Category: Earnings Recap

Earnings Check-in: $STRT Some things you think are priced-in…. are not

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Strattec just reported FQ1’22 with sales of $100MM vs. $126MM PY and basically break-even on the net income line vs. $8MM PY. The stock is down ~7% on the news.

I am a bit surprised this wouldn’t be priced in more pre-earnings, but I get it: it is a microcap and actually seeing the poor results may be stark realization of what is going on.

As I mentioned in my first post,  as well as American Axle, investors are stepping out of the way of any of these names due to the semiconductor shortage that is causing auto OEMs to shutdown plants temporarily.

Here’s the company’s reasoning for the results and it is obvious:

Sales to Stellantis / Fiat Chrysler Automobiles (FCA) and General Motors Company in the current year quarter decreased over the same period in the prior year quarter due primarily to lower vehicle production volumes for which we supply components due to the continuing impact of the global semiconductor chip shortage.  Sales to the Ford Motor Company in the current quarter increased primarily due to the increased content on the F-150 pick-up truck for which we supply components. Tier 1 Customers and Commercial and Other OEM Customers were down in the current year quarter compared to the prior year quarter due to lower production vehicle volumes relating to the semiconductor chip shortage referenced above

Short-term, results will be ugly! Long-term, this bodes well for an elongated up cycle.

The reason why used car prices continue to make new highs is simply because people can’t get new cars. As new cars are continuously delayed, the existing fleet will continue to age, resulting in a large restocking cycle down the road of new cars. It isn’t that people don’t want cars – it is that they can’t get them. I’d much rather have that alternative than the latter.

Case in point, check out Lithia Motors inventory numbers lately and look how limited new vehicle inventory is (and used for that matter). They typically have 77 days supply of new cars, but instead now just have 24 days! 

Long-run, I still think Strattec stock is going for <3.5x normalized EBITDA, which is not too bad!

Earnings Check-in: Don’t Miss the Forest for the Trees $LGIH

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I last did a “don’t miss the forest for the trees” post on Big Lots. That company went on to rally from when I posted it (not because of me, but because the reaction was way too negative). Unfortunately, supply chain concerns have created new pressures on BIG. In a similar vein, supply concerns are now pressuring LGIH stock, but I remain unfazed and take comfort in the long-term story.

LGIH just posted September home closings were 793 vs. 811 last year, which is a miss for a company “growth” company and I believe this is below expectations. They didn’t report earnings, but investors closely watch these reports for signals of how the quarter will shape up.

We’ve seen other builders also lower their guidance already:

  • Pulte (PHM) lowered closings 6%
  • DR Horton (DHI) lowered closings 9%, but raised GM target, so net / net EPS impact was margins
  • Lennar (LEN) lowered closings 5%
  • KB Homes missed closings by 7%
  • Hovnanian just lowered guidance for closings and lowered EBITDA expectations (see yellow line below).

So clearly the homebuilders are all aligned here.

But you need to understand why they are all guiding down: tight supply. To me, this firms the thesis.

LGIH is a largely spec builder at really attractive price points. While they are selling lots very quickly and now need to reinvest, I am comfortable that this model will continue to do very well in the long run. Absorptions are still running at 7.7 (compared to average pace of 6.5) so again, this isn’t really a demand issue, but more so a supply problem. I like it when demand outstrips supply.

Interest rates have also increased modestly, so can’t help but think that is pressuring the stock. That could have a severe impact on the price, but again, I’d likely be unfazed given the long-run story here.

At ~8x forward PE and 2x TBV, I also think valuation is undemanding (DHI trades at 1.6x TBV).

Earnings Check-in: ABM Stock Performance is Perplexing $ABM

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This update will be brief, but I wanted to highlight that ABM recently reported last week, following its M&A announcement that I covered in this note.

When I first wrote about ABM stock, I said (i) guidance was way too low, and I expect a lift in guidance across the board (ii) there’s upside optionality from doing a large acquisition and (iii) the stock is cheap.

