Dude, let’s order up some pizza!

wayne pizza hut

 

We’ve been looking for out-of-favor brands since ATG launched.  Some businesses are driven by management, some by macro trends, some by innovation, etc…  There are a lot of reasons why a business can excel; a resurgence of a brand is one of those reasons.  What better way to turn a brand around than a new global advertising campaign?   I’m always on the look out for new ad campaigns that could turn things around.

In this case I’m going to be talking about pizza.  As a lactose intolerant man, and a New Yorker, I’m not the global pizza brand customer.  But I know there are three major players in the industry:  Pizza Hut, Domino’s, and Papa John’s.   There are some secondary brands (Little Ceasers, CiCi, etc…) and then there are mom and pop shops.  Pizza isn’t a new category, nor is it going out of favor.  What drives the success of these companies versus the rest of the industry is branding, new products, and global/national food trends.

I really like the new Pizza Hut redesign.  Pizza Hut built its brand on the red roof stores, which was targeted towards eat-in customers.  As pizza consumption moved to delivery, the eat-in business suffered, and stores built for eat-in customers were not a good use of capital.  Pizza Hut has been on the decline for some time.   Same-store-sales have been negative for 8 quarters in a row.

So what’s going to change?  They are rebranding.

http://www.fastcodesign.com/3038752/inside-pizza-huts-saucy-rebranding

 

pizza hut new logopizza hut swirly

 

 

I like the focus on pizza sauces.  I like the spirals.  I like the new logo.  I think both Papa John’s and Domino’s have been running long term campaigns, which I like, but have been on for years.  Even good campaigns can lose their impact after a few years.  So maybe it’s Pizza Hut’s turn.  I have convinced myself I like the ads with grumpy Italians even though a writer I respect recently trashed them.

Pizza Hut is owned by Yum brands (YUM), which also owns KFC and Taco Bell.  So even if Pizza Hut does well, YUM brands trends could differ.  But I like the direction KFC and Taco Bell are going, and it appears taht the stock doesn’t have much built in for “The Hut.”

While this isn’t my typical value play, I don’t mind owning a world leader with a side story that could provide some upside.

-moMANon

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ATG Take on American Realty Capital Properties(ARCP)- Eat that Lobster!

moMANon is pushing for an ATG position in American Capital Realty (ARCP), a large REIT focused on single tenant properties (including 500 Red Lobster locations) that has been at the forefront of scandal allegations over the past few weeks.  Two weeks ago the stock started tanking on news that the FBI and SEC were investigating reports of accounting errors and potential fraud.  The resulting drop in stock price has been dramatic- at one point the stock fell 37% to $7.85/ share from a price of $12.48/ share at the end of October before settling at $8.66 as of today.  While nothing definitive has been announced, early indications are that the investigation centers around “improper accruals related to executive bonuses” as reported by none other than Ed Rendell, former Pennsylvania Governor and ARCP board member.  At a minimum, it appears that some heads of ARCP management are likely to roll.

I’ve looked at ARCP before, but never had a good feeling about Nicholas Schorsch and his basic strategy of simply gobbling up as much single tenant real estate as humanly possible to package into a diversified alternative real estate investment vehicle.  As of a few months ago, the 10%+ dividend offered seemed thin compared with the 7% cap rates he was paying for recent acquisitions, and I was convinced that rates would start ramping up (which clearly did not happen).  The Red Lobster lease-back transaction helped boost his yields, but I don’t exactly see people flocking to Red Lobster in droves (aside from those few seeking the nostalgic euphoria of Cheddar Bay Biscuits).

moMANon’s suggestion to go long on ARCP amidst the current controversy is ballsy and contrarian, to say the least.  Here’s a quick snapshot of the equity’s current ratings as reported by Schwab:

ARCP Ratings

“F”, “Sell”, “Hold”, “Avoid”, you get the picture.  After a quick gut check, however, I’m with moMANon on this one- ARCP appears oversold and ATG is going long on this REIT.  Here’s a quick summary of what I like about it:

  1. The stock trades at a material discount to book value at 0.74. In today’s environment it is very difficult to find a REIT trading at a discount to book value, particularly one with a portfolio that is 99% leased with an average remaining lease term of 12 years.

