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.”
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:
This is a business that has been impacted both by a commodity downturn and COVID (hit occupancy).
With where things are, I think their earnings should improve over time
I also think the US will likely improve as we still are underinvesting back in O&G and E&Ps are only disciplined for so long…. but that’s just upside
I think where commodity prices are at this point will also mean producers will eventually be willing to commit to new projects and that will drive demand for CVEO’s lodging and hospitality services.
CVEO’s balance sheet is in great shape, limited BK risk, and generating solid FCF
However! You don’t need to bank on much. You just need to think things won’t get too worse given the company generates good FCF. And there was evidence things would at least level out.
I was pleased to see CVEO report Q2’21 EBITDA in-line with estimates ($32MM), generated good FCF again (~$14MM) which all went to pay down debt. The company is 2.0x levered now.
How are things moving from a trajectory standpoint? Sorry I’m ripping a bunch of comments from the call:
We are encouraged by the decline in COVID-19 cases in Canada and hope this trend allows our customers to continue to normalized operations.
The British Columbia health order, which temporarily limited occupancy at all industrial projects in the province, including our Sitka lodge, was lifted late in the second quarter. Now that, that order has been lifted, we have seen an uplift in occupancy as our customer works to catch up on their project time line. These expectations are in line with the EBITDA guidance that we are maintaining from the last quarter. Yes, we’ve seen much better turnaround activity.
Second quarter was in line with expectations despite the fact that we had one customer push some of their activity from Q2 to Q3. But it appears that that activity will come through. But turnaround activity in Canada is clearly much improved year-over-year.
For the full year, we’re still expecting Canadian billed rooms to be approximately 2.3 million billed rooms, a little over that compared to 2.1 million billed rooms last year. That improvement is both operational as well as better turnaround activity over year. Going into the third quarter, we’ve seen better occupancy for most of the second quarter, we averaged about 5,000 Canadian guests a day, and now we’re averaging a little bit over 6,000. So things are improving, but certainly not to where we were pre-pandemic.
In Australia, we anticipate that the prolonged travel restrictions related to the COVID-19 pandemic will continue to pressure our performance in the region with increased labor costs anticipated to be a factor that we can continue to — that will continue to impact our margins.
The outlook for metallurgical coal markets in Australia for 2021 has continued to be impacted by the Chinese trade policy. So increased interest in Australian met coal outside of China has built some of the negative impacts.
We expect a supportive commodity price environment to remain for the rest of the year with met coal currently trading above $200 per ton. The met coal prices are at much healthier levels than we had last provided revenue and EBITDA guidance.
We have chosen not to increase our expectations for the back half of the year for the Australian segment. Our customers continue to be hesitant to increase activity in light of the lingering China-Australia trade dispute.
Our current guidance does not assume a material improvement or degradation in the Australian-Chinese trade dispute, nor does it assume a material improvement or degradation in labor costs.
It seems like they are being very conservative with Australia assumptions. Perhaps 2022 will be better…
Importantly, they increased the FCF guide again… now $68MM at mid-point. So even though shares have moved up, we’re still talking about a 22% FCF yield on CVEO stock.
I kind of hate it when people say, “look I get the pitch, but what is the catalyst??”
You can imagine a scenario where the company has basically no debt and if the FCF yield is still this high… well, companies have a way of solving that problem. That is the catalyst.
Here’s what they said on the call about a buyback – quite a change in tune from just all debt reduction commentary:
Stephen Michael FerazaniSidoti & Company, LLC – Research Analyst
Great. Great. If I could just get one more in. You noted lower CapEx now expected. You’re down to 2x leverage, sounds like reasonable free cash flow this year. Any other thoughts on uses of cash given that leverage is probably down to an area you’re comfortable with?
Bradley J. DodsonCiveo Corporation – CEO, President & Director
It’s getting there. I think for our business, our target is to get to 1.5x levered. That being said, to your point, capital allocation decisions, have a little bit more freedom now and we will be assessing whether or not a share repurchase program is prudent, but that is on the to-do list for Q3.
I just really like the right tail on CVEO stock… I certainly make no bets on where commodities will go. But I am at least aware of where they are and where we likely are in the cycle (we’ve had a good 5 years of a downturn, now things have turned up). The stock is a 22% yield on pretty conservative numbers with the US also not contributing at all.
Lastly, you’ll recall part of the thesis was about a “forced seller.” I felt like his indiscriminate selling was pushing the stock down despite positive trajectory in the business. Isn’t it funny how his last reported sale was April 9th and now CVEO stock is moving higher?
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.
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.
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.
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 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.