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Earnings Check-Ups $SKY $CVCO $ITRN

Reading Time: 3 minutes

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 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!

Sun Communities Has A Bright Outlook, But Is It An Opportunity To Buy The Stock? $SUI $ELS

Reading Time: 6 minutes

Sun Communities (ticker: SUI) and Equity Lifestyle Properties (ticker: ELS) are REITs that manage Mobile Home (MH), RV Park, and Marina properties. The space has great tailwinds, stable growth which outstrips supply every year, high barriers to entry due to Not In My Backyard mentality (NIMBY), and are recession resistant businesses. I think Sun Communities outlook is bright.

These tailwinds set the stage for excellent compounding, demonstrated by the results of the asset class and the internal and external growth drivers.

However, we’ll also discuss if the outlook is bright enough to outweigh some of the issues I see with the company. 

Sun Communities recently made a splash with the announcement that it was acquiring Safe Harbor, the largest marina operator.

I actually have looked at buying a marina privately and thought it was a great business. It’s not a “growth” business to a private operator, but the capital investment prevents competitors.

Try to even imagine building a new marina these days – it requires all the regulatory burdens (e.g. zoning, permits) but also dredging and making the marina accessible for boats. Not to mention, in some areas, you’re building on wetlands so environmental issues really come into play.

So this leads to a really sticky business (particularly in salt water where boats are larger and harder to move) because the boats often don’t have a great place to go, while demand is stable to moving up.

Even though (i) I thought Sun Communities was paying a lot for the $2.2BN Safe Harbor acquisition last year and (ii) it doesn’t have any real relation to its core business, I liked the transaction.

A few years ago, ELS expanded into marinas and I guess SUI also saw the merits. In addition to the marina benefits I mentioned above, it is still early days for a consolidation story.

So far in this brief post, I’ve only talked about marinas, but I should discuss the MH and RV space as well. Sun Communities has been rapidly consolidating the MH and RV space along with ELS.I think it will be just a matter of time before these two control the market plus a few mom & pops.

Readers may already know too well that in America, we have an entry-level home affordability problem.

Months supply of inventory is at all-time lows at around 2.3 months (6 months supply is considered “balanced”, and we’ve been well under that for 5 years). Months’ supply refers to the number of months it would take for the current inventory of homes on the market to sell given the current sales paceHistorically, six months of supply is associated with moderate price appreciation, and a lower level of months’ supply tends to push prices up more rapidly.

At the same time, millennials are finally getting married, having kids and have built up savings (I don’t really buy into the “flight to the suburbs” thing every headline is saying, as I previously wrote about). So the issue is that there just isn’t supply. If the average millennial is having trouble affording their first home, imagine the bottom quartile of America.

I think there will always be demand for mobile homes given affordability issues basically in any period of time, but at this point the story makes even more sense. As shown in the first two tables of this post, you can see some of SUI’s metrics for rent and NOI growth. Occupancy is also very strong. Even in 2008, occupancy and rent collection remained solid. Coming out of the GFC, they were firing on all cylinders (similar to Autozone’s cyclical dynamic).

Turning to the RV business, RV sales have seen a boon from COVID. SUI manages transitional and permanent properties and the transitional really took off in the 2H’20 has vacationers hopped in the RVs for the family trip instead of flying. I think we could see tailwinds for years to come here.

I do have concern that we may also have a glut of RVs in the near future once airline flying comes back. Fortunately for SUI and ELS, the number of RV shipments (or boat shipments on the marina side) doesn’t really matter. It matters if people are utilizing them and taking them on trips. We’ve seen sales take-off of this equipment, so it’s possible in 2-3 years the owners who no longer utilize them often just decide to rent them out.

It’s not all a great story though. While it should be clear by now that I like the fundamental story, I don’t like the capital structure and returns set-up. Let’s walk through two of the issues I see.

  • FCF isn’t that great Ok so if you’re a REIT investor, you probably already know that cash flow on these names isn’t actually that great (despite being dividend stories).
    • This is mostly because they consistently spend to acquire additional properties and that’s how they grow.
    • In addition, because they are REITs, they basically have to pay out 90% of earnings as dividends. In exchange, they pay no federal income tax.
    • The problem: they don’t build up cash. Therefore, they constantly rely on the capital markets to grow. I don’t think that’s a terrible issue, per se, but it does make the business more risky on the margin.
  • Constantly issuing equity My last points above are really trying to drive at this issue. Because they don’t accumulate much cash and they don’t want to get too over their skis with debt, these companies issue a ton of equity.
    • Share count for SUI is up from 58MM in 2015 to 110MM PF for the Safe Harbor acquisition. So essentially doubled in 5 years.
    • Yes, Adj. Funds from Operations (AFFO) per share has grown at a 9% CAGR over that time period for SUI.

These two things matter to me mainly due to opportunity cost.

Let’s take Home Depot as a comparison ( I just picked them because I’ve written about them – you could also use Fastenal, Dollar General or any other non-real estate company).

Home Depot generated $18BN of FCF in the LTM period. It then paid $6.3BN in dividends and bought back $3.8BN of stock. That means they have $10BN leftover to buyback more stock, do acquisitions, reduce debt, invest back in the business – whatever!

Now let’s look at Sun. LTM (9/30/2020 before the Safe Harbor marina acquisition), they generated $543MM of operating cash flow and spent $31MM on “recurring”, or maintenance, capex (which oftentimes is an understated metric and more of a “burning the furniture to keep the lights on” figure). So that is $512MM of FCF. They spent $853MM of acquisitions of real estate plus paid $303MM in dividends, so they had to fund that via $618MM of equity issuance plus debt increased by $108MM.

On one hand, Sun Communities is growing (and growing quickly). But on the other, they consistently need to tap the markets for this growth.

Maybe I’m being dumb and should think 10 years from now… then they’ll have the size where they can reduce this reliance. But I’m also buying a name that has to issue equity to fund growth.

I think I’d prefer to buying companies that generate so much cash flow and have healthy enough balance sheets that they don’t really need to rely of equity capital. I think names like this will compound much faster than those that do require equity capital.

Part of this is because volatile market DO happen. We saw it in 2020. We saw it in 2018. We saw it in 2016, and so on. I’d prefer to own companies that could take advantage of a market sell-off to act quickly.

I’m not just speaking of Sun Communities being able to buy back its own stock in these scenarios, but also move quickly to buy discounted assets. If the market was weak, then the currency Sun Communities uses to buy assets will also be weak and that will hurt returns.

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.