 

  1. The REIT appears appropriately leveraged at approx. 55% loan to value with ample debt service cushion and an average interest rate of 3.55%.

 

  1. The current scandal might actually turn into a positive situation for shareholders, preventing management from aggressively pursuing further growth in a frothy real estate market.

 

  1. A monkey can manage a portfolio of singe tenant, triple net properties. Assuming no further acquisitions, it would be very, very difficult for management to screw up the management of a well-diversified, 99% leased portfolio of single tenant properties that have long lease terms.  While it’s challenging to find a talented management team to execute an accretive growth strategy, it’s not challenging to find talented management to oversee a portfolio of low-maintenance assets trading at a discount to their intrinsic value.  Any growth beyond responsible management is icing on the cake.  (I think I just spent three sentences re-iterating the exact same point- at least it’s an important one 🙂

 

  1. ARCP’s current forward dividend is 11.40%. The sustainability of this dividend is certainly questionable when looking at recent financials, but my rough back-of-the –envelope calculation for current cash flow yield is a very respectable 11% (Q2 2014 Earnings (with nominal sale activity) before depreciation/ amortization of $215 million, annualized against a current market cap of $7.81 billion).  It appears that a substantial potential dividend drop despite ample cash flow support has been priced into the stock.

 

At a very rough gut-check level, I agree that the market value of ARCP’s portfolio materially exceeds the current enterprise value of  $17.7 Billion ($178 psf on 99 million sf).  $178 psf feels pretty cheap for a well-diversified, strong credit and fully leased portfolio with an average remaining lease term exceeding 12 years.

ARCP Portfolio Overview

At the end of the day I think this is an opportunity to invest in a portfolio of stable, cash-flowing real estate assets that are worth more on the open market than the stock price suggests.  Shady/ potentially unethical management has scared investors away in droves to the point where all it takes for this investment to succeed is some house cleaning at the front office and a new management team that can clip coupons and manage the debt side effectively.  I’ll take that risk… and a double order of Cheddar Bay Biscuits!

-Maverick

Navigating Choppy Waters (in Luxury)

Cruise Line Pic

 

The market is a vengeful mistress. After 8 relatively strong months and a 2014 YTD return of just under 9% through August, the S&P took a wicked left turn, wiping out almost all of that gain over the course of September and early October.

 

It can be hard to remember that a responsible investing time horizon should be measured in years and not weeks or days, especially when headlines of eminent collapse are a daily occurrence. And it’s hard to stomach daily moves when volatility ramps up; no one enjoys losing more than 1% of their wealth in a day unless it involves a really, really good time in Vegas.

 

The good thing about volatility is that it often creates options. If stocks are popping, you can take some off the table, and if they are collapsing, you might pick up a favorite name.  That’s why we always have dry powder available.  If you are all-in from the get go, there’s neither margin for error nor the opportunity to capitalize on bargains.  Being 100% invested in any one thing (including a diversified equity portfolio) is risky business*.

Maverick and I have been discussing the benefit of low oil prices. While energy stocks take a hit, there are plenty of industries in which gas prices are one of their biggest expenses.

I’m looking at Royal Caribbean Cruises (RCL) in particular. While fuel is only ~12% of costs, and the company hedges much of their near term volatility, over the long term, lower oil prices can add a couple points to their margins, driving a large improvement in the bottom line.

In other words, low fuel = bueno.  All things aside, RCL’s stock has tanked in the last month in lockstep with oil prices despite their inverse relationship:

RCL vs OIL

Now I have plenty of issues with the cruise business: They don’t pay taxes because they operate offshore.  Every dollar they make gets dumped back into new ship construction (though RCL is paying out a tidy 2% dividend).  And shareholders rarely see the cash being produced by the business.  For a trade, however, I’m comfortable owning the group, and if we find a down day we might pick up a little for a short term play.

RCL Chart

 

It’s important to note that RCL has also bounced back off its lows the past three days. If the bounce continues, we’ll probably let this one go and wait for the next opportunity.  If not, ATG may be throwing on the flip flops for a quick sea-faring expedition.

-moMANon

*not the good kind with a young Tom Cruise

Another Take on ESV and OZM

Below is moMANon’s response to my last post on ESV and OZM.  Since I wrote my last post praising ESV and questioning OZM, ESV has dropped another 4% and OZM has gained 4%, so I have to give some credit where credit is due (at least for now).  🙂

“The call out is well deserved.  But such a thing demands a response:
  • ESV and oil rigs.  These are very cyclical businesses.  Drilling rates go up, the industry builds more rigs, drilling rates go down, repeat as needed.  The timing of the cycles changes, the upswing can last longer than expected and the downturn can be worse than you planned.  While you earn a nice dividend you need to insure a lot of volatility.  While I too have little idea what will happen to oil prices they need it to rebound so drilling activity picks up and rig rates stop falling.  I too hope we’ve seen the bottom, and will support a Maverick purchase (but still no full position).   There’s still plenty of downside available.
  • OZM.  I’ve been trading around OZM for a while admittedly have position bias.  The downside is all true: performance sucks, management is bribing people, and hedge funds are under fire in the news.  But I don’t think OZM and BX are the same play.  Blackstone is a bull market winner; more deals, more inflows and more asset appreciation.  OZM on the other hand will do well in a flat and choppy economy with lower risk and steady performance.  Don’t get me wrong- I like Blackstone.  It is the benchmark in financial services, and buying a best of breed always seems to work out well.  OZM is a cheap way to play hedge funds, which have had a tough run, but the fees have held up, and the market can always shift to a more hedge fund friendly trajectory.  I like them both.  As long as assets under management keep growing, OZM is a better business going forward then it was yesterday.  For now they keep adding dollars even with the headwinds.  Some performance boost would go a long way but I have not lost faith.  Buy OZM.”
-moMANon

Water is Not Scarce

water tap

 

I know I’m not going to do a good job explaining the intricacies of the world-wide water supply and demand issues.  But I hope I manage to get a few points across:

 1.  Water is not scarce. 

2.  Water is cheap to process but not FREE. 

3.  Access to water is an economic issue. 

Water is a hot topic nowadays.   Shortages are predicted, conservation is discussed, and water quality is called into question.  The Wall Street Journal and the Financial Times are doing full-page pieces on the perils of the coming water shortage.  The recent algae bloom in Lake Erie caused green water to pour from the taps in Toledo.  As Paris would say, “Water is so hot right now.”

Water is not scarce.  It is a grand misconception.  Cheap high quality water is becoming less available but there are literally oceans of available water.  The issue at hand is that people are used to free water.  And while water is not scarce, the price of water is going to rise.  Drinking water prices are going to rise, potable water prices are going to rise and industrial water prices are going to rise. 

Much like fossil fuel consumption, we took the easy path to get the high quality stuff first, and now we have to work a little harder to get quality water.  Unlike fossil fuels there is an abundance of water and we are not going to run out.  Water costs money to procure (wells, transport, etc.) money to process (filtration, desalination etc.), and money to distribute to the end users.  Water procurement and processing technologies continue to improve and have become much more economical. 

So while water is not vanishing, it will cost more money.  And while water will be affordable, the massive quantities being consumed will mean that the money spent within the “water” industry is going to rise exponentially.  

As savvy investors how do we benefit from the rising tide of water?  Many industrial companies service the water industry (repair pipes, provide technology, build infrastructure, provide chemicals, etc.) but not many are 100% focused on water.   Water utilities provide water and waste treatment – an area likely to see both technology and price increases.  Additionally some chemical companies are focused on purification and water treatment.  So while I don’t think there’s a water crisis, I do think there’s a water gold rush coming, and I’m looking for the guys selling the pick axes and overalls.  We’ll report back once we’ve determined how exactly to execute an investment strategy around  this thesis. 

