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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

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!

Time to Buy Berkshire Hathaway Stock $BRK

Reading Time: 3 minutesI’ve been watching Berskhire Hathaway stock this year — as many investors do. Berkshire’s annual meeting was timed well as it came during the heat of the COVID-19 crisis. Many felt disappointed to hear (or decipher) that Buffett wasn’t leaning in to the downturn. He wasn’t deploying his “war chest” of $125Bn+ in cash. In fact, he sold his airline stakes, sold some banks, and Charlie Munger even mentioned some businesses might be shutdown. Buffett also mentioned that the amount of cash they have isn’t really a lot to them in the grand scheme of a panic.

Now with the S&P back up to near highs, many are calling out Buffett and saying he’s lost his touch. “Maybe he’s too old now” and “maybe he doesn’t care anymore now that he’s approaching 90 and loaded” or “maybe the oracle has lost his touch”.

I don’t really think that’s the case and think the negative sentiment creates an opportunity in Berkshire Hathaway stock. People who argue that Buffett is too old and “lost it” could have easily argued the same thing when he was 65 going on 70, 75 going to 80… Buffett has that itch that can’t be scratched.

I do think some of his methods are too old fashioned. I can’t actually confirm this is true, but he has said he won’t participate in auctions. What board would actually be able to justify selling to him without a second bid? Especially when times are good and they are a good business.

Do we see Buffett do another elephant sized deal? Maybe. Maybe not. As I’ve written before, I think we could see deals that are smaller than what people expect.  But either way, I don’t think the option value of some deal being done is being appropriately valued today.

I’m taking Berkshire Hathaway’s current market cap and subtracting the market values of his equity holdings (note, I pulled this from Bloomberg, so it may not be 100% accurate). I then subtracted the cash to arrive at the value the market is ascribing to the “core Berkshire Hathaway” business.

I say core, but in reality there are so many subsidiaries within Berkshire Hathaway. You have GEICO, Berkshire Hathaway Energy, BNSF, Precision Castparts, just to name a few well known ones. If interested, I highly recommend perusing the list of subsidiaries on Wikipedia. I bet there are quite a few you didn’t realize he owned.

At the end of the day, you’re being asked to pay <8x earnings for the collection of businesses that Warren has acquired AND you have free upside from the cash if it is ever deployed.

Frankly, the real upside in the stock may be 5-10 years away when Berkshire Hathaway is broken up and people realize the sum of the parts is worth more than the whole.

Either way, look at the impact of Berkshire going out and deploying cash. Earnings could likely go up 30% from where they currently are and even deploying the cash at a worse multiple than where Berkshire trades today (i.e. dilutive), you’re still paying <9x earnings.