Category: Columns

Earnings Check-in: $MAS quality still underappreciated

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Masco stock continues to reflect too much cautiousness. Should this company traded at such a discount to the market?

As a reminder, Masco owns Behr paint (exclusive to Home Depot) as well as other brands like Kilz. The company reported Q2’21 numbers, which were good and raised guidance, but the stock hasn’t reacted as much as I’d hope.

Q2’21 EPS was $1.14 vs. consensus $1.03 and they raised EPS to $3.70 vs. consensus at $3.63

That’s a “modest raise” so why was I expecting a stronger reaction? I got the sense that Masco stock was becoming a consensus short. This stems from the company’s exposure to DIY vs. DIFM (do it for me). Sherwin is a play on DIFM whereas Masco stock is DIY.

Masco’s paint did decline 5% on a +8% comp, so things are normalizing.

But not all Masco does though. Masco is the owner of Delta, the faucet and plumbing brand and that’s ~60% of LTM sales. This fact is often overlooked in my view and its easy to relegate Masco just to “Behr paint.”  Plumbing sales were +53% and +31% on a two-year stack.

So there was caution on DIY and there was also caution on raw material inflation. PPG reported earlier and highlighted that inflation and supply shortages would hurt earnings expectations. Masco has inflation headwinds, but it actually said it was have price / cost neutral by year end and they had margin expansion from volume gains.

Where does Masco stock sit now?

Masco stock currently trades at 10.5x 2022 EBITDA and 15x EPS. However, they are currently doing about $850MM in FCF and they have $750MM in cash and nothing drawn on a $1BN revolver (so plenty of liquidity).

At the current market cap of $15BN, they could easily buy back 10% of the stock over the next 12-18 months. They repurchased $875MM in the TTM, so its not crazy to think they keep on plugging away at this. This very much reminds me of my Autozone call

Also, its important to remember from a valuation standpoint, Masco’s ROIC is insane. Take a look:

 

Moving on from $HFRO: $NHF seems to be better risk / reward

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HFRO has had a nice bounce since my recent post and is +8% since I wrote about it. I think it still has upside from here, but if I’m honest, it depends to some degree on “known unknowns” and discount narrowing, which is always a tough story with no catalyst.

Full disclosure, this shift comes after talking to MDC of Clark Street Value. His posts on NHF were excellent and after he joined a Twitter Space I started, I though NHF was the better opportunity. Highly recommend you follow his blog if you’re not already.

HFRO is still fine! But NHF on the other hand:

  1. Trades at a larger discount (~32% vs. 22% at HFRO). However, the Terrestar position is at 9%, which I had concerns about, so its close.
  2. Has a better catalyst to close the discount: its converting to a REIT which will trade on FFO most likely and multiples are typically pretty high in REIT space. Therefore the chance the discount narrows is descent even ex-Terrestar whereas at best I was thinking HFRO would still trade at 85% of NAV.
  3. Nexpoint has decent track record in real estate
  4. Have also demonstrated that they want to do things to close the discount (like an exchange offer for pref)

So full disclosure, I still own HFRO, but bought the same $ amount of NHF. Over time, I probably will close out of HFRO.

Earnings Check-In $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.