If you had told me that ABM would go on to raise EPS guidance TWICE and announce an $830MM accretive-day-one deal, yet ABM stock would be little changed, I’d be SHOCKED. The stock is actually down about 6% since I wrote about it…

When ABM reported, they increased EPS guide now to $3.5 at mid-point. This is now at the high range of the previously stated EPS guide.

Not to brag, but this is exactly where I thought it should be, which you can see in the original table I posted:


Why the Muted Reaction?

I struggle to believe this was “priced in” to ABM stock when I first wrote about it, I just think sustainability of earnings is being questioned.  However, management actually noted the current high margin environment will likely persist for even longer than I thought:

Overall, demand for ABM’s higher-margin virus protection services remained elevated in the quarter, underscoring ongoing client concerns regarding cleaning and disinfection of their facilities. As anticipated, demand for virus protection eased slightly in the third quarter compared to the second quarter of fiscal 2021, but remained well above pre-pandemic levels. The emergence of the Delta variant and rising COVID-19 cases nationally have gained heightened interest in the need for disinfection prevention measures, particularly in high-traffic areas. As we look forward to 2022 and beyond, we believe that virus protection services will remain a contributor to our overall revenue as disinfection becomes a standard service protocol in facility maintenance programs

….So I think it’s still hard for us to pin down a formal long-term margin. We’re looking forward to giving you full year guidance in the next 3 months, and then that will give you the insight for the next year. But look, we’re going to say what we’ve continued to say throughout, which is the 2 areas for elevated margins are in disinfecting and labor arbitrage. And we believe we will permanently keep portions of that. As we restaff these buildings, we believe we’re going to be able to do it more efficiently, and we’ll capture some savings. Again, it’s still too early to figure out how much.

And then the disinfecting, we see like maybe 2 quarters ago, there was — or maybe even a quarter ago, there was no Delta variant, right? So like I think this is going to continue to evolve. And we’ve all just said it even anecdotally. It’s just… I don’t think facility managers or landlords or principals of schools, I don’t think anyone thinks it’s responsible to discontinue disinfection services, especially in high-touch areas. So that’s going to continue, too. So we believe we will continue to be elevated, but give us until next quarter when we do full year guidance to kind of give you that year outlook.


So again, I go back to the original pitch. I’m not necessarily expecting this work to last forever, but here’s what ABM will do (and basically already did):

  • they’ll generate a ton of FCF (about 11% of market cap by my math)
  • they will use cash first to pay down debt from the Able acquisition
  • Once they are in a comfortable range, they’ll buy something else
  • Rinse & Repeat

This is what compounders do, it’s just a bit frustrating when this compounder gets no love.


I think the pushback is that margins likely will go down in the future – but what does it matter if earnings DOLLARS are higher? (They buy something else, there are some structural changes in the business, aviation and education segments are roaring back at higher margins which is happening, etc.)

The point of this slide to me is not that ABM is some dividend stock, but that it does a pretty good job compounding earnings.

Earnings Check-in: $BIG Let’s Not Miss the Forest for the Trees

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$BIG reported today, August 27th and it was a miss. Guidance was also worse than expected.

  • EPS was $1.09 vs. $1.12 consensus
  • Comps were -13.2% vs. -11.4% consensus (but they were lapping a +31% Q)
  • ’21 EPS guide was $5.90-6.05 vs $6.66 consensus, with the company calling out freight and supply-chain challenges.

This is a common theme among retailers to-date. Another favorite of mine, Dollar General, reported some similar issues.

That said, it is hard for me to call this quarter “ugly.”

  • On a 2-year stack basis, sales comp’d +14%. They said so far in the next Q, they’re ahead of that.
  • As I noted in my original post, $BIG now has no debt, but is flush with cash. This is tremendous option value and they still have $293MM  left in cash (they typically might carry just $50MM).
    • They bought back ~$400MM of stock, I expect that to continue, and isn’t too shabby for a company showing $1.67BN market cap at the time of writing. Share count is down ~12% since their FYE.
    • They announced they’re using some cash to “refresh” 800 stores (a bit more than half their stores), but it’s a modest $100k per store refreshes. I imagine this is high-return investments.
    • They’re adding new stores in ’21, about 20, but noted they will 2-3x that pace in the future. Gaining scale is important for their relatively small footprint.  As a reminder, they’ve been a net store decliner over the past 5 years, but now they’re positioned for growth. 
  • They’re rolling out 2 forward DCs to help with supply chain and delivery. These are the first in the co’s history.
  • Furniture continues to comp well and this is what they’ve centered their stores on. I like that exposure.
    • Broyhill continues to chug along to being $1bn brand. They also noted, “Real Living” brand is set to be $1bn brand too.
    • They are adding sales staff specifically focused on helping folks buy furniture. In test markets, it resulted in a 15 point increase in sales. As they roll this out to more stores, they expect a 1 point increase to comps in 2022. Next imagine it rolled out to 1,400 stores…

On the call, they also stated, “Moving into Q3, our inventory situation has improved, and we have seen a resurgence in sales with early strength from our Halloween and Harvest assortment. Although supply chain pressures related to Asian port and manufacturing disruption will continue to create challenges, we are much better prepared to win at the all-important holiday season.”

So where I am sitting, I still like the story. Again, at the time of writing, the market cap is $1.67BN. However, they do have $293MM of cash which it seems like they can reinvest in the business.

Even with the guide down, the stock is trading at 6.6x EPS ex-cash. That seems too cheap to me. If the market wants to price $BIG as the same story as what it was 2,3, 5 years ago, I think that is incorrect.  Supply chain woes will be temporary in my mind as well.

 

Earnings Check-in: $ITRN Unveils Hidden Bringg Asset Worth Third of Market Cap

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Ituran posted solid results for Q2’21. OEM subscribers notched a gain and aftermarket continued to plug away subscriber gains. They gained 24,000 subs, well ahead of the typical range of 15-20k per quarter. Given operating leverage, EBITDA reached its highest level in 2 years, which makes sense now that the OEM business has stabilized.

I also really liked what they had to say about Brazil and their future there:

“Once we decide to take our technology from the Israeli market, duplicated to the Brazilian market. I’m talking about gaining more and more market share, and I will be a little bit arrogant. And I think that in 2 or 3 years from now, we will be the largest fleet management and telematics services in Brazil. We are growing exponentially from month to month. And I really believe that in 2022, this will allow us to increase materially the numbers of subscribers, the net subscribers growth in Brazil apart from the Ituran SVR. And the third segment that we do it in Brazil and in Mexico, by the way, is duplicate our business from the United States. The U.S. business of Ituran is quite small, but it’s something that is very unique to run traditional applications.”

Please go back and read my initial post on the company as well as the Q1 recap for more.

Ituran also renewed its share repurchase program, which is a positive addition to the dividend. They’ve paid down a considerable amount of debt, which I expect to continue, but the return of capital story is more positive than I expected.

Ituran continues to print cash and I think the market underestimates this recurring business. The stock still trades at ~6.5x 2022 consensus estimates. 

However, that number drops even further when you account for Bringg, an investment Ituran made in 2014.

 “In June, one of our early-stage mobility technology holdings, Bringg, a company we seeded in 2014, raised capital from leading venture capital investors. We are very proud that in only seven years, this company, of which  Ituran remains the largest shareholder with 17%, has grown to its current valuation of $1 billion and it is still valued at close to zero on our balance sheet. Ituran prides itself on its ability to correctly read market trends and invest into disruptive mobility technologies. Our investment in Bringg is a successful element of this strategy and has become a strong value-add to Ituran and its shareholders.”

The Bringg stake is therefore worth $170MM to Ituran, valued at zero on the balance sheet, and foots to about a third of Ituran’s market cap.

Adding everything non-core, Ituran trades at less than 4x ’22 EBITDA:

Ituran ex-non core assets