Category: Earnings Recap

CorePoint Q3’19 results weak, as expected, but once again asset sales are the real story $CPLG

CorePoint reported weak Q3’19 results, but as I said in my last post where I decided to exit my long call on the stock, this was expected.  In positive news, the company came to an agreement with Wyndham on its booking issue and will receive $17MM from them to settle their tax agreement. In total, the company will get about $37MM in awards from Wyndham and Wyndham will have to create a new system for them.

Now for some bad news. Results continued to be very weak on the portfolio. Comparable RevPAR was down 6.3% with nearly 550bps of market share loss. Occupancy was down 250bps Y?Y and hotel EBITDA margins were down 520bps, from 26.3% of sales to 21.1%. This was a bad print by any measure.

The company also reduced its outlook for the rest of 2019, calling for RevPar to be down ~4.5% for the year vs. their August expectation of -3.5%. EBITDA was also lowered from $155MM to $147MM, though $2MM was from asset sales and the rest was from Hurricane Dorian (which I noted in my last post) and its outlook revision reflecting weaker macro trends. Unfortunately, on the call the company said,

“Although we’re not providing guidance for 2020 at this time, we are expecting to face several headwinds in the business next year. In addition to slowed industry expectations, we will be impacted by everything we just discussed with respect to the performance of our portfolio, the timing of the full functionality of the new tools as well as limited visibility at present into any near-term potential lift from being part of the Wyndham distribution network.”

So not overly confident in the 2020 outlook.

But here is the interesting thing: There is still a strong dichotomy between what the private and public markets are willing to pay for these assets. CPLG is literally selling its worst assets for well above where they trade in the public market. The public market also seems to completely ignore this phenomenon. The company announced with this release that they sold 7 hotels that they previously noted in Q3, but also 18 others in 12 different markets for $70MM. The multiple was 38x EBITDA of 2.4x sales… They also sold 12 hotels for $42MM so far in Q4 for 2.4x sales and 29x EBITDA… They also have 25 more hotels for sale for $115MM, though unclear what the multiples are.

Recall, these assets are operating well under the threshold for what the company considers its “core portfolio.” I continue to believe they should continue to sell the company off piece-by-piece AND including the core portfolio assets. When you are trading for ~0.5x book value and 8-10x EBITDA, there is no better way to create shareholder value than to sell assets for higher than where you trade and either buyback stock or pay dividends.

Disappointing Q, but asset sales will help close value disconnect $CPLG

Clearly a challenging Q and guide down from CPLG. To recap earnings, RevPAR decreased 6.1%, but adjusted EBITDA came in ahead of expectations at $46MM and street estimates of $36MM. However, due to an issue discussed more in detail below, as well as pressure on oil markets, the company reduced EBITDA guide to $155MM (down 13% from prior) and expects RevPAR to decline from -4.5% to -2.5% (from +1%).

This guidance assumes that disruptions that occurred in 2Q continue through the balance of the year (mgmt noted RevPAR was already down 5.1% Y/Y in July).

Disruption Event

From the call, it sounds like the company had issues with its “revenue management tools, customer interfaces and the administration of corporate and group bookings” which had an adverse impact on the business. This is run by Wyndham, which is technically the property manager on CPLG’s properties. CPLG noted because of this disruption, “there are several events of default under the management agreements relating to all of our wholly owned properties.” This also seemed to be the main driver of the guide reduction.

For the second quarter, total U.S. industry RevPAR grew 1.1%, and RevPAR performance in the upper midscale, midscale and economy chain scales in the quarter was 0%, down 0.7% and up 1.7%, respectively.

As a result of our 6.1% decline in comparable RevPAR for the second quarter, our comparable RevPAR Index declined 455 basis points.

We believe this underperformance is well outside normal expectations and reflects the impact of an adverse disruption to our business.

It remains to be seen what remedies will occur under this. Wyndham likely will fight these claims, but considering the disruption at CPLG one could envision that it is owed monetary damages from the lost earnings (and not to mention stock price).

For now, it will continue to pressure earnings… but I continue to think that misses the point of the whole story behind CPLG….

Asset Sales

The company’s asset sale program continues to go very well. To highlight some data points from the call:

  • Sold 3 hotels in May for $16MM
  • Sold 1 hotel in Illinois that was non-operational for $3MM
  • Sold 7 non-core hotels in July and August for $29MM, the average hotel-level EBITDA was 1,200bps below the company average
  • “We have 27 hotels under contract with qualified buyers, expected to generate over $100 million of gross proceeds at pricing in line with our initial expectations, which we expect to close by the end of the year”

Let’s recap what they’ve sold and announced thus far then:

This is clearly accretive to the equity, whether they pay down debt or buyback stock. A dollar of debt paid down is a dollar to the equity. 

So two questions we can ask ourselves is: What will the rest of the ~36 hotels be sold for?  And two, why don’t they find more hotels to sell?

Well, to answer question number two, it seems like mgmt is open to that:

“Given the early success we’ve seen in our noncore asset sales, we will continue to evaluate the composition of our portfolio in order to drive long-term shareholder value.”

If the rest of the hotels are sold at 20x EBITDA, we know they generate ~$5MM of EBITDA based on the presentation posted. That would be another $100MM in proceeds. This foots to management’s quasi-guide: 

“These hotels typically trade on revenue, and we’ve targeted a range of generally 1.5x to 2.5x revenue. To date, we have been well within that range, which could translate to potential gross proceeds of at least $250 million, if we are successful in disposing of the noncore portfolio in its entirety. “

Valuation

Given the fact that the asset sales have gone so well, I would strongly encourage more or a sale of the whole company at this point. We know from this chart there are a lot of hotels that have less than 25% EBITDA margins and those could be added to the list. 

In the meantime, I think the valuation on CPLG is fine, not overly compelling when solely looking on EV/EBITDA. Again, the real story is selling assets well above BV and closing the gap. Book value remains above $20/share. I think mgmt should focus on more sales to realize value.

Thoughts on Apple Given Tariff News $AAPL

AAPL reported Q2’19 earnings last week and they were pretty good. However, given the most recent tariff news and Apple has a supply chain overseas, stock has declined over 10% in two days. What is the market pricing in?

A simple way of expressing the markets new view is to say, “what is the change in stock price implying about EPS estimates?”

The price change in stock is therefore equal to the change in earnings estimates.

So the market is essentially pricing in a China impact of at least 11.7% to earnings. Is that reasonable? That could be from a 10% tariff or a retaliation against a US producer like Apple.

After skimming AAPL’s filings, I found that China represents ~20% of sales. Assuming this business is of similar margin to the whole company, that means that ~$10.8BN of net income comes from China, or $2.4 / share. Since the market is implying the earnings estimates need to come down by ~$1.5 / share, one could simply say that the market is implying 62% of AAPL’s China earnings are gone ($1.50 out of $2.40).

Obviously, it isn’t that simple (for example, the market could price in some slowdown in AAPL’s other regions due to a slowing global economy).

I will say though that this seems bold considering what Apple had said on its latest earnings call:

I sometimes like to do this math to gauge how realistic or unrealistic the market is being. Sometimes, like in the case of Bayer and the glyphosate liability, I think the market is pricing in sums that make no sense. Other times, it underestimates them.

Fortunately for Apple, they’ll be able to grow EPS in a lot of different environments due to their cash hoard. Here is a snapshot of their capitalization.

I think people often forget that Apple has a lot of long-term investments in marketable securities on its balance sheet. I would consider that cash for all intents and purposes because the company can (and does) sell some securities for attractive investments or to buy back stock.

Therefore, ~24% of Apple’s market cap is in cash right now. Let’s assume they use all that to buy back stock, but it comes at a premium. Let’s use ~30% premium which is around $250 / share.

At $250 / share, they can repurchase 842 million shares, which is a little less than 20% of the outstanding amount. If I assume net income is unchanged for 2020 (roughly $58BN), then EPS should go from $12.78 to $15.71. A 15x multiple on $15.71 is a $236 stock price, or 22% upside. A 17x multiple foots to 38% upside to $267. At 17x, this is ~1x above the S&Ps P/E multiple, but well deserved in my view given I think AAPL is an above-average company.

At this point, it seems like Apple is well positioned to either return capital to shareholders or invest cash for new projects. Tariffs on Apple are a negative, but not a deal breaker. While others are concerned about the company and what lies ahead for its future, I think having so much cash at this point provides for a significant margin of safety.

Solid Q1’19 – Maintain Buy on Hostess Stock $TWNK

Hostess reported Q1’19 EBITDA of $49MM compared to $46MM of consensus and my $45MM estimate. Sales growth was the really strong point with 6.7% growth, beating consensus by 560bps.

This is honestly the best news for Hostess stock since the acquisition of Cloverhill. Recall, Hostess bought Cloverhill out of distress (but what I view is a great deal). Cloverhill was an operation with negative ~$20MM in EBITDA (and a bulk of its employees were undocumented workers), but still had strong brands. Hostess management figured they could turn the operation around and get it to $20-$25MM of EBITDA in a couple years from purchase. Since they paid $40MM for it, they essentially bought the asset for 2x EBITDA – in a market where food / consumer companies are going for well into the double digits.

Following the acquisition of Cloverhill, however, quarters optically looked very ugly since the company was negative EBITDA. Even if I didn’t mark it, you could probably guess when the business was acquired.

Now, with this print and clear improvement in Cloverhill (given margins are improving on a quarterly basis) I think Hostess will now start to be appreciated by investors.

For one, its becoming more clear that the Cloverhill deal has synergies.

Club was a terrific growth driver for us. We talked about when we acquired the Cloverhill business of not only did it give us a platform to expand into breakfast but it also gave us some access to certain customers and channels to be able to expand that.

We’ve leveraged that in club, not only for the Cloverhill and Big Tex brands but also to expand our Hostess branded business as well as we launched Dolly in club as well as across some other channels. So the innovation of taking that platform and spreading that across multiple channels

The cadence sounds good as well. With a solid beat here, we have to ask ourselves what the outlook is for the rest of the year. Management was pretty clear:

But more importantly, we did expect merchant — the breadth of the merchandising improvements including our largest customer still improve as the year went through. We expected it to get better as we came out of Q1. Across the board we’re seeing that and I expect that to continue and to accelerate as we go through the year.

Is Hostess stock still cheap?

I think it is. Despite Cloverhill pressuring the company’s margins in the short term, Hostess still has top-tier EBITDA margins in the food space. If Cloverhill is turned around as planned, this could step-up to high 20s again. But is that what consensus is expecting? Let’s look at the estimates:

This doesn’t add up to me. Hostess did $230MM of EBITDA in 2017 before it acquired Cloverhill. They said on the acquisition call they expected Cloverhill to contribute $20-$25MM in EBITDA by 2020 (which was re-iterated on the lastest call).

This would imply to me that Hostess should be more likely to do ~$250MM of EBITDA by 2020, well ahead of $222MM expected by Wall Street analysts. Now, there has been inflation across the board impacting food companies, but even if the company did $235MM, that is well ahead of street.

Despite too low of estimates, the multiple ascribed to Hostess is ALSO too low.

Hostess stock trades at nearly a 1x discount to where the median comps trade. If I were to use $235MM-$250MM, the company trades at 10.9x-10.2x 2020 EBITDA. This seems too cheap.

What do you think Hostess is worth?

The company has top tier margins, generates strong FCF, and has great brand value. I think the Cloverhill acquisition also shows management is smart with how they allocated investor’s capital.

Therefore, I think the company should trade for 12.5x-13.0x EBITDA. This would mean the company trades in-line with General Mills, a food giant that has been struggling with organic growth.

At the low end, I think there is ~20% upside over the next 12 months and ~30% upside in a bullish scenario. This seems like a solid return to me with relatively low risk compared to other investments I see today.

CorePoint Q1’19 Recap: Asset sales are the real story $CPLG

CorePoint reported Q1’19 EBITDA of $43MM compared to $40MM estimates and $37MM last year.

Net/net this was an OK result. Obviously, EBITDA beat expectations. RevPar was up 3% according to the company, which is ahead of their 0-2% growth guidance. Unfortunately,  though, excluding the hurricane-impacted hotels of last year RevPar would’ve been down ~1%. EBITDA improved due to these hotels coming back online, but that was to be expected.

April was also looking slightly weak due to oil related market which the company noted was softer than Q1’19 as well as an outage at their call center.

Fortunately, the outlook was also left largely unchanged. The company filed an 8-K that shows they are taking steps to lower G&A (reducing headcount which should save 7% of G&A or $1.5MM).

As I noted in my prior post, the real developing story, Core Point is looking to divest “non-core” hotel assets. They had conducted 2 sales at very attractive multiples when they initially announced this.

They also announced 3 more hotel sales. The hotels carried an average hotel RevPar that was 25% lower than the portfolio average and the average hotel EBITDA margin was 700bps below the portfolio average.

Therefore the implied valuation for these 15x at EBITDAre or 2.5x revenue multiple, per the company disclosure. This is a great result. Let’s take a look at what that means so far for the five hotels sold:

We know from this chart below that there is still a lot of wood left to chop.

Since the 76 non-core hotels were already excluding the 2 asset sales sold for $4.5MM, there are still 73 hotels left worth $132MM of sales and $11MM of EBITDA.

This is important because the sales proceeds / multiples thus far have come well in excess of where CPLG is trading. CPLG currently trades at 9.9x 2019 EBITDA… If it can continue to divest non-core assets at multiples above where it trades, this could be very incremental to the stock, as shown below:

More than likely, the company will probably sell these assets for 2.0x Sales as they move forward, meaning CPLG would be trading at 8.4x on a PF basis. If the stock were to trade at 10x, this would mean it is worth $18.7/share, or 35% upside.

That said, I think that would still be too cheap given multiple ways to look at it, whether it be cap rate, book value, EV/EBITDA, etc. CPLG is too cheap.  Imagine if CPLG just traded at book value… the stock would be worth $21/share.

It seems to me that the reported book value as well as the JP Morgan valuation is looking more and more accurate.

The company has also started to buy back some stock. Per the earnings call, “Our priority has been on paying down debt and opportunistically repurchasing our shares accretively at a discount to NAV.”