Category: Earnings Recap

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!

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

Reading Time: 2 minutesCorePoint 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

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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.