How to Invest like Bill Ackman  

Businessman Speaking Through Megaphone

 

Over the last few years Ackman has been a mainstay in financial news for his concentrated bets and loud public voice.  He launched a multi-billion dollar fund that invested in one stock (Target).  He is one of the most well-known activist investors in the business.  (Ackman is an activist for his own hedge fund, not for anything noble or worthwhile.) 

Ackman was in the news this week because he promised the “presentation of his life” about Herbalife (HLF), a stock he has been short for nearly two years.   This announcement alone drove the stock down 11% on Monday.  After actually finishing his “bombshell presentation” Tuesday, Herbalife responded by rising nearly 25% by the end of the day.  I think this proves once and for all how efficient the market can be.  Bill’s power point presentation lasted nearly 3 hours- after recently sitting through the movie Boyhood I cant attest that 3 hours is TOO LONG.  If you need 3 hours to make your compelling case about a stock, you’ve gone too far down the rabbit hole.  In fact, if you can’t tell someone your pitch in 5 minutes it’s likely you are too far up your own ass for any stock idea.

Over the last few years there has been a rebirth of “activist investors,” a title that used to signify shareholders fighting for value for other shareholders over incumbent management that was doing a poor job.  Success as an activist has led Ackman and Einhorn to become kings of self-promotion.   Today activism appears to be a code word for pumping your own positions.    

I figure with our follower count approaching 30’s (in 3 continents no less), ATG is reaching that level where some self-promotion could help move the market in our favor.  I’ll have to work on a fancy slide presentation.  But next week expect some bombshell news about one of our positions.  Or maybe a new positions, it depends on what graphics I think fit the stock choice the best.

Long on WWE, Round 2…

wwe

It has been a while since my last post. The market keeps going up, the economy is adding jobs, and the threat of interest rates rising is increasing. All these things make me more nervous about the market. As a result we are back to focusing on under-performers, forgotten names, or perhaps out of favor brands. I discussed World Wrestling Entertainment (WWE) a while back. It was an out of favor brand that started to build some high expectations, only to come crashing right back to its out-of-favor price point. (The stock went from 12 to 30 and back down to 12 in a couple of months.) So let’s revisit it:

At this price point I think WWE is back to being out of favor. The two catalysts for its brief rise and fall were a TV contract renewal and subscriber figures for the WWE online network. Expectations for both were high, and reality was a cruel mistress. So back to the basics. The dividend is 4% a year. With massive insider ownership, I see them protecting the payout as that’s how management can continue to take money out of the business. Management has not had a great track record- a juiced-up Vince McMahon promises a wild ride. They have plowed money into numerous dead end ventures (XFL anyone?). But WWE is the really the only large scale wrestling brand around. While I have passed my wrestling phase (it lasted through college, don’t judge), that doesn’t mean they don’t have a large fan base here in the states.

They continue to produce media stars every few years, with the Rock being the pinnacle of their branding success. And yet they continue to fail at leveraging this star power into consistent earnings. WWE also rolled out their own movie division that produced movies starring their talent. (It was a bust, not XFL level, but a bust.) Revenue for the company is growing at low single digits, which is nothing to brag about. And they are expecting a net loss this year as they transition to online delivery from one off pay-per-views.

So what’s the good news? They have almost no debt (~$30 million), expectations are low, and they trade at 14-15x next year’s earnings per share (EPS). It’s a long tenured brand and consistently a top ten cable program. And while I own it I can collect a nice little dividend. If subscriber numbers creep forward or cost cutting exceeds expectations I’ve seen the impact a little hype can have on the stock price.

We’ll start small but ATG is initiating a position in WWE. Hopefully we won’t get body slammed*.

*- I’m sorry… couldn’t resist.

-moMANon