topics that my head was spinning with where I want to research new opportunities. It just shows how good of a host he is, being able to navigate the conversation through these topics.

Please check out the link below for more info and find the podcast here:

– Apple
– Spotify

New pod out with Diligent Dollar – $CVEO, $CVCO, $SKY and more

Forced Seller + 25% FCF Yield = Interesting Civeo Stock $CVEO

Reading Time: 4 minutesToday will be a quick idea on Civeo. The bottom line is that CVEO stock trades at ~25% FCF yield, is only ~2.5x levered, and there is a “forced” seller I think is driving down the stock.

Ok – “forced” seller is kinda click bait. The company completed an acquisition a few years ago, giving the seller some stock as consideration. That seller is now blasting out nearly every day, which I get into below.

Background

Civeo provides hospitality services to commodity industries. So think about remote locations where companies are mining precious metals and pumping oil and gas, Civeo provides lodging, food service, and housekeeping for those companies.

Commodity prices generally have been completely bombed for several years now, particularly where the company participates. This includes oil, liquified natural gas, met coal (the coal used to make steel), and iron ore, though demand has still been OK (as I noted in this oil post). The nature of the business also means they typically are in highly commodity driven areas – Australia (given their met coal and other metals help serve the China / Asia demand), Canada (oil sands) and the US E&Ps.

As you can see, the stock has not performed too well in this environment.

The company currently operates around 28 lodges covering 30,000 rooms. They also own a fleet of modular assets that are typically used for short-term stays in the US and Canada.

“Forced Seller”

ANYWAY –  if you were to look at the company’s insider transactions, it would look UGLY. The Torgerson’s have sold 3% of CVEO stock (almost $7MM) in near-daily blocks since August 2020.

That is until you realize the Torgerson family were the sellers of a company Civeo bought, Noralta Lodge, for $165MM. Of the total purchase price, $69MM was issued in equity to the holders of Noralta.

This was a little over 3 years ago at this point, so no surprise following a COVID scare + some time since you’ve sold your business that’d you would just want to move on.

The Torgersons still own 11% of the company, so there is a long way to go, but I can’t call the end of this technical factor.

Nearly 25% FCF Yield

The seller is obviously not selling because the value of the CVEO stock looks too rich.

On the latest call, Civeo management guided to $55MM of FCF. This compares to a market cap of ~$230MM. Previously, the company used FCF to delever (after levering up for Noralta), but now that it is at 2.5x, there is a bit more flexibility. As I’ve talked about, I like these busted balance sheet names as they start to improve, but are still in the penalty box of equity holders.

When a stock trades at 25% FCF yield, the market is saying there is high bankruptcy risk. I don’t think that’s the case here. The term loan and revolver mature in 2023 and they generate plenty of FCF to keep lenders happy.

Fortunately, the COVID snapback has caused commodities to rip. If they stay elevated, who knows, but I think it will at least help the company extend contracts on existing lodging facilities and maybe sign some new ones (that will also help any concerns with credit facilities, but again – I’m not concerned there).

There is a bit of a spat going on between China and Australia over trade, but I think it’ll be sorted out eventually. Either way – this was included in mgmt’s FCF guidance. Secondly, the company announced it renewed several key Australian contracts on its latest call.

Back to the FCF yield guidance – there should be pretty good visibility. You have a set number of rooms available on site, you talk to your customers about need and what they are planning for the year, and you have a general gauge of commodities (are they up or down, is demand up or down) so you can try to win more business. This makes me believe FCF guide is a decent one to bank on.

Last thing I’ll say, the past 3 years the company actually generated $63MM of FCF on average. There was some working capital movements there, but it doesn’t seem unreasonable at all to me.

M&A Target (Seriously)

Using “M&A target” as an investment thesis is weak… yet here we are.

Typically its weak because its like, yeah sure… in SOME scenarios, this COULD get acquired (especially in a deal hungry private equity market), but any time I hear that, it doesn’t come to fruition.

In this case, Target Hospitality received a buyout offer from TDR Capital. Now, it was apparently a really cheap price of $1.50 and now Target Hospitality is trading at $3.40. Target Hospitality currently trades at 7.25x ’21 EBITDA vs. 6.0x for CVEO. HOWEVER, Target is also pretty levered still at 5x EBITDA vs. 2.5x for CVEO. Their cash flow has also been much less consistent. 

I also think the capital markets are supportive and perhaps this company would be better suited as a private company, rather than a $230MM public company. Just